No evidence of downtrading; see 10% volume growth: Dabur

With the monsoon playing spoilsport, FMCG companies are likely to be worst hit and chances of downtrading are also high. However, Sunil Duggal, CEO of Dabur India believes there is no evidence of any downtrading or slowdown in consumption despite the fact that consumption is slightly subdued in certain pockets.

Duggal further adds that there is an uptick in crude prices and inflation. But, Dabur is optimistic about achieving volume growth of around 10% and believes volume offtake in the festive season will be key to growth. At present, the company is concentrating on the fruit juice segment and is not looking at inorganic growth due to economic uncertainties.

Moreover, Dabur is seeing good growth in its international business, particularly from the Gulf, added Duggal.

Here is the edited transcript of the interview on CNBC-TV18.

Q: First a check on the rural consumption pulse. You have your finger on that pulse, what is the sense you are getting? Is there consumer down trading? Is there a definite slowdown in consumption, first rural but urban as well?

A: I think the rural side remains fairly robust. There are pockets of softness in parts of South and West but by and large now with the monsoon having revived very strongly in parts of North and East, the demand side seems fairly steady and at the moment its early days. But, we are seeing no evidence of any downtrading or any slowdown in consumption.

Q: That’s the drought part of it but we are seeing a lot more expensive consumer durables struggling with lower demand, you can see definitely in the cars and two wheelers segment, does it percolate down to FMCG products as well?

A: It perhaps could but, I don't think so. I think the down trading if it happens will be of a comparatively minor nature. We are not too concerned about that aspect. I think what is concerning us a little more at this point in time is the revival of inflation. We are seeing a strong uptake in commodity prices, crude, edible oils and the whole agri basket.

That could put pressure on margins because I think the headroom in terms of price increase is a little limited because of the economic downturn. Last year everybody in the staples area took up prices by a pretty solid amount. I think this is something which is a matter of concern that there could be pressure on margins. That will beat the fact that the demand side remains fairly steady.

Q: Just wanted to concentrate on the volume expectations for FY13 then because you started Q1 FY13 on a strong note of around 10% volume growth. Just give us a sense on whether you would possibly maintain that, would it be better or are you expecting something less?

A: I think the pivotal quarter is the third because a lot of our sales come then. If you are able to hold the line at 10% in Q3, then we should have a reasonably good year in terms of volume growth. I am still pretty optimistic of having the volume growth in around 10% or so. But, it is not to be taken for granted.

I think a lot depends upon the festive season demand which will peak in October and November. That would I think determine the course of the year. But as I said, the bigger concern is margins and not perhaps so much the volume growth.

Also read: Mkt to head upwards; positive on FMCG: Edelweiss Sec

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Q: What about ad spends then, there has been a trend of increasing ad spends in the past couple of quarters and there is increase in competition from the FMCG space. Give us a sense in terms of how much of a component would advertising contribute in terms of revenues and what sort of margin pressure would it result in?

A: In the first two quarters it would be in the region of 14% because there was margin expansion on the back of low commodity prices. Going forward in Q3, if there is compression of margins there could be some lowering of advertising and promotional (A&P) spends.

I think that would be the prudent thing to do like what we did last year. Then the ad spends could go down to 11-12% level which we saw last year. But, it's early days yet, we want to hold the A&P spends at an aggressive 14% odd. Whether the commodity price cycle will enable us to do that is too early to call.

Q: In the FMCG segment of skincare, shampoos and oral care, many of your products are well known but they are not the first or not even a strong second. Will you see some rationalisation in that area, drop off some brands, concentrate more on any one of them?

A: Not really, I think we play a very specialised, very niche play in these very large HPC segments of oral, hair and skincare. Other than hair oils where we are pretty mainstream, in shampoos we are number four or number five. But we are very siloed in the herbal shampoo space.

Likewise in toothpaste we are number three but then we have largely a very herbal Ayurvedic range of toothpaste offerings. It is comparatively easy and profitable to operate as number three, four, or five if you have niche play. You can't mainstream your products and be number four or number five and still be profitable. I think that's pretty well documented but we don't play the game like these big HPC domains.

Q: What about the fruit juice segment. Is that a major thrust area in terms of growth? How do the margins in that space compare with margins elsewhere and what kind of volume growth in that space do you see?

A: The headroom in terms of growth is enormous because the market has barely been scratched; the competitive intensity is comparatively low and at the same time the margin profile is inferior to health and personal care. So we have to be a little circumspect on how much we invest there.

But we remain committed to our beverage portfolio. We do have leadership in the fruit juice space. We are consolidating our position and enhancing capacity. It will remain a very fundamental driver of growth even though it may not be in the same league as our health and personal care products, in terms of importance. But it will remain very important from the growth driving point of view.

Q: You all did very well in your international business in the previous quarter, 24% growth is what you clocked on a YoY basis. Give us a sense in terms of what sort of trends are you spotting in the international business and what sort of trajectory can we expect on that front, which are the hottest selling products, etc. Just throw some light on the international operations.

A: I think the gulf business will drive growth as far as international business is concerned this year. Next year the Africa piece should be very important in driving growth. So growth will come even though there are pockets of concern in Egypt and parts of North Africa.

The political and economic uncertainties may put some pressure on demand there but, overall the international business should continue to grow ahead of domestic business. We will see a reemergence of profitability which was eroded a little last year because of softer commodity prices prevailing in the Mina region. The overseas business is by and large on track and we need to just put more momentum into Africa growth which we will do by the end of this year.

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Q: How exactly would you do that, would it only be organic growth that you are looking at in the international space or would you even be aggressive possibly via the inorganic route?

A: We envisage organic growth in the current year. Going forward, there would be definitely some elements of inorganic. At this point in time we are being a little circumspect in terms of prospecting for targets and doing any deals because of the economic uncertainty.

Its perhaps a little bit better to sit on cash and look for value, which would emerge perhaps going forward. We will do deals only when they are attractive both from the strategic importance perspective as well as from the financial viability side. Acquisitions will be a driver of growth even though we haven't put any numbers or any targets behind how much we would seek from acquisitions.

Q: Since you say that perhaps margins would be your worry and not really so much volumes, give us an idea would it be a 20% year in terms of revenue growth, would it be a 14% margin year, some numbers, some guidance?

A: Very roughly I think you can visualize a mid teens revenue and profit growth for the coming year. But again we are just four months into the year so it's early days. But that's something which I think we should be able to achieve.