Dabur’s Duggal says a little bit of sugar is just fine, the focus is on topline

The target is really the sugar products which have no nutrition value. Candy, colas, have zero nutrition value. A juice, even though it has some sugar, I am talking about the ones which have some sugar added. They do have a lot of nutrition value. You have fruit pulp and all the vitamins and all that. So you cannot call that as being not nutritious.

But having said that, for children and all it is perfectly okay. Children’s tolerance for sugar is much higher. Especially if it has some nutrition, they can have some sugar. It is the nutrition-free products which are coming under the scanner.

There’s almost a big movement now against sugar, particularly in the US and other developed nations. Isn’t it time for something like that in India?

We are offering sugar-free products to our consumers. And we are trying our best to reduce the sugar content as much as possible. Many juices like, say Amla juice, Jamun, or so many others, cranberry, this that...if you don’t add some sugar, nobody will take it. They taste so horrible. But you can have sugar-free orange, apple, mixed fruit, grape, all these you can have without sugar because there is a natural sugar content in the fruit. But many fruits don’t have any sugar content. You cannot have it. It is inedible.

Even things like guava, you can’t have pure guava juice. You have to add sugar. So you will not find 100 percent guava juice, 100 percent cranberry juice, 100 percent pomegranate juice in the market at all. 100 percent pomme (pomegranate) mil sakta hai (can be found). But not many others. You have to add sugar. Otherwise, no one will drink it.

Have you taken a holistic view of the sugar content in your products and said we will reduce it by ‘X’ amount across all products?

We are engaging with regulators. There is that. . .What’s that thing called? The sugar-fat HS something... There are some, some codes which have been defined by the FSSAI as well as the health ministry in terms of regulation of sugar. At least informing the public how much sugar this thing has.

Sri Lanka has already done it. You know they have these labels, which indicate the sugar content. Red is very high sugar, green is no sugar etc etc. Aisa kuch inka codification hai (there is some codification like that).

I am sure India will soon do it so at least people have an informed choice. Isme sugar hai, isme nahi hai, isme kam hai, isme zyada hai. (this has sugar, that doesn’t, this has less, that has more) so anybody who has any allergy to sugar or mothers do not want to give sugar to their children beyond a certain level, then, you know, it is flat. But if you ask me the real culprits are the junk food which have no nutrition value but high sugar and the calories. That is really something that should be at the target of the regulators. Uske baad (after that) they should look at all products with sugar. Yes. But shuruaat karni chahiye udhar se (But the beginning should be made from there) because that is really the poisonous stuff.

Almost three months into GST and a little less than a year since demonetization, where do you stand as an FMCG company and where does the demand stand?

See the end demand is, at the moment, reasonably steady. But that is off a low base of last year. So, we are seeing steady demand coming from the consumption side. Having said that, the sustainability of the demand is still a little suspect.

So I would not you know stick my neck out and say that this demand is something that we can now see for the next many quarters. It could evaporate because there are weak macros in terms of employment, in terms of higher inflation, in terms of poor monsoon, low GDP growth, low wage growth etc etc. So there are many of these headwinds.

So, therefore, the sustainability of the demand perhaps is contingent upon government stimulating demand through providing fiscal stimulus to the consumer. If that happens, then you can see that stimulus fueling demand into the future. If that doesn’t happen, then the demand might just slow down.

Are you still reeling under the GST impact?

GST impact has been there amongst the channel partners. We are GST compliant, our suppliers are GST compliant, our customers are GST compliant. Customers as in the distributors. The compliance levels start dropping off after that. Many wholesalers are still not compliant, many retailers are still not compliant. And so, there is a lot of confusion and uncertainty in the mind as to the compliance framework they should adopt. So, therefore, we are seeing a downtrend in sales to the traditional wholesalers.

Now to feed the rural demand, we are going more to the super stockists which are the alternative channel to feed the rural markets. So the balance of sale is shifting from the traditional wholesalers to what you call the super stockists and this is a big shift which we believe will continue for some more time till wholesale re-balances and then wholesale might then start growing once again. At the moment, sales to wholesalers is declining.

You have earlier talked about initiatives in consumer healthcare business. How is that plan progressing?

It’s not a big bang initiative. It is a series of small initiatives but many of them. It is a lot of effort and energy and resources will go into this initiative. And we have some of the products (points to a showcase in the corner where some of those products are kept for display) which are indicative of the way forward in our attempt to seed consumer healthcare products.

Now they will be incubated through the retailing route and taken to market subsequently when they’ve reached a certain amount of critical mass and doctors’ support. Then we will go to media and take them over to counter. But all of them will have ayurvedic heritage. They will be derived from Ayurvedic sources. But we will brand them and improve their performance through extensive clinical trials and support, and then only we will take them to market from the OTC perspective. At this point of them they will remain prescription, then they will move to OTX and then to OTC.

When do we see more of white Ayurvedic products coming out from your stable?

I am sure we will be launching other toothpastes, Ayurvedic toothpastes. But whether they are white or you know green, that is not really the issue. They will have a proposition which is quite different from our existing toothpastes. Like our Red is a very different product. Even that would be a very different product.

How is your Red franchise doing?

Red is doing very well. We have got Red gel, that is also doing well. I believe that the Red toothpaste is going to grow much further. See today in oral care, we have a 15% volume share and Unilever has a 17% share. Colgate of course is much higher. We want to take the number two position in oral care in the next one to two years after Colgate. And Red will be the key driver of this growth. As a standalone brand, it’s already the number three brand.

What about Babool?

Babool will be a herbal discount brand. After a couple of years of subdued performance, it is now growing strongly once again. So we are seeing good growth there. So there is a body of consumers who want ayurvedic and herbal products but who cannot afford Red toothpaste and other herbal products. It is meant for them, it is meant for the lower end of the consumption level.

Is there discounting happening in toothpaste market?

Some prices came down after the GST. It wasn’t very large amount. We also reduced the price of Red gel by around 10 percent, a couple of other SKUs (prices of stock keeping units) were reduced by 10 percent. But inflation is now picking up a little bit. Maybe some price increases going forward. In oral care by the year-end, there could be price increase.

But you know the whole pricing decisions are not something which we taking a long-term view. We will see the inflation situation, we will see the competitive context. We are under no huge pressure to improve margins, we are sitting on good margins. The whole effort of the company is directed at driving the revenue growth, the topline and especially the volume growth because over the last one and a half years, our volume growth has been quite muted because of various issues whether it is demonetization or GST or competitive forces.

We want to rebuild the topline. It is important for us to grow volumes in the higher single digits. We may or may not do it but that is the endeavor immediately. And If are able to do it, then margins will automatically improve.

We see our business as being revenue driven and the margins is an outcome. If you become too margin focused and lose sight of the topline growth, that according to me does long-term damage to the business.

Almost half-way through the year now, what kind of margins and sales growth do you expect to end the financial year with?

We don’t do outlooks but I think the volume growth for this year would be in the region of 5 percent to 10 percent despite the fact that the first quarter was a negative growth of around 5 percent. We still are hopeful that we can get, maybe not to 10 percent, get into higher single digit through the balance of the year and 5 percent to 10 percent for the full year. Balance of the year means Q2, Q3 and Q4.

Margins we will like to maintain at last year levels (FY17 operating margin 19.6%). I don’t think at this point of time there is any effort on our part to improve margins beyond what they are because we will be spending substantially more on two items – one is your advertisement and I am talking about media and the other one would be your sales infrastructure. We have already doubled the number of people for our rural initiatives. And all that costs a lot of money but it is worthwhile because our rural growth is now becoming much better than our urban growth.

What kind of spending will then go into advertisement and sales infrastructure?

These two areas you see. Let’s say, the media growth, we are looking at almost at 20% growth for the balance of the year. I’m talking about Q2, Q3, Q4. For Q1 it was lower because of GST there was no point in spending too much on media. But balance of the year, 15 to 20 percent growth is what we are seeing. In Q2, Q3, Q4, y-o-y, it will be 15 to 20 percent growth in terms of media spends which is much more than our topline. (FY17 advertising and publicity spend Rs. 646.1 crores).

There will also be double-digit growth in sales and marketing spends, sales infrastructure which is people as well as the network cost. We will reduce some cost from the overheads. There will be some cost reduction. So hopefully the cost reduction from overheads will mitigate the increased cost of sales and marketing and we will end the year with flattish EBITDA (FY17 EBITDA Rs. 1,807.3 crores).

We are looking at automation at the factory level, we are looking at increasing use of technology which will make our workforce more productive, particularly the sales organisation, also marketing, finance etc etc. So all along, there will be a lot of rationalization. So we are looking at productivity gains fueled by technology to manage costs much better than in the past.

How is your coconut water doing?

Coconut is a very perishable product. So you have to go from the water in the coconut to the water in the bottle within a few hours. It is very difficult to have that supply chain. We should manage it. But I think the supplies have improved. We have got three suppliers, earlier on we had only one. So, we should be able to meet most of the demand. But when demand peaks during dengue period and all that, then obviously there is some shortage. We have complete leadership in coconut water. I think nobody else is even close to us.

How is the competitive intensity in juices now?

B Natural (by ITC) has definitely been very aggressive, doing high levels of discounting. So definitely the competitive environment in juices has become much more than what it was said a year ago. We also have to up our spends in terms of the promotion piece but still, the growth is reasonably good.

Do you see any price increase in juices?

Input costs are under control. Lot of it is imported and a strong Indian rupee is making the imports cheaper. So the cost pressures are not there at the gross margin line. But yes the promotion, advertisement promotion part has increased. So overall there is some damage to the margins which we hope we can cover maybe by next season.

How is the shampoo market behaving?

We expect strong growth in the second half of the year. At the moment, we are changing the whole packaging formats, we are changing the proposition. So we are flushing out the old stocks and not putting in new one in this quarter. So this quarter may be little deep for shampoos but the inherent brand has got huge strength, especially in rural areas and we expect strong double-digit growth to start from the third quarter.

We are relaunching Vatika. There is a new campaign by Kareena Kapoor on satposhan. Satposhan is a very important ayurvedic concept, seven benefits, seven ingredients leading to seven benefits.

The CSD (army canteen) business of companies is going through hiccups. Have we heard the last on that?

Picking up. By September we will see near normalcy. The quarter numbers will still be lower as compared to last year. Going forward, it is hard to say whether it will regain its old momentum or whether they deliberately will trim the sales and reduce the pipelines and make it a tighter entity.

There is a lot of talk as to they will be delisting a lot of the slow-moving SKUs from all companies. So that might hurt sales to some extent. We are not overly concerned about it because whatever shortfall happens in CSD, we can make it up in the civilian market.

What are the slow-moving SKUs in your portfolio that could be impacted by an adverse decision of the CSD administration?

We have very few because of we already when we see we a slow-moving product, we ask CSD to switch the listing from the slow-moving product to a new product. So we deliberately delist many of our slow-moving products and tell the CSD that this is a new product which has been launched. Like recently, we delisted some product and ask them to list Red Gel. So I don’t know what the outcome has been. But this what our strategy is. We also don’t want slow-moving products sitting in CSD because ultimately they will come back to us as not being able to sell.

But what about the whole issue of CSD trying to plug leakages?

They are plugging it. The deep sales decline which happened in the first quarter and continued in July has meant that the pipelines have come down from CSD. Whether they want to reduce the pipelines, even more, I don’t know because they are not telling us exactly what their strategy is. I think they are still working out the strategy.

There is a new CEO of CSD who has come in. He is very keen on employing technology and making it a very modern kind of enterprise. I think it’s still work-in-progress. So the final CSD structure in terms of their policies, in terms of their listings etc etc will emerge may be in the next three months or so.

Patanjali is now here to stay and is now part of boardroom discussions at every company. What’s been its impact on you? 

See in our case, Patanjali we believe take away share only in one brand – Dabur Honey. Our oral care portfolio is very visible, it continued to grow, it’s growing even faster now and in Honey, the damage was genuine because there was a pricing, big pricing difference, there was a lot of effort by Patanjali to promote their cheaper honey.

Now, we also have now reduced prices by giving more volume for the same price, we have not reduced prices in terms of MRP reduction but we are giving more, 25 percent more honey for the same price as the original and now also we are seeing that customers are convinced that our quality is much superior to that of our competitors’. So we are seeing a sharp rebound in honey offtake and we believe that over the next one to two years, we will fully regain our lost market shares and we will continue in this dominant position.

You had plans to set up a greenfield plant in Jammu? Does that still stand?

We decided not to put up a greenfield site in Jammu because the area where this was, the exemptions came to an end in March. We were thinking that they might continue after March but they shut down the area-based exemptions everywhere including Jammu. And then we decided not to set up a greenfield plant. But we continue to expand our existing plant. That will continue to be very important and we will be putting in more capex and expanding it further.

What’s your capex for FY18?

This year, we will be spending around Rs. 350 crores-400 crores. Last year was around Rs. 550 crores. So it will be much lower than last year. There was a little bit of revision upwards but I will stick to Rs. 350 crores, because of the backlog it may go up to Rs. 400 crores but I think Rs. 350 crores is probably a more accurate number. No revision except for one extra, some extra capex in Pantnagar plant to accommodate the new line, the new range of beverages which we will be launching next summers.

What is the new range of beverages you just mentioned? Will this be under the Real brand? When do you plan to launch it?

This will be under a different brand, not under real Real brand. This will be more value add, value priced beverages which will be under a different brand. It will be a sub brand under Real, so the architecture will be under Real. But the sub brand will be the dominant feature of that product. This will be next summers, may be around February or so because these lower price point drinks are very summer centric. So we will be launching it. We tested the market this year, next year we will be doing a bigger launch. This will be more in terms of fruit drinks, the biggest market is in drinks.

With winters a month or two away, how do you see Chyawanprash sales?

Very hard to say, very hard to say. Chyawanprash has a substantial amount of wholesale dependence. Quite frankly, we are not very certain about how the chyawanprash season will go. One thing I can say for sure if it’s a severe winter, we will have a good season. But if it’s a mild winter, we do not know. Also, there is a lot of competition now which is going to come up which we believe will, may have some near-term impact but long-term competition actually grows the category.

So we will be happy to see competition here because there will be more excitement in the category, there will be more visibility and we should benefit from that at the end of the day. But the outlook of chyawanprash is not very clear. It could be a great year for chyawanprash or could be a so-so year.

You talked about price increases happening in the latter part of the year. Which products could see this?

Price increases will probably happen in areas where the inflation impact is high. So definitely in coconut oils, there will be price increases. There may be price increase in some of our homecare products because the GST rate has gone up, in our skincare products because again the GST rate has gone up. But it’s not going to be very dramatic. I expect price increases to be around 2 percent, contributing to 2 percent of revenues this year, not more than 2 percent. The inflation, as far as our basket of products is concerned, has been reasonably under control.

How is the Namaste business doing?

Namaste performance in Africa is very good. In North America, the performance remains weak and we expect that the rebound will happen by the end of the year. And next year, we should get back to a strong growth path in North America. At the moment, the legacy issues in terms of the portfolio are still weighing down the performance.

But the good thing is that Africa is now growing at 30 percent and the whole logic of buying this company was to move the business to Africa. Now that is really happening and we believe the Africa business in the next two to three years will be bigger than the North America business. And then even if North America continues to have flat sales or even slow decline, the big growth in Africa will more than make up for it.

Is there further scope to bring down cost in the Namaste business?

There is always scope for reducing cost. We are engaging in a study in terms of how we deal with the whole business, the operating model for Namaste. We will be taking a call on this in November. We have engaged a firm of consultants to help us with the design in terms of the organization for the North American business in particular. We will be seeing the report early November, only then we will take a call as to way forward. We will all be going Chicago and the report will be presented in Chicago.

You had plans to bring in a foreign partner in your retail business NewU. Where does it stand?

I think logically the partner will come in where is clarity on FDI. When FDI is allowed in retail, multi-brand retail, then I am sure the partnership options will be there. So in anticipation of that, we continue to grow the business and do it profitably. We don’t want to make losses in the business. So the business is profitable and we grow it by around 10 percent to 15 percent every year in terms of new store openings etc etc and this will continue to happen till we find a partner and we then we can take it in a much larger format. Then we can even demerge it from the company and use it as a platform to build this franchise. So there is a lot of value sitting there but perhaps will be unlocked only when FDI comes in.

When do you see demand really coming back?

That is the most difficult question to answer because we do not know how this government is functioning. But by any logic, the government around one year prior to elections starts driving what you call priming the consumption engine. I think it might happen even before one year, it might happen now because if you see the FM’s statement, there is already talk of stimulus and all that. I think it’s still being discussed and it will happen I am sure. So I am pretty confident that at least leading up to the elections, you will have a good consumption space despite the macro headwinds.

When do you expect Tezpur plant’s capacity utilization to reach 100 percent?

It’s fully on stream. Of course, it’s not anywhere, nowhere near 100 percent of capacity. We keep bolting in machines there as and when the demand is. At the moment also, a fair amount of capex is put in because our toothpaste and hair oil sales have become very good, small packs in particular. And we need much more capacity. And we need much more capacity. So we are putting up lines there very regularly. But still, only by 2020 will it be fully 100 percent fully operational.