Hope to garner Rs 10K cr revenue by 2020: Marico

Below is the verbatim transcript of Saugata Gupta's interview with Farah Bookwala Vohra.Q: Let me start by talking about Marico’s trajectory. Today Marico is Rs 5,000 crore plus company and by 2018 you are looking at garnering revenues of about Rs 10,000 crore. As you go along this path and try and achieve these revenues, what would serve as pillars of your growth over the next three to four years?A: The way we have been looking at is if you look at our past track record of delivering around 16-18 percent topline and a 16-18 percent bottomline, we want to first maintain this track. However, what we realise is that what got us here from the Rs 1,000 crore to Rs 5,000 crore journey, by doing the same things will not go to the next level. I think what we have undertaken is, what we call a five year transformation journey. What we have identified is five areas where we need to be top quartile amongst all global consumer packaged goods (CPG) players.The approach is very simple. We have painted a picture of what this organistaion is going to be like in say 2018-19 whether it’s we do it in 2018-19 or 2019-20 that Rs 10,000 crore mark, what is more important to say is that can we look future backward and work towards a kind of a milestone in all these five areas of transformation we have identified and make it best in class CPG company. Our approach is that if you do the right things automatically the outcomes will happen. Q: One of the biggest areas of weakness has been what is happening in rural India where rural inflation continues to persistently be higher than urban inflation thereby denting consumer sentiment in rural India and we have seen the kind of impact that has also had on Marico’s results as well as a lot of other FMCG companies as well. However, as you take realistic stock of the situation how far do you think recovery is?A: What has happened in the last six months or so, there are two issues. I think one is that obviously there is a bit of a crunch in rural liquidity and number two is I think what has also happened is the fact that in the sense that there was a sort of a certain momentum which was there, the base effect has come into being. So, yes and no. I believe given the fact that input cost situation is an all time low, this gives us an opportunity for all FMCG companies to actually drive a sought of in terms of pass on the benefits to the consumer in terms of pricing. Also, drive innovation in terms of increase the advertising inputs and actually kick start consumption. However, having said that we believe that urban consumption recovery is going to happen perhaps earlier than rural. Rural is a wait and watch also because some parts of the country has suffered two consecutive years of drought. So, that is a factor to come to it. However, having said that, are we too worried about it? The answer is not really because I think this is a great opportunity for a lot of FMCG companies to actually take certain pricing calls aggressively, don’t look at short-term margins but ensure that this is ploughed back into both, driving affordability, driving distribution and driving innovation.  Q: You talked about an aggressive pricing strategy and we know that Marico has decided to take price cuts and buy market share as well as volume growth and this is going to be your strategy going forward. Right now Marico benefits from benign commodity prices as well as the fact that you already have leadership positions in many of the segments that you operate in as well as the fact that you have sophisticated pricing models as well. How long can it be sustainable?A: What we are trying to do essentially is to drive these price cuts to get the momentum and kick start the consumptions. We do have obviously also innovation to drive the growth but at the same time pricing is another lever to drive the growth. What we are looking at and if you look at the entire sector, is that earlier people and lot of players before 2012 were delivering double digit volume growth, 10-12 percent, can we get the 6 percent which we have been doing to 8 percent and gradually to 10 percent. Once we do that I think the momentum will take care of itself.Having said that, yes, we have been, the sector has been lucky enough to go through a kind of deflationary phase in terms of input cost. How long will that last? It is difficult to predict but we can see at least a 9-12 months cycle where things will continue to be soft. We are hopefully that in the second half of the year and going forward in 2016-2017 things like Pay Commission, One Rank One Pension (OROP) implementation those will also drive a little bit of consumption.Q: Let us talk about some of your segments as well and I want to touch upon Saffola. Now, Saffola has been underperforming and in your latest quarter also, you have seen a growth of just about 4 percent. Earlier as well, you have said that you would like the Saffola portfolio to contribute a lot more to your revenues. Why is it that efforts at innovating in the Saffola portfolio is not paying off, what are you going to do to cause or to bring about an uptick in demand as far as the Saffola portfolio goes? A: I think we have been having disappointing results with Saffola and what we had been doing, the easiest one obviously, is to do a price cut. However, I think that is not the entire story because at the end of the day you have to invest behind the brand because Saffola is a brand which needs investment. It is a brand which a certain set of people who are health conscious who move into this brand and what we have done over the past five to seven years, if you look at say five to seven years ago or 10 years ago it was a very therapeutic brand. It is now from therapeutic to a pro-health or a pro-preventive kind of a brand. Having said that, again I think two things happened, one is obviously there was an affordability point of view. Number two, what had happened is that there was another issue of we getting squeezed from both the entry point level through some brands and at the top end through certain other species of oil. So, we haven’t done innovation at the top end which we have to do. However, the second thing which was happening was we were attracting a set of consumers who are pro-health were also consuming less oil and we were not getting a set of consumers who wanted to have a healthy live but the brand was seen as too pro-health and a niche for them. So, we were not playing all the entire variants. So, one of things which we have done, started the processes is that one we have done is selective price cuts. We have not done across the board price cuts because we need to protect a certain level of margin. Secondly what we have done is, we have started pushing some of the other entry point variants of Saffola which are the affordable Saffola and that should drive our volume growth. We are fairly confident of a much better performance in the second half of the year. I think we wanted to do a lot of experiments, we tried four-five things, some worked, some didn’t work but at least we now know what is going to work for the next couple of years. However, having said that, we haven’t done enough innovation at the top end which we have to do. _PAGEBREAK_

Q: Coming to the Paras acquisition that you have made in 2012 and when you acquired brand such as Livon and Set Wet. It's been three years but that portfolio also continues to underperform and one of the reasons that you have mentioned in your own investor presentations is because of lack of penetration and as well as low investment. So going forward how are you going to relook at this portfolio and what kind of investment can we see to drive this particular portfolio?

A: I think two things happened. When we did the Paras acquisition in early 2012 it coincided with the urban consumption slowing down. So therefore some of the categories in which Paras participated, those categories which were growing at high double digit rates, slowed down to single digits.

The other thing that happened was that it was not a straight pass. It was with a Reckitt for a year and this was a low focus brand because they always intended to sell that part of the business. So there was erosion of brand equity during that time. So the last two years before we got the brand there was some erosion of brand equity because there was not long-term equity behind the brand. So what we did and that was something which we perhaps in hindsight didn't do well, there were three essential franchises. There was a Livon franchise which was into hair fall and serum, there was gel and there was deodorant (deo). In both serum and the gel, we were market leaders but the category penetration was low, so therefore we ideally should have investment behind growing those categories where we are market leaders and as market leaders it is our responsibility to grow these categories. Instead perhaps we picked on the more exciting category which is deo, which was very highly competitive, it was cluttered. The investments required was higher and actually amongst the three it has lowest margin also. We put all our investment behind trying to grow deo market share and there was innovation disruption that happened in 'Fogg', the category changed from 'gas' to 'no gas'. As a process, those two years of investment didn't give us the yield. So fortunately we have started doing the course correction. So, first we started driving gel which we started off sometime last December. Gel is growing. We have now started the serum journey. We have much improved product, we have gone into LUP; one of the reasons of success of gel was driving the Rs 10 price penetration. So we have started the same thing with Livon and also in Livon Hair Gain, which is a hair fall product, we faced a lot of counterfeit which we have currently corrected and taken certain measures. So we believe that if we can get to the two segments back into growth phase, automatically the entire portfolio will start growing. Deo is on hold. What we need to do is at the end of the day we have to maintain where we are and perhaps we are planning some renovation on the brand sometime in the near future in the next couple of months.

Q: But when you say deo will be on hold. Are you trying to say that there will be no further investment that will go into the deo category?

A: We are saying that unless we do some renovation on the brand because deo category needs some kind of a differentiation to drive the growth and therefore there is no point investing behind it. In any case it is under the same brand Set Wet. So we are looking at a much larger frame of male grooming as oppose to saying that this is for gel styling and this is for deo. So we are looking at an umbrella male grooming brand like Set Wet and as long as we advertise Set Wet, it will have a rub off on deo.

Q: Coming to value-added hair oils, a very innovative segment by Marico but the real issue is that today when you look at the portfolio that you have and it is a high margin category but the margins are not as high as that of your competitors like Emami and Dabur. Why is this case?

A: The way to approach it is that we have been growing market share both in value and volume terms. We have a much broader participation strategy. We do not participate in one single segment and if you see the past, the sub segments were specie based or seed based. I think we have moved it to more consumer need base because what people look at this category is a fine balance between sensorial and nourishment and within that there is also specificity of problem solution, for example we believe hair fall which is a Rs 900 crore market, is a very attractive market. We participated selectively in the south but now we have a product which we have test marketing, prototyping in the west. We believe it has huge potential. Similarly we have found out another way, mustard is a huge pool in some of the north Hindi speaking markets.

So our strategy is a much broader participating strategy and the way to look at it is that we straddle across different price points, so you might have 'Shanti' at the bottom of the pyramid but you have 'Hair & Care' or tomorrow something which is premium hair oil which will be at the top of the pyramid. So we want to straddle and play across the entire pyramid and our endeavour is that how do we in the next three-four years move our volume share from currently 30 to 40 and our value share which is 22-23 at around 30-32. So we are definitely looking at both volume share and value share moving in tandem. As far as margins are concerned, we have to look at what is our operating margin and we have said that as long as our operating margins for the entire group is within 16 to 17 percent, the kind of a threshold, we will maximise volume and we will maximise market share gain._PAGEBREAK_

Q: Marico has adopted an incubation model to prototype hair and skin products and this part of your endeavour to grow the portfolio as well. What I understand is that Marico is looking to pick up a significant stake in a start-up. Can you share with us what the start-up is likely to do and how it will help you in your endeavour? Do you have any specific targets that you can share with us?

A: I think we wanted to invest and we have put in some investment behind this salon – this is a skincare range which sells into the salon segment and more at the mass end of the salons. We believe that this segment is a key influencer, salons today, in terms of consumer habits of adoption of hair care products.

An access to this segment gives us some kind of a hold in terms of doing consumer insighting, test marketing new things. This company where we have invested, put a strategic investment in, is manufacturing skincare products for this segment. We believe there could be a portfolio in hair also which we can plough back in. So, it is just an experiment. We have just made a strategic investment.

Q: Also we understand that Marico has now set up a merger and acquisition (M&A) strategy cell and you have recently appointed Pankaj Saluja as the head of that M&A cell which is directly reporting to you. Over the next few years, what is your inorganic strategy going to look like? Is it going to be a series of small strategic investments like the one that you just talked about or would you perhaps also look at something as big as like the Paras acquisition that you did in 2012?

A: As far as M&A is concerned, I think one part which we have talked about is making a series of perhaps strategic investments into adjacencies which will help us in our core businesses and achieve our long-term aspirations. As far as the other part is concerned, I think we have now made a series of M&As in both international markets and in India.

We have a lot of learning’s from that and we believe that while the past, inorganic was a key driver of growth in the international business, we have sufficient scale and now that we have one Marico, we have unified the India international business, the first thing which we tried to do is how do we build capability in the international business for organic growth because we believe that inorganic can’t be an escape button for not doing organic growth and inorganic is more of a accelerator of growth and not means to grow.

I think we didn’t realize the full potential of the entire cross-pollination or the synergies which we have in each of our business in different markets which we have. So, in the last two years we have done a lot of, what I call course correction, building the foundation for the international business to develop capability for sustainable predictable organic growth. We now believe there are opportunities. We have to also de-risk our business, there is some concentration of profit pool in certain markets and therefore there are certain markets in both South East Asia, it could be in South Asia and in East Africa where there could be opportunities for what I call inorganic opportunities for growth which we will look at it.

Q: Are there specific geographies that you have looked at which in East Africa that you would want to get into in perhaps the next fiscal year?

A: We are looking at emerging markets of South East Asia and East Africa as the first base. Now, there could be certain opportunities even in existing markets which either gives us dominance or scale up because at the end of the day I think we need to also ensure that each of these hubs where we have a management bandwidth and a system and distribution, how do you realise the full potential of that.

In a lot of our markets, we are in one pillar which is basically either male grooming or hair nourishment, I think it is important that we get into both and perhaps look at some adjacencies. For example, skin is an adjacency.

Q: Since we are talking about international markets, I should touch upon your international business as well which has also recently been under bit of a slowdown especially because your largest market Bangladesh has been underperforming. What is your forecast on your international business for the next few quarters? Do you see that correction taking place immediately or do you think that recovery is still a bit far away?

A: There were multiple issues across multiple fronts and that's one of the reasons our international business has not been performing well. However, we didn't want any short-term fixes. We wanted a long-term fix and long-term fix means a correct portfolio with a right to win, getting the go-to-market (GTM) in place, getting the cost structure right, getting processes, system and talent and to me once you do that then you can have a repeatable model of growth, which is a sustainable profitable growth. We have been getting those things right.

As far as Bangladesh, which you mentioned specifically, there was an issue because our huge dependence on one particular Parachute coconut oil, which has 80 percent market share, the loose to brand has also been 80 percent. I think that has lead to saturation, so we had to diversify our portfolio aggressively, which we didn't do and the reason was that in our earlier structure where international business was a separate profit centre. Bangladesh was almost like a cash cow to the entire business and therefore it was to an extent perhaps in hindsight cross subsidising, we had invested. So we are getting into the investment mode.

The point is that still Parachute contributes to maybe 85 percent of the total portfolio. To get that 85 percent of the total portfolio and to get that and that is saturated. It cannot grow beyond 1 or 2 percent right now but at the same time there could be opportunities. So to get 15 percent to grow at 40-50 percent, you need right portfolio that takes little time. I think what we are doing is, we have been patient about it. In some of the cases recovery has taken perhaps a couple of quarters more than it should have, but having said that I think we are pretty more confident that international business at least in the next couple of quarters getting back into growth and delivering 10 percent plus constant currency growth, is very much imminently possible because a major part of the course correction is over and having said that we are far more confident about the second half in terms of international business getting 10 percent at least to start off with and then progressing towards what is our aspiration of 15 percent constant currency.

Q: It is also important for us to touch upon the growth of private brands in India, for example one of the brands that is most talked about today is Patanjali products. Today it has grown to become Rs 2,500 crore brand competing with some of the biggest MNCs in India. Do you think India has come to that stage where these private brands are now going to have a bigger play in the consumption pie in India and that perhaps MNCs will have a tough fight in terms of protecting their market share as well as protecting their consumer base?

A: If you look at it, most of the categories, there is enough headroom for growth and penetration which is low. The other interesting thing is that today there is a convergence as far as the aspiration from the rural and the urban consumer is. A lot of people at the bottom of pyramid are looking at the same aspirational brands; it's the outlay which they are look at. So, as long as you continue to innovate and drive better availability and affordability, I think it is a level playing field.