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Last Updated : Apr 19, 2017 12:15 PM IST | Source: CNBC-TV18

Require evenly spread monsoons; expect benign raw material costs in FY18: ITC

In an interview with CNBC-TV18, S Sivakumar, Group Head-Agriculture & IT Business at ITC spoke about the latest happenings in his company and sector.

Fast moving consumer goods (FMCG) companies have a bunch of cues to watch out for including monsoon and goods and service tax (GST).

In an interview with CNBC-TV18, S Sivakumar, Group Head-Agriculture & IT Business at ITC spoke about the latest happenings in his company and sector.

Below is the verbatim transcript of the interview.

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Anuj: If the India Meteorological Department's (IMD) prediction is right, it would mean two back-to-back normal monsoons. Do we see that leading to higher demand considering that it is back-to-back good monsoon?

A: I think that is the hope at this time. One of the issues with last year's monsoon although on aggregate it was normal, you had shortfall in parts of south, parts of north-west and east. So there was anywhere between 5 and 10 percent deficit in these three regions; only central had a bit of excess. We have a couple of crops like sugarcane and cotton suffering last year.

This time, from what we heard yesterday, it is going to be more evenly spread and certainly it's the forecast at this time. So how it spreads is something that we will keep watching for and not only regional spread but also the spread over the monsoon season like the El Nino effect is going to be in September or later. Therefore, to that degree we are going to see more evenly spread both from time perspective also. I think that's the reason to cheer and optimism at this stage.

Latha: At the moment which crops would you be positive on in India given what you have head from the IMD?

A: The kharif crops; the big one is paddy, oil seeds, sugarcane and cotton. We do not have a minute regional spread but with the indications that we have on all three counts; the quantum, regional spread and time spread, all of these should be looking good. Paddy is typically, there is a small amount of irrigation so normally it is resilient. However, oil seeds, with good rainfall certainly productivity is much better and when there is more water, sugarcane is something where you will see much better yields. To relative to last year we will see a better sugarcane crop. Oil seeds were good last year also. So there will be an improvement in sugarcane and cotton. Paddy and oil seeds will maintain.

Latha: Generally would you say that for all industries that are buying food as their raw material, food grains or crops as their raw material, FY18 is likely to be good partly because of the monsoon and partly because the rupee is strong. So even if you are buying edible oils for soaps, you think raw material prices are going to be under control for FMCG?

A: Next year we can look forward to relatively benign raw material prices both from better monsoon and domestic crops and potentially imported at stronger rupee. So, on both counts we should see a more benign price situation.

Anuj: In your nine month business there was a bit of fall in margin and that is why while your revenues went up in the agriculture business, almost near double digits, the profitability went up only 7 percent. Do you see that correcting next year?

A: It's a question of mix in terms of where the opportunities are. Sometimes there are more opportunities and relatively high margins and sometimes relatively fewer margins. So when you look at this, you also see it from a perspective of how much capital is deployed and what kind of return one is getting there. A part of that is on account on mix changing there, the absolute quantum of certain kind of commodities increases in the overall portfolio. However, it's too early to say anything at this stage and we do not give any guidance as to what it would be but one can look with more optimism because there are going to be all-round better crops. So you have more to transact with both from the perspective of sourcing for our FMCG products which is a one key activity and second, also sourcing for other customers both in domestic and global markets. So there is optimism on that count as well.

Latha: A question on demand - if it is a good monsoon how would you look at rural demand as well if you are saying that crop prices will actually be under control partly because of cheaper imports and good monsoon. Won't that be negative?

A: Typically when you talk of good monsoon and very counterintuitively an unhappy person is a farmer. Quite often farmers says a wee bit bad weather leading to slightly lower crop is much better for me for higher prices than very good weather conditions and you have much better crop effectively my income stays the same or comes lower.

So at an individual unit level that is what the perception typically occurs and therefore farmers always look for a wee bit less production than demand because that is how the supply demand dynamics work, but when there is an all-round better crop the absolute total income goes up. So per unit price typically is lower, so farmer is counting - my per unit price has gone down but typically for the same inputs when the weather is good then there is a larger output and therefore even at marginally lower price there is aggregate income which goes up. Therefore, you would have larger quantum of money in the hands of farmers leading to better demand.
First Published on Apr 19, 2017 11:05 am
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