The unseasonal rains are likely to have a significant impact on rural demand, says Sunil Duggal, chief executive officer, Dabur. He however, hopes the rising urban demand on warm summers will be able to combat the fall in rural sales.
In an interview to CNBC-TV18, Duggal says he expects volume growth to be in the range of 6-10 percent and rules out the likelihood of any price reductions. Furthermore, he expects to log in 19 percent operating margins in FY16 and says the company has a lot of launched lined up for the upcoming quarters.Below is the transcript of Sunil Duggal's interview with Sumaira Abidi and Reema Tendulkar on CNBC-TV18.
Reema: Very recently we had the management of Mahindra and Mahindra (M&M), they held an analyst call and they indicated that the demand for tractors is worse than the most pessimistic scenario they had envisioned and tractors too is an indicator perhaps of the rural demand. In the last quarter Dabur had lower the volume growth outlook to 6-10 percent. How is Q4 shaping up, so far in your sales have you seen some slowdown in rural consumption, in urban consumption and therefore what will it do to your volume growth in Q4?
A: It will be inline with what we had indicated which means that growth will be in the region of 6-10 percent in volume terms. So demand remains depressed. There is a fair amount of pressure in terms of rural demand in particular but even urban demand doesn’t seem to be picking up as of now. So we are hoping now for a warm summer which can fuel demand for our summer products and that could perhaps mark the beginning of the change towards better days ahead, but too early to call as of now.
Sumaira: A big pull and push is happening for a lot of companies like yours, so you have benign raw material prices on the one hand but there is agrarian crises which has cropped up. Do you think there could be a downside risk to your assessment of 6-10 percent volume growth?
A: I think the downside risk would happen in the event of a significant failure of the monsoons then of course the volume estimates could go southwards very quickly but unless that event happens or any other event which we cannot visualise, I think 6-10 percent is within reach. We do also expect that of now our low base of last year demand would pick up and we would see some acceleration in terms of growth both urban and rural particularly urban.
Reema: This time around we have got a lot of uncertainty because of the damage to the rabi crop because of the rains, do you think the volume growth in Q4 could be lower than what we saw in Q3?
A: The unseasonal rains which do seem to have damaged rabi crop in northern and western parts of the country may have some impact. How severe the impact will be is too early to say but certainly it’s not a positive sign and something which we were hoping would happen, so it could depress rural demand to some extent. Let’s see if the uptick in rural demand which we anticipate can compensate for that but it’s too early to say. So, Q4 is going to be relatively muted quarter. I do not think it will be a very bad one but it’s unlikely to be radical improvement of what we have seen in the previous quarters.
Sumaira: You had indicated last quarter that there was no pressure for price reduction but may you consider it now in the event that you need to protect your volume growth?
A: Not to a large extent. We will be taking up promos to some extent in selected brands where there is a lot of heightened competitive activity but no price reductions. We do not envisage that happening, in fact we will see selective price increases in few of our brands. So, we do expect around 1-2 percent of price increase to happen in the next fiscal year as things currently stand but that maybe mitigated by heightened trade promotional and consumer promotional activity in some of our brands but by and large there won’t be much activity on the pricing front either upwards or downwards.
Reema: How has the overseas business panned out in this quarter? In the previous quarter you had faced some one time pipeline correction in Namaste etc, any aberrations in this quarter which will affect your overseas business?
A: The collections have been done. There would be improvement in growth of some of our overseas businesses, the north American business in particular. The Middle East and North Africa (MENA) business continues to remain at a good momentum and the Turkey business is performing well. So overall there will be some improvement in our overseas growth as compared to the previous quarter at least, so we should look at better numbers coming from there.
Sumaira: Any new launches that you have planned in FY16?
A: A large number but we have been circumspect on how many actually go to market, so on the pipeline there are around 10 significant launches, all of them may not go to market. It depends upon market sentiment, it depends upon the demand situation but we are prepared, in fact we have been little quiet in terms of new product launches in the last 12 months, so there are lots of products in the pipeline, waiting launch and we will see how things go. If it’s a long hot summer then we will be launching aggressively a slue of summer oriented products in beverages and other areas but if it isn’t then we may go a bit slow and look at the winter months for launch of the winter products which we also have in the pipeline.
Reema: The tailwind for all the fast moving consumer goods (FMCG) companies has been the raw material cost. How has the raw material cost been in Q4 compared to Q3 or last year?
A: It’s definitely been more benign and we are seeing improvement in margins. To some extent they will be taken up by the increase in the promotional and other spends which would nibble away at the improvement in our gross margins but something will flow down into the EBITDA line. So the overall profit and loss (P&L) construct would be stronger from the point of view of margins than in the previous couple of quarters. So that’s the upside like I said we are having headwinds in terms of demand but tailwinds in terms of margins.
Reema: Give us a sense in FY16 for instance what could be the sustainable margin range or the margin band that you think Dabur will be able to enjoy?
A: We are going for 19 percent EBIT margins and that’s something which we can reach which is around 1.5 percent above what we been doing in the last one year. So definitely there is significant improvement, but a lot depends on demand outlook and the consequent comparative activity which could raise our agro budget significant beyond what we are contemplating as of now. So its still early days, the year has not begun and there is a lot of uncertainty in the environment but at the same time of a very low base of last year we should see improvement in demand particularly urban demand. So I remain optimistic about the prospects for next year.
Reema: Just to clarify – EBIT margins you see at 19 percent not EBITDA?
A: Almost the same thing. You can take it as an operating margin which should be in that region.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
