Will use Discaria buyout to strengthen SA supply chain: Dabur

Consumer products firm Dabur has acquired a South African cosmetics company Discaria Trading for an undisclosed amount. The company will be used as as a base for local supply chain expansion and perhaps, other acquisitions in future, said Sunil Duggal, Chief Executive Officer, Dabur.South Africa is a big market and it will be essential to have a good local supply chain, Duggal said adding the company plans to sell haircare products in the country. The company generates USD 5-10 million in revenues form South African business, he said.Below is the verbatim transcript of Sunil Duggal’s interview to Nigel D'Souza and Latha Venkatesh on CNBC-TV18. Latha: It is all of a 1,000 Rand equity capital for this unit that you have incorporated in South Africa. Is this just a beginning, are you going to capitalise it more, what are your plans? A: Yes, This is just a beginning. It is a shell company which we will use to acquire or to build the local supply chain and to perhaps also to get local brands into it. So, that will happen in the future. At the moment we are just preparing the ground for enhanced activity investment in South Africa. Latha: But what is your market research preparing you for in that country? Give us some timeline, some sales revenues that you are looking at and some capex plan that you are capable of? A: The first step would be to build a local supply chain in southern Africa. Now as you are aware all the four parts of Africa south, east, north and west, comprise of separate free trade zones and it is important to have a local supply chain in each of these otherwise it becomes prohibitly expensive to market products there because of the tariff barriers. So, we have got a local supply chain and the west, north and eastern part of Africa now. We lack one in south and the best way to do it is to acquire a supply chain, acquire a manufacturing facility etc and it is much cheaper to do that than to build something which is greenfield in that part of the world. So, that is the intent. First to build a supply chain and then perhaps to acquire local brands. Latha: What is the size of the market and what is the kind of capex you are looking at?A: At the moment we are looking at ethnic hardcore and the size of the market would be in the region of USD 100 million. So, it is pretty sizeable and then we can expand also into other areas in skin and oral care which we have the portfolio. So, there is a huge amount of upside which we can see in South Africa. It is a big market, but then it is essential to have a local supply chain. The currency is very volatile and importation into the country also attracts tariff barriers. So, therefore it is essential to put our foot in the ground there.Latha: Give us a few more numbers, what money do you make in South Africa now in terms of revenues and what maybe the capex you will put in?A: Well the revenue stream at the moment are small, 5-10 million but there is a lot of upside there if you do local manufacturing. The capex would not be very large to begin with. Instead of putting in capex directly we prefer to buy an existing supply chain, set up etc. We don't have any budgets in mind but they won't be anything very substantial. It is at least far less than putting up a green field facility. When it is ready we would focus upon acquiring local brands and it is very difficult to sipe that investment. It could be small, it be reasonably large. But in Africa we would prefer to go a little slow and steady rather than to do anything big ticket because the issues with regard to currency volatility are very light there. So, you can make a mistake in putting too much money too quickly there. It is better to build upon a business brick by brick and that is really which will generate sustained profitability.Latha: A word on the local markets as well. One was under the impression that things are picking up in the rural economy. We saw tractor sales improving over the last several months and one thought the rains would bring in a little more in terms of demand. It was a bit of shocker to see the Hindustan Unilever (HUL) volume growth at the lower end of expectations or even the lower than the lower end at four percent. Should we understand that the economy itself is not growing as one thought it is or is this a story of intense competition?A: It is a story of lag really. We should see growth picking up, all evidence points in that direction. But like I have always been saying that don't expect anything significant to happen before the beginning of the second quarter. So, hopefully we should see some green shoots emerging in perhaps September and then the market should perform better.At the moment the demand situation continues to remain quite stressed and it has been like this for the last three or four quarters. In fact it has been getting progressively worse but hopefully things have bottomed out and we should see better days ahead.Latha: The Goods and Services Tax (GST) amendment bill looks like will be on the anvil and will be passed by probably August 10 and the expectation is that by the end of calendar 2016 the various states would have passed the state GST bills as well. Should we look at some substantial revenues, savings, for companies like yours in FY18?A: It is quite possible that there would be a lot of revenue savings, but one can't take it for granted. A lot depends upon the rates and the various slabs and there is a lot of work to be done in GST. So, I don't see implementation happening say, by April 2017, it will take a little bit longer than that but we are hopeful that the outcome would be generally positive for us. We have many products which is in the health and wellness domain which should have a little bit more benign rate. So, we should benefit from that.Nigel: Your honey products business there was a price cut that was taken in the recent past because there is a new player there who is giving you a run for your money. Has it helped you in terms of getting market share?A: It is reverse the downward trend. No, we haven't done a price cut. We have just given some additional provisions to narrow the price gap a little. There is still a significant price difference and the next competition but the attempt is to narrow it but ultimately the value proposition has to be more than just pricing comparisons. We believe we have a superior product and superior value proposition and we believe that will prevail. So, at the moment of course like with most of the product like the sales of honey also are under pressure, partly on account of competition, partly on account of overall lack of demand but I am not overly worried about it. Again by the second half of the year, third quarter etc things should pick up.Nigel: There is so much talk about the monsoon and things are going to improve from here. I wanted to know, how does the summers go. Was there good demand for your juices, did you see any kind of incremental volumes come in from there or was it a tad bit better than what we have seen in the past?A: Yes, the juices had a reasonably good run in the summer but again being of a slightly discretionary nature the demand wasn't as intense as what we have been used to in periods of better demand. The other summer products which are driven by hot summers like glucose etc did well. So, overall the summer has been reasonably beneficial for us. But in the context of the compression in demand it has not been as good as we would have normally expected it to be.Latha: So, double digit revenues and 20 percent margins are still doable?A: Not in the first half for sure, but we would give it a shot in the second half.Latha: Margins, I assume raw material products are still not a drag and prices are still very low?A: Raw materials are still pretty benign. Some pocket of inflation like sugar etc but few and far between. Overall there is no stress on margins.Latha: So, 20 percent margins should not be an issues, it is only the revenues that you would worry about?A: Yes, the whole focus is on revenues. Margins are pretty much taking care of themselves.