May pass on decline in input cost to customers: Marico

Speaking exclusively to CNBC-TV18, the group chief financial officer of Marico Milind Sarwate says they are considering reducing prices going forward so as to give the customers the benefit of declining raw material prices.

However, considering changing prices in the FMCG industry is difficult, Sarwate says they will not take any rapid decisions. “There is a lead time, there is a lot of work involved, so we will not take kneejerk calls,” he said.

Like most companies, Marico hiked prices in the first half of FY12 to counter rising input costs and economic slowdown. On the back of the hike in prices, Marico saw an almost 450 basis point advantage on raw material costs this quarter, which they ploughed back into ad spends.

The FMCG company reported net profit below street expectations at Rs 72 crore for the quarter ended March 2012. Volume growth came in at 17% overall and 12% for the domestic business. “Rural and modern retail sales have also grown at 40% plus each,” added Sarwate.

Going forward, Marico expects volumes to grow by 12%.

Below is an edited transcript of his interview with Latha Venkatesh and Gautam Broker. Also watch the accompanying video.

Q: What's been the volume growth this time around, and pricing was expected to be subdued, so what have you delivered this time?

A: The volume growth this quarter has been quite strong, it has been 17% for the group as a whole and especially in India we have done quite well. As you know the impact of the price increases that we had taken in the first half of the year would start wearing out as the base becomes one with the price increase. So may be relative to that the volume growth number is not coming out so strongly, but it is a pretty good number at 17%.

Q: What's been the domestic growth like, and can you break it into categories like Parachute and the other products?

A: The domestic growth rate in terms of volume has been pretty strong at about 12%. Parachute Rigids, which is the most commonly seen stock-keeping units (SKU) that we sell for coconut oil has seen a very strong growth rate of about 11%.

If you look at Kaya, the same store growth has been around 16%. The international business, where the volume growth competition is a bit difficult, even that has put in a number of 6-7%. So on the whole I feel we are satisfied with the kind of growth numbers that we have put in in terms of the underlying consumer franchise.

Q: How much has been the rise in realisations and what is the operating margin picture?

A: We had already announced that while choosing between margins or volume growth, we would go for volume growth. So while we have always had 16-17% volume growth, our margins have been always between 12-13% and this quarter has not been different.

In terms of sheer raw material cost, we had an almost 450 basis point advantage this quarter over corresponding quarter of the previous year. We ploughed that back into our ad budget, which was pretty strong this quarter at about 14-14.5% of revenue.

Net-net, we were able to hold the margin at around 12.5-12.7% during this quarter. If you look at our gross margin, that is if you add up the operating margins and the ASP expenditure, we have moved up by about 300 basis points to 27%.

Q: On advertising and sales promotion (ASP) the guidance was about 12%. You said 14-14.5% and it is a one off. Where do you see it stabilize?

A: Our long term projections have always been between 10-12%. You know in our industry depending upon what you do with your new products, what you do with the strengthening of the existing portfolio your spends from quarter to quarter may keep differing. But this is not the quarter in which anything substantially different would happen. So in Q1 you might see the number going back to the long term mean of about 11%.

Q: An advertising cost is always an investment as well, so how does that help you in FY13? Can you guide us in terms of volumes and sales?

A: I feel that we have focused more on the building blocks of growth rather than targeting a certain number and that building block investment has paid off. In terms of topline, we will continue on the same growth path. Our first quarter numbers obviously I can't comment on that but early sense have been alright, nothing different happening.

If you come to ASP, this quarter particularly would see a skew depending upon whether a company is investing in ASP on IPL or not. We are not an IPL advertiser in a big way, so this quarter we might see a subdued ASP number from Marico. But I feel that when you are looking at the long term India growth story, a quarter should not cause us to take a deeper look than what we are doing today.

Q: Could you mention the growth in Saffola and hair oils?

A: Taking hair oils first, we have clocked a consistent growth in hair oils of 24-25%. Market share we are doing pretty well. Saffola keeps turning on those quarterly performance, that is 11% volume growth. It continues to hold its market share amongst premium ROCP. If you look at the growth potential of our flagship brands, that has been intact, so I wouldn’t say there is any shift in those stories.

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Q: Have you seen any slowdown in demand?

A: We have not seen a slow down, but I feel that statistically we have been clocking very strong numbers and it may be difficult to just maintain those numbers. For example, our rural sales as well as our modern trade sales have both been growing at 40% plus in India. Those numbers are not really easy to keep up quarter after quarter.

Having said that, I don’t think we have seen any specific sign that demand is slowing down. Some of the related industries, like retail for example, are showing signs that there is a slow down. There is a sign of slow down in high end consumer items, but as they FMCG always gets impacted the least and the last, so let’s hope that that day doesn’t come.

Q: What are you guiding by way of revenues and volume? Can we work for FY13 also with say a 12% blended volume and 24% revenue growth?

A: It’s difficult to predict the revenue number, but the volume growth is something which we have been targeting in the region of what you mentioned. Pricing is a situational call which we will take. We already declared that if we see significant drop in the raw material base, then we might pass on a large part of that increase to the consumers because finally we want to build a very solid platform to tab into India’s growth story.

So I won't be able to comment on the sales value numbers, but volume growth is something which we are clearly targeting both in India and overseas, also in Kaya in terms of same store growth.

Q: Do you expect this raw material advantage to continue, you expect the prices could get a little easier atleast at the first half of FY13?

A: So to say fingers crossed but if you look at copra, for the whole year it was 20% higher than last year. For Q3 it was about 20% lower. On quarter on quarter is about 12-13% lower, so one doesn’t really know. But the kind of inflation that was seen in copra for the past two-three years we may not be seen, so we are hopeful on that front.

Q: At what level would you look at passing on the advantage?

A: Firstly in an FMCG situation it’s not very easy to keep changing retail prices. There is a lead time, there is a lot of work involved because we end up distributing something like 4 crore bottles of coconut oil every month. So we will not take kneejerk or rapid calls; we will wait and take a decision.

There is also a coinage issue involved; you have to price the product at a number which is very easy for the consumer. You can't make it Rs 52.56 or something like that.

Q: Anything on the international front that you can update? Would you think that the volume growth will be better than the 6-7% that FY12 has yielded?

A: I hope so, because most of the territories where we have been traditionally strong were plagued this year by either a political turmoil or some other movement. In any case, foreign exchange fluctuations were pretty stiff. Inflation ruled in most of these countries.

Bangladesh, for example, we were not having a good time. Competition wise we have retained our market share; our new product has been doing well, but in Q4 we have not done well.

Egypt has been another story. Despite the various disturbances, we have done much better than last year. Our Egypt business is back on an even keel and we hope that the political situation in Egypt does not deteriorate. We should be having good time ahead in Middle East and North Africa.

In South Africa, our business has become sizeable. It has crossed Rs 100 crore turnover. Vietnam we continue to do well. There, as you know, we are fighting with global MNCs but X-Men, which is our flagship brand, has done pretty well. It continues to have a 45% plus market share, so international business has been a mix bag.

We are hoping that Bangladesh stabilizes, there is an election in the offering next year. Hoping that things will stabilize in Bangladesh, that’s the principle concern, I would say.