Premature price rise not in line with input costs hit us: Marico

Regarding GST slabs, he said the four-tier slab structure is good. It aligns the current tax structure to most of the products with the entire industry, he said.Below is the verbatim transcript of Saugata Gupta’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Anuj: Your domestic volume growth was slightly lower than market expectation and that has been the industry specific issue. If you could tell us what is happening and when do you see volume growth picking up?A: If you look our case in quarter two, what exactly happened was while the rest of the portfolio did well -- if you look at value added hair oils which grew at around 11 percent, Saffola 8 percent, our youth portfolio grew at 29 percent, the issue was entirely related to Parachute. We perhaps took a pre-mature price increase which was not in-line with the input cost. We took that price increase in July. Our consumption especially in rural which Parachute has a significant part, continued to be stressed. That was one of the reasons that Parachute had a 6 percent volume decline.However, having said that, I believe that we are cautiously optimistic about a recovery especially in rural. Urban, there are some green shoots; that green shoots is being seen more in things like durables and autos, but I believe that with all the money flowing in because of the things like 7th pay commission and other things, there would be a gradual recovery in urban also.Latha: How is this supposed post monsoon rural demand looking like in the past one month? I mean we are perhaps a month after the rains have stopped, is it really indicating for the month of October an improvement in demand?A: Let me put the facts on the ground; I think this year there were some unseasonal rainfall towards end of September. So the harvesting has got a bit delayed. Now, after a good monsoon the harvest money and money comes in, it doesn’t immediately translate into consumption, but whatever trends are I think the worst is over and the worst was some time in quarter one and perhaps some part of July-August. I believe that rural consumption will go up. Now the question is at what time and at what pace -- that we have to wait and watch. However, as far as the bottom, we have discovered what the bottom was perhaps in beginning of quarter two.Sonia: We have seen a big expansion in your gross margins, but that is because of the way copra prices have fallen. Copra prices are down about 30 percent year-on-year (YoY). Do you see a further impact of that on your margins going ahead as well and is this 52 percent something that is sustainable?A: Overall, if you look at our operating margin, I think we are more comfortable with an operating margin of 17-18 percent. Copra has started hardening a bit towards August. What is most important is to get volume growths back and historically whenever there has been inflation since we compete a lot with unorganised who believe in cost plus, we tend to do far better in terms of volume growth.As far as we are concerned, our focus will continue to get back volume growths. We are most happy with a sustainable margin of 17-18 percent. So, in the second half you won’t perhaps see margin expansion so much, but I think what is more important is to get the volume growths back.Latha: Will there be price cuts?A: No. If you really look at it, I think the input costs have bottomed out. In fact copra is going up, crude of course is stable but it is certainly higher than what it was in the second half of the year. We won’t take price cuts, but we will be certainly much more price competitive with respect to the unorganised and the locals in the second half of the year.Anuj: Three or four days back we were talking to the Dabur CEO Sunil Duggal and I asked him, in this environment are you willing to compromise on margin to see volume growth and he said yes, they will do that. So, the competition will do that. You think you will have to follow suit?A: As I said, there will be no margin expansion from now on. Therefore, whatever the input cost increases that will happen, we will absorb that. I believe, as I said that if you look at our first half, the operating margin has been a little higher than the 17-18 percent of kind of a blended margin which we are talking about, that is the margin we believe is the best in terms of driving volume growth.Anuj: Forget about margin expansion, the margins are healthy in an environment where the volume growth is not there. Are you willing to compromise on say letting margins go by 200-300 basis points if that leads to volume growth?A: I think the question is the right pricing. I think margin is just a derived function of that. What we intend to do is to ensure that the pricing is best to drive volume growth. As a result, the second half absolute margins will be slightly lower than first half and we are happy to do that as long as volume growths come back. The question is as I said, organisationally we believe in three things that we need to give the best pricing to the consumer, we need to invest behind long-term innovation and ensure that our long-term strategic initiatives like on talent and other initiatives continue to go ahead.If that means a little bit -- obviously in the second half as I said that the margins will be slightly lower than the first half and also the second thing that will happen is as I said that we will also get out of the deflation effect from quarter four. Now that also gives you cushion to absorb certain costs.Latha: I just wanted to get one word from you on goods and services tax (GST). Today we will probably get the standard rate, probably tomorrow. What is a rate which will be neutral, no benefit, is it 24, is it 26? What will be a harmful rate and what will be a palatable rate?A: Let me just give you a view of it.  I think that four slab GST is very good because what it does is it aligns the current cost structure or the tax structure to most of the products which are there in the entire industry. I think that is a very good suggestion because what it does is it ensures that it controls inflation, at the same time it ensures that in terms of the kind of compensation which the centre has to give to states is taken care of. We are most happy with this four structure rate. I think what is important is GST makes life far more simpler in terms of supply chain efficiencies. The second thing we really like it because of the fact that it gives us a level playing field with a lot of unorganised players because it will ensure far better compliance. So, a mixture of these two will be very good for players like us which have a lot of unorganised and a lot of locals we are competing with. The four structure, the four slab rate is very good.Latha: Which is your rate in the four slab, it might be 26?A: No, it is in different categories and different rates, but as I said what it does is it aligns your rate to what your current rate is in your net payout. So, that is a fairly good for the entire industry, I would say.Sonia: You did mention that your focus will now be on volume growth. When do you think the company can return back to that 6-8 percent volume growth that you used to enjoy same time last year?A: If you really look at our volume growth trajectory, there has been aberration only one quarter. Even in quarter one, we did have a volume growth of around 7-8 percent in India business. We are pretty confident that we will very soon recover and definitely by quarter four we will get back and there could be a significant recovery even in quarter three.