See Q1FY16 subdued; demand to pick up in Q3-Q4FY16: Dabur

The first quarter of FY16 would be a bit a subdued but the overall volume growth for whole of the fiscal would be in line is the word coming in from Sunil Duggal, CEO, Dabur India. Volume growth would likely remain in band of 6-10%, he said.

Demand will pick up in third and fourth quarter on back of hopes of good monsoon. So overall for FY16 demand looks fairly promising, said Duggal in an interview to CNBC-TV18.According to Duggal although urban consumption demand hasn’t picked up, rural demand has remained resilient despite challenging macros. However, rural centers have shown signs of emerging demand, he added.On the margins front, the improvement story is likely to continue for first half of FY16 but would remain subdued for the fiscal as a whole. We are looking at 100-150 basis points improvement in operating margins Commenting on ad spends, he said 50 percent of gross margin expansion would be deployed towards higher ad spends and balance 50 percent of gross margin expansion would likely flow through to the profits.

The FMCG major’s total income jumped 10.2 percent to Rs 1944.8 crore as against Rs 1764 crore in year-ago period. Net profit of Dabur India grew 21 percent to Rs 284.8 crore in the January-March quarter from Rs 235.3 crore in last fiscal.

Below is the transcript of Sunil Duggal’s interview with Anuj Singhal and Ekta Batra on CNBC-TV18.Ekta: It was a volume growth of 8 percent this quarter which came in on a base of 8.3 percent on a year-on-year (YoY) basis so congratulations on that front but how is FY16 looking? A: Looking alright. I think the first quarter maybe a little subdued but we should see pickup in demand happening on the back of what we hope is a good monsoon. The third and fourth quarters, there should be some turnaround. So, we are cautiously optimistic about the year. The unseasonal rains in the first quarter have dampened our summer brands a little bit so the first quarter numbers could be a little muted.Anuj: What is the trend in rural versus urban consumption because anecdotal evidence is telling us that there has been quite a bit of rural slowdown but there has been a bit of pickup in the urban consumption patterns? A: It has been a little contrary to what we expected. Urban growth has not picked up whereas rural growth has remained more resilient than what we expected. I think there is a bit of a disconnect in rural itself, the prosperous rural in the North West India, South India are doing extremely well but the more deprived rural markets in the eastern part of the country and central part of the country are not performing. So, there is a bit of disconnect between what the prosperous rural and the less prosperous rural is doing.Ekta: Would you think that maybe a monsoon which would be below average or the likelihood or a possibility of a below average monsoon might impact your sales in the rural areas at least in the first half of FY16? A: It is possible. Very bad monsoon would definitely impact sales, lower than normal monsoon may not have much of an impact as we have seen in the past. However, the fundamental issue is revival of urban demand. We do expect some signs of that emerging and we do expect in the second half of the year there would be a revival. It should have happened much earlier but so far it hasn’t but we still hope that it will but with a low base it is more likely to happen in the current year than perhaps  it was in last year. Anuj: What about your margins because 25 percent of your costs are related to crude and derivatives and while the last quarter was quite good in terms of crude price fall we have seen quite a bit of rebound in crude prices? A: There is a rebound and therefore we will have to lower our expectations on the crude derivatives a little bit. However, overall the margin environment still looks reasonably benign. I think the margin improvements will continue in the first part of the year, little hard to say how they will map out in the second half but the margin outlook remains good. Unless there is a huge change in the dynamics of oil.Anuj: First half itself if you could tell us the kind of trajectory that Dabur is likely to enjoy for margins?A: We are looking at 100-150 basis points improvement in operating margins and that seems to be visible at this point in time. Ekta: I don’t think we got a range or maybe a number estimate in terms of the volumes that Dabur could possibly enjoy in FY16. Could you give us a range or maybe what you might be working with? A: A 6-10 percent is the comfort zone in terms of the volume growth that we see this year. They may trend towards the lower end of this band in the first half of this year but hopefully will pickup momentum in the second half. However, 6-10 percent is what the picture is as we speak and it is unlikely to cross either of these two numbers. Ekta: I was reading some reports with regards to Dabur which indicated that maybe the urban demand revival would also depend in terms of pickup in general store sales, which Dabur is not seeing currently. Can you just illustrate for us what is taking place at this point and what do you think might lead to that up tick? A: We have done extremely well in modern trade. We have grown at 20-25 percent over the last couple of years. It is hard to project that kind of growth happening for another couple of years because modern trade itself is not growing at that pace. So, the general trade is instrumental and fundamental in demand revival. Also, last year we did have a comparatively poor set of numbers coming from institution and enterprise sales. This year it is likely to be much better. So, that also will contribute to growth. So, there are some tailwinds happening in terms of volume growth trajectory in terms of enterprise and we do see some revival happening in terms of general trade.Anuj: What is going to be your future strategy on ad spends. In the past you had indicated that you will not be spending too much on that, will you keep moving on that policy? A: As we speak we have put in a pretty aggressive set of numbers in terms of ad pro spends. We are taking up ad pros by around 100 basis points so the material cost impact which is expected to be around 200 basis points, around half of that we will pass on in terms of higher advertising and publicity (A&P) and the balance half should flow down into the profit. So, we are pretty aggressive at this point in time but having said that if we don’t see the demand reviving we might cut down on some of the initiatives. However, as we speak we are still committed to launching a large number of new products this year, much more than we did last year. Ekta: How is the international business doing, we do understand that your Namaste brand has been facing some transition issues? Can you tell us what you are working with in terms of FY16, in terms of growth as well? A: There were some corrections which we had to take in terms of the pricing, etc which were disturbing markets in Africa in particular but the worst is behind us. This year we should see some growth happening for the Namaste business both in North America as well as in Africa. So, the corrections and the pain which we had to take last year will no longer happen. We have seen bottoming out in terms of that business so growth should come back. Organic business in the Middle East and North African region (MENA) region continues to do well. We hope to maintain the same level of momentum as last year. I think the only thing which is bothering us in terms of international business in the current year are the currency movements. We do have pockets of extremely weak currencies in Turkey, Egypt, Nigeria, most of Africa. So, that means we lose a lot in translation and that does affect our numbers. Our constant currency growth in fact in the fourth quarter is almost 1 percent above our visible numbers and we do think that the currency weaknesses would impact some topline as far as even the current year is concerned.