Volumes a worry but see Q4 margins improve by 1%: Dabur

Sonia: I was just going through your press release where you do mention that in a low growth and challenging environment Dabur has continued to report a strong volume led growth. Just give us an indication of what you expect to see in the next couple of quarters? Will it be very hard for you to sustain this 8.7 percent volume growth given that the macro conditions have slowed down?

A: If you just take the last quarter, the volume growth has been in the negative territory for key HPC (home and personal care) categories like oral care or hair oils. The outlook for the near-future doesn’t seem to indicate there will be any significant uptick. So, therefore hanging on to these volume growth in HPC categories in particular is not going to be easy. I think we will have to exert whatever energy we have to get there.

Growth in foods has been a little bit better; category growth has been around 7 percent but still nothing very encouraging. So, so far the sharp increase in consumer confidence hasn’t been translated into any great deal of traction on the ground. So, growth is muted, the only positive sign is that the margin pressures would abate a little bit, we will be seeing a better gross margin delivery which hopefully should flow down.

Senthil: Are you seeing softening of input prices? How are you going to improve margins?

A: We would look at improving margins on the back of softening input prices. We do see a reduction in terms of the – freight bill for example will come down quite dramatically and the hydrocarbon down cycle should result in the downstream products becoming cheaper but so far that hasn’t happened but it is a matter of time. So, we would see some pressure abate as far as the gross margins are concerned. However, the volume side presents a larger area of concern.

Sonia: When you say larger area of concern what do you mean exactly because in the last couple of quarters you have indicated that you will be able to sustain 8-10 percent volume growth and 12-15 percent revenue growth? Would you scale down that estimate now?

A: Not in a hurry but I would be little bit cautious in terms of giving those outlooks for the future now because that was predicated on the back of an anticipation that there would be improvement in category growth and we certainly won’t see them trend down as they were in the last two or three quarters. However, the down trend continues as far as we got the September data and it is as bad as what it was a month or two ago and worse than what it was three to six months ago. So, therefore unless there is some improvement in this rate, improving volume growth is going to be very hard. We will be lucky to hang to the volume growth we are generating so far.

Having said that, consumer confidence being where it is it should translate into better delivery on the ground as far as category improvements are concerned. So, I am still optimistic but so far the numbers don’t seem to support it.

Senthil: So any early leads from what happened in October festive sales, have they improved a bit. I know these are not reflected in your quarter number you are talking about but any indication of what October is looking like?

A: The festive is not very material to us. The only thing which sells real well during the festive season vis-à-vis the other parts of the year is the gift packs which we sell during Diwali and sales of that have been again a little bit under what we anticipated. So it has not been a great Diwali season as far as our business is concerned. But having said that Diwali is not very material as far as growth is concerned.

I do expect growth to come back into our personal care and healthcare portfolios in this quarter but we probably would see lower growth coming from foods on a very high base of last year and high growth in the previous quarters. Therefore it will be a mixed bag, we should be able to see reasonable growth emerging but the trend will be more towards personal care and healthcare which we have invested a lot of money and foods what might trend down a little bit but whatever the situation, it is going to be hard work to get to this 8-10 percent volume growth and 10-12 percent at this point in time doesn’t seem visible unless it is a dramatic shift in the way consumers are behaving in the ground.

Sonia: So as far as your margins are concerned going ahead what should we expect to see by the end of this fiscal and when will the price hikes that you have taken, when will that impact flow through?

A: The flow through is happening and it will continue this quarter and I don’t think there will be any significant price increases for the balance of the year. Whatever has been done will now kick in, most of it has, some of it remains. Therefore we should be able to see a margin improvement not less than 100 basis points emerging in the fourth quarter in particular beginning in the third. We are still sitting on some high priced inventories beginning third quarter but they should be exhausted by the middle of third quarter and then we should see margin uptick appearing in our books.

So the picture is a little bit benign as far as the margin is concerned and like I said by the end of the year 100 basis points, maybe 150 if you are lucky is certainly what we would expect.

Sonia: You did mention a while back that it is imperative for the industry to now take some steps to exert energy back into the sector. How would you be doing that, will it be in the form of new product launches, will it be in the form of higher ad spends that you would have to take?

A: One is continuing to invest in your brand. I don’t think there is any point just not spending enough in terms of communicating with the consumer but I will be a little bit cautious in terms of introducing new products especially at the discretionary end of the market. We are going to do some in the third quarter but perhaps we won’t do as many as we would have in a normal year. So it will be a mixed bag of caution as well as aggression. Aggression on the A&P front, caution in terms of innovation and then we will calibrate the business every month and see how things are and there is every possibility that the consumers’ sentiment may dramatically turn positive in a very short period of time. When I say sentiment I mean actual purchase on the ground, the sentiment is already very positive. So it is hard to imagine a situation where consumer sentiments remain positive for extended periods of time but that doesn’t translate into demand. So the situation will turn for the better very soon.

Sonia: Viewer – Nitin from New Delhi: Is the best for the international business yet to come?

A: The two parts to this is that our traditional business in the Middle Eastern and African region has been doing extremely well and if we continue that trajectory that would be itself a great achievement. I think the acquired businesses need a better performance particularly out of North America and parts of Africa and we are engaged in a very committed fashion to turnaround that business and get it into a high performance mode starting Q4. So, I am hopeful that the aggregate delivery of the international business would improve significantly on the back of improved performance by the acquired businesses in the next fiscal year.

Sonia: If you had to tell us where the slowdown is the fastest between skin, oral care and hair care which is the one segment that you are most concerned about right now? Which one would it be?

A: Our exposure to skin care is comparatively low even though skincare is the most damaged of all the categories in terms of growth. Hair oil is another area of concern where the category doesn’t seem to be growing over the last many quarters. Oral care while the category is not growing, we are pretty happy about our performance. We have been growing well ahead of category, our higher margin products are doing extremely well. So, I am very optimistic about our performance in the oral care space particularly in toothpaste.

However, we will have to innovate very aggressively as far as hair oils is concerned because there is change in user habits and behaviour and we have to measure up to that. So, our HPC portfolio which has been fairly muted in the first half of this year should perform much better in the second half and oral care perhaps will lead that performance.

Sonia: How long do you think it would take for not just Dabur but for the entire industry to see that 10-15 percent volume growth? Should we rule out FY15 completely?

A: Going from minus 1 to plus 15 in a few months is hard to visualise. So, I would rule out this year. I think if it can come back to mid single digits, 5-6 percent volume growth that would be a good way to end the year from where we are today. Then we should look at much more aggressive double digit level growth in the next fiscal. However, we have been through seven months of this year and the growth has been much below what we expected.

Senthil: What explains that this delay in translating as you called it consumer sentiment into actual demand?

A: I think one is that the price increases have been much higher than what is normally done by the sector; typically 6-8 percent price increases. Perhaps there has been some push back from the consumer as far as these are concerned.

Also, there is a whole lot of low unit packs which are at very aggressive price points of a great value to the consumer. However, in a sense almost qualify as a down trading which the consumer is perhaps now gravitating towards. They see great value in low unit packs but from the companies perspective it means less delivery in terms of tonnage also, less capturing of margins. So, these would be the two reasons why the consumer is perhaps not reacting the way we expect them to.