The buzz of rural recovery is gaining traction. To know the reality on ground and how their business is faring in rural areas and how the industry is growing post GST, CNBC-TV18 spoke to Sunil Duggal, CEO, Dabur.
The first glimmer of demand from the rural was seen in the second quarter and the traction is likely to continue and perhaps gain momentum in the quarters leading up to election.
Rural will be a pivotal element in terms of the entire consumption story in next 3-4 quarter, said Duggal, adding that they have invested substantially in building rural infrastructure in anticipation of this demand.
Post demonetisation there a lot of pain period for the supply chain.
Duggal said they have rebalanced the entire feeder into the rural markets by depending more on the rural wholesaler because urban wholesaler is still under acute stress. “Therefore the whole pattern of distribution has changed from urban to directly going into rural feeders,” he said.
In the second quarter, the company’s urban wholesale saw a decline of 20 percent on year on year basis but in fact rural wholesale increased by 30 percent, he said, adding that these trends are likely to continue.
The urban wholesale supply chains are limping back to normalcy and they may never have its earlier position ad dominant feeder for rural segment, said Duggal.
On the business front, he said, the demand of herbal and Ayurveda oral care products is very robust and could be a sign that in the long-term the herbal story could be substantially bigger than what it is.
The herbal market, which is around 15 percent of the total could be much higher going forward, said Duggal, adding that there is distinct preference for herbal products.
Talking on volume growth for the company, he said there could be volatility in the numbers because of low base and so the Q3 numbers would look much better on a year on year basis. Overall, second half will be much better than first half of FY18, largely on back of growth in Q3.
Giving an outlook on prices going forward, Duggal said with signs of inflation picking up in Q4 on back of oil and so they would have a challenge of meeting the much higher numbers in terms of inflation maybe through prices increases or other means. Therefore, price increases are possible, he said.
Below is the verbatim transcript of the interview.
Latha: Can you already see any improved prosperity or improved demand from the rural areas in the third quarter?
A: I think we saw the first glimmer of demand uptake happening in the second quarter and I think it is going to continue perhaps even gain some momentum in the quarters leading up to the election. So, rural is going to be the pivotal element in terms of our entire consumption story in the next three or four quarters. We have invested in anticipation of that substantially in building our rural infrastructure.
Anuj: There was quite a bit of pain period after demonetisation specially in the supply chain. Is that well and truly over now and are you seeing clear signs of recovery?
A: Well, what we have done is that we have rebalanced our entire feeder in to the rural markets by depending more upon the rural wholesaler because the urban wholesaler is still under acute stress. So, the whole pattern of distribution to rural has changed from urban to directly going into the rural feeders. I think that is very important because in the second quarter our urban wholesale declined by 20 percent on a year-on-year basis, but rural wholesale increased by 30 percent. So, I think that is what is happening and this is a signs of the trends which will continue.
Latha: Would you say that now sales channels are back to normal after the GST disruption?
A: Well, the urban wholesale is limping back to normalcy. I don’t think it will ever have its earlier position where it was a dominant channel to feed into rural. But some recovery is happening there but the rural wholesale continues to be pretty robust and that will feed into rural demand perhaps some more so than the urban wholesaler.
Latha: Why do you say it will not ever limp to normalcy? We were under the impression that listed formal sector players will actually have upper hand and therefore sooner or later the channel also will get an upper hand no?
A: Not necessarily, I think it is a rebalancing of channels. The rural demand if it is there somebody has to feed it. The trading wholesalers which were located on the large urban centres which were the dominant channel to feed into rural they have got impacted seriously by demonetisation and by GST. While they are recovering I don’t think as I said earlier that they will reach their earlier position where they were the dominant feeder.
Anuj: I just want to talk a bit about the oral healthcare products. Off late we have seen for your company also last quarter was extremely good. Is this entirely because of new product offerings specially in the Ayurveda space? If you could just tell us what has led to that kind of growth in this segment?
A: We haven’t launched any product other than Dabur Red Gel which did contribute in some way, but not significantly to our total growth. So, the demand for herbal and Ayurvedic oral care products continues to be very robust. I think this is a sign of a long term story where the herbal platforms can be substantially bigger than what they are. At the moment the herbal market is perhaps 15 percent of total. There is no reason why it can’t be significantly higher than that. I think that is the reason why herbal brands are doing so much better. There is a distinct preference for herbal products.
Latha: Your volume growth in the second quarter was very impressive 7.2 percent what should be expect in the second half?
A: There will be lot of volatility in terms of the growth numbers which you have seen because the base is very different in third quarter and in the fourth. In the third quarter we had a very low base so obviously you will see much better numbers on a year-on-year basis emerging. The fourth quarter was a more normal quarter so we will have to work a little bit harder to get into the strong volume growth numbers.
However, overall second half obviously will be much better than the first and largely on the back of much better growth in the third quarter. I think the challenge really comes in the fourth quarter when we have a normal base and then we have to grow on top of that.
Latha: Then let me just speak about aggregate numbers about Rs 2,000 crore revenues in the second quarter. How will second half look?
A: The third quarter is our biggest quarter because that is when our lot of the winter brands kick in so I don’t think the comparison on a sequential basis is very meaningful. On a year-on-year basis, yes you will see good growth happening in the third. There is no doubt about that but we shouldn’t get carried away by that because it is on a low base. I think the challenge would be to drive good double digit growth in the fourth quarter.
Latha: What about prices? You all did cut when the GST rates got rationalised, but going forward first of all did that cut mean more volume growth and going forward how will prices shape up there is a chance you are going to pay a little more for raw material?
A: You are absolutely right, to answer your first question first there has been definite improvement in the traction of products where we took a price cut. Perhaps it is the trade stocking up and more than the end demand so it is a mix of both higher end consumption as well as trade stocking up. However, this GST rate cuts which happened recently in November was only around 10 percent of our portfolio so it wasn’t that significant.
Now on the inflation front there are worrying signs of inflation picking up in the fourth quarter largely on the back of the oil table which has gone up. So, there is a bit of a lag between the downstream products price going up and the crude going up and that is going to happen perhaps starting in February or so. So, we will have the challenge of meeting the much higher numbers in terms of inflation perhaps through price increases or other means and that is something which we are addressing at this point in time.
Latha: So price increases are possible you think?
A: They are possible yes.
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