Sunil Duggal says Dabur will ramp up media spend significantly FY18, eyeing M&As

You were heavily dependent on your Nepal factory till some years ago for sourcing Real juice which is an over Rs 1000-crore brand. You have had to shut down the plant in the past due to unrest in that country. How important is that plant to you now?
It is still important. The importance has lessened over the last 2 years because of opening of another facility in Sri Lanka and now the Pantnagar facility. But it still remains important, perhaps not in terms of meeting of demand, but in terms of profitability. If there’s any stoppage of the plant, it does have an impact on profitability even though our network now will enable us to service the consumer even with Nepal shutting down, but at a higher cost. Nepal is a plant which is a very efficient plant and the depreciation is almost now; it is fully written off and so these plants are normally always more profitable.

And in terms of market access and all, Nepal for north India is much better than say Sri Lanka for north India, so there will be a profit impact. But last year when it shut down, the year before last, we both had a profit as well as a revenue impact. Now, we believe that the revenue impact will be marginal but the profit impact will still be there. Not as much as what happened earlier but we will not be able to fully mitigate it in case there was a prolonged shutdown.

Now, coming back to the shutdown issue, we believe that these issues with regard to disturbances can continue; we don’t envisage a situation where the shutdown will be for 2 months or 3 months which was the case the last time. That was unprecedented. And even if the shutdown is sporadic, we will have no problems in meeting the demand from other sources. So a prolonged shutdown is very unlikely; sporadic shutdowns can never be ruled out but will not impact the business in any significant manner. It remains a key facility. Around half our juice business will still be sourced from there but let's say the importance of Nepal in the context of our supply chain will diminish over the years.

What is the capex for this financial year and what will it be next year?
This year, we would have spent around Rs 550 crore from global capex. Next year, we will probably be spending around half of this because a lot of this capex went into commissioning of these two plants in Pantnagar and Tezpur and obviously we will not repeat it.

A major capex over and commissioning of two new plants – does that rule out any new manufacturing unit in the near future?
We will be exploring a facility in J&K but at the moment we haven’t taken a final call on it. So we have a tract of land, around 5-6 acres in Jammu. Whether we will set up a facility there or not we will consider perhaps a little later in the year.

The land which we have got is more than sufficient for the needs which we may have in the future.  So I don’t think there’s any real need to acquire any contiguous pieces of land.  The question is whether we need to set up a facility there at all. We don’t have a clarity on that as of now. But I think we will decide in the next six months or so.

Your advertising spend has come down in the ongoing financial year. Why so and how is it going to be next year?
The media spend has gone down largely on account of the demonetization because after demonetization, there was not much point in spending too much money because the consumption had then gone down to very low levels. So it would have been a bit of a waste to spend too much money above the line. Also, our profitability was under pressure. So we cut back on above-the-line spends and we didn't cut back on promotions etc. That has continued.

Now, going forward, we are going to resurrect from the next financial year above the line spends but continue to scale down the below the line, particularly the consumer promotions. Keep in mind that the ad-pro (advertising promotion) shrinkage will perhaps be a little bit optical because everything other than media is now netted off the revenue line.

Earlier on, only a part of it was netted off and a part of it was shown as advertising and promotion. So, basically the ‘P’ element from A&P will completely disappear from the P&L. It will be subsumed into the revenue or in the COGS (cost of goods sold) part and COGS lines.

So next year, you might see a sharp uptick in the spends on ad-pros under the IndAS  (Indian accounting standards)  as that will reflect only media and media we will take up significantly higher [share] but below the line may be little bit lower than current year. So the blended A&P will not be a significant difference but above the line part, the media part will be significantly higher. At this point in time, it will be around 15 to 16 percent if you take total A&P including below the line promotion, both trade as well as consumer.

How is the cost pressure across your various product categories? Which are the products that could see price hikes over the next few months?
Input cost pressures in honey are very benign. In fact, there has been a sharp reduction in input costs over the last one year. So we are sitting on perhaps the lowest cost base which we have in honey for the last 5 years.

So obviously, the margin issues are not a threat in any form. Having said that, because of the sharp deceleration in input costs, we have given more products for the same price; we are giving typically around 20 percent to 25 percent free. But still the margins remain very healthy because of the very sharp lowering of the input costs.

Take another category -- hair oils. Now, this is in 2 pieces. There is perfumed hair oil and then there are coconut-based hair oils. The cost pressures on coconut-based hair oils are very high because of the sharp spike in the copra prices and there we are resorting to price increases in a significant manner to mitigate the high cost of inputs.

The other part which is much bigger for us is perfumed hair oils. It is not having any significant inflation [pressures] because those products are based upon vegetable oils and oil derivatives, mostly in the packaging part and both these have remained reasonably under control. So there is no significant cost pressures in hair oils.

In juices, there’s cost pressure because of the high prices of sugar. So there is some pressure in terms of juices on margins. But because of the rupee strengthening and there’s a high import content, much of that input cost pressures are being mitigated through lower cost of laminates and concentrates.

We are exploring the possibility of taking a price hike (in juices). At the moment, we are not committed to taking a price hike in the summers but chances are we will be doing it.

Toothpaste -- there’s no significant cost pressures. It is under control. Shampoo again the same. Some increases in surfactants but overall it is not a big component of costs. So, shampoo margins are remaining reasonably intact.

We will start to explore Chyawanprash cost issues around August-September when we start manufacturing chyawanprash and if prices of sugar are on a high then it will have some impact on margins. But we believe that sugar prices also will come down and many of these cost pressures on account of this commodity would ease in the next few months.

Till some years ago, Dabur was the first name in Ayurveda. But with the advent of Patanjali, how has that suffered and what are the steps that you are taking to ensure you retain top-of-the-mind recall in Ayurveda?
There is a short term problem when somebody new comes in on the same platform as you are. But I think the sharp increase of his business indicates that there is a much bigger or wider market for Ayurveda than perhaps what existed earlier. So he has been able to convert a lot of people into his products. Most of his conversions have not been from us.

They have been from other companies or other products, lines etc etc.
His (Ramdev) growing the whole market for ayurvedic products is actually a big benefit to us in the long run. He opens up the space and then if we play our cards well we can also improve our standing in that area.

So we are not really too bothered about any loss of market share to Patanjali. We are interested in how much the market is being opened up because even at a lower share we may be better than a higher share of a small market. So if he is able to grow the Ayurveda franchise by 2x for example, we will be one of the biggest beneficiaries. Optically, our market share may go down but it is a much bigger pond which is then being opened up.

What is your next big initiative?
We are looking at consumer healthcare in a big way on the Ayurvedic platform. And that’s going to be very, very important in terms of our future initiatives.  We don’t want to go into commoditised areas like ghee and atta and daal etc etc because I don’t think there’s much value which is sitting there. So it will be really into the highly branded items, highly valued added items in personal care, in food and beverage and particularly in consumer healthcare which we will be looking at.

For example, we are incubating a lot of products through retailing. We have done 10 such products in this year, in liver control, in lipid management, in stress management, diabetes management etc etc. So these are products based upon Ayurvedic formulations in a branded format.

And with these products we plan to then go directly to consumers after may be a year or two or three years when they have gained some amount of critical mass through the doctor route and through the retailing route. This is a big initiative which we will pursue. And it’s very highly value added. But unlike Patanjali, we will not be getting a majority of our turnover from the commodity space.

Where does your retail business NewU stand now?
The synergies with our main business are low but it’s a business which is growing very fast, performing well and showing a profit. So I think we are quite happy with the performance of NewU despite the demonetization issues etc. We still managed to grow and make a profit last year. Going forward, we would like to scale it up outside the boundaries of Dabur. Outside the boundaries means getting a foreign partner in or getting some outside investment in so that we are able to scale up because the issues with NewU is the faster you scale up, the more money you lose.

We can open up 100 new stores; we have got around 80 stores; we can open up 80 more in one year but then the bleed which will come out of there will be quite high and since it’s part of the consolidated set of numbers, we are not willing to absorb that bleed. So, the whole long-term plan or the medium-term plan for NewU is to carve it up as a separate entity with outside investments and then scale it up to a different level.

So it can become a very large format beauty store, brick and mortar beauty store and we are also exploring online options. How to get a higher part of the revenue through online sales, around 15 percent of sales of NewU comes through online and we are seeking to make this much bigger.

We are willing to dilute our holding in NewU to somebody outside the Dabur system if it means that it will lead to a rapid scaling up in the business. We are still waiting for FDI issues to be clear. Once the FDI is allowed, which is perhaps going to happen at a point in time, in multi brand retail, that’s the time we will be starting to talk to people. It’s strongly cash positive but at the bottomline it’s just about breaking even.

How do you see the margins in the next financial year?
The margins will be pretty similar to what we see last year. May be there will be a mild shrinkage on account of COGS but otherwise the margin profile should not be very different from current year.

The challenge is really the demand and if we are able to manage the consumption stress and get back our business into strong double-digit growth -- that is what we are looking at more than margins etc. A lit bit of 50 bps here and there, margin going up and down doesn’t really make much of a difference. The demand after demonetization came down very sharply.

Since then in this quarter it has been reviving but reviving slowly. It has still not reached up to pre-demonetization levels.

We do expect the pre demonetization levels to happen only in the second half of the year. If we are lucky may be in the second quarter but there is also the issue of GST which will likely be implemented from July 1 which might further lead to destocking of channel inventories and lead to some pressure on the topline. So, once the GST issues are rebalanced which will be in the second quarter, from the third onwards we should actually see strong growths coming quarter coming back. GST will lead to destocking in the first quarter and second quarter, it will led to some kind of turmoil, turbulence with trade when they seek to get clarity on how it is going to impact them.

So the first six months of the year are going to be impacted negatively by GST, but we still welcome GST coming in because we believe long-term it will be very good for the sector  and we do see strong growths coming back from the second half of the year.

How are your two main foreign subsidiaries – Namaste and Hobi – doing?
Both businesses are doing reasonably well. What we need to do is to get a much higher slice of the Namaste business from Africa. At the moment, around 30 percent is coming. Our stated intent was that it should become around 50 percent by now when we bought the company.

By 2017-18, we should have been 50 percent. We are still 30 percent. And the reason for that is that the currencies in the emerging markets in Africa have come down very sharply which made the cost of the goods there very expensive and therefore our sales return didn’t happen with the same velocity as what we expected.

What we have done now is we have localised manufacturing of Namaste products in our Africa plants to may be 70-80 percent of domestic sales from this year. So this year we should see a good growth in terms of the volume of business which we get from there, from Africa. And while that 50 percent will still take another two years or so, it will now happen because all the Africa sales will come from local manufacturing.

Hobi is doing very well. It’s growing in the local currency at around 20 percent, 15-20 percent which is a very good situation despite the economic situation in Turkey. The problem is that the Turkish lira which is the local currency has depreciated 30-40 percent in the last year and that has led to some losses in terms of translation.

The currency issues are something which we did not anticipate. It is very hard to anticipate currency. Other than that, I am very happy with the acquisition. I think they are great platforms to build a much larger business and if the currencies remain stable, they will give us very good value. But there is a fear that the currencies may continue to depreciate in which case we will have to deal with that. But if the currencies behave, I think we will be very much benefiting by those acquisitions.

Do you have any plan to set up a new manufacturing plant abroad?
We have just bought a facility in Johannesburg, a small facility which we are now converting into a plant. It was an existing manufacturing set-up. We bought that over and now we are putting in the latest manufacturing infrastructure.

So that’s one. Other than that near term, this year and may be next year, there is no plan for an overseas plant because we have got many. We have got one in Nigeria, South Africa, Egypt, UAE and Istanbul. So, we have plants all over that region.

Are you looking at acquisitions?
Yeah, of course. M&A has always been an integral part of our growth story. We are looking for M&As, both in India as well as overseas. India is in fact a better place to look at M&As than overseas at this point in time because the visibility in terms of growth is higher. I believe that M&As in the near term would be an important part of our growth.

So we are hopeful that something will happen, if not this year, then may be next year in terms of an inorganic opportunity. It could be an entry into a category in which we are not present.

So we typically like to buy smaller companies and then scale them up and then take them to a different level in terms of scale. Similarly, we would be exploring those opportunities rather than looking at very mature categories and large brands.