To sustain double-digit volume growth going forward: Marico

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To sustain double-digit volume growth going forward: Marico

Marico posted its second quarter FY12 numbers. Chief of finance, human resource and strategy Milind Sarwate told CNBC-TV18 that the margins would remain under pressure in short-term. Moreover, he indicated that the company expects to sustain double-digit volume growth for FY12.

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During second quarter FY12, Marico 's consolidated net profit was at Rs 78.3 crore versus Rs 71.56 crore (YoY) and net sales were at Rs 974 crore versus Rs 778.8 crore (YoY).

Chief of finance, human resource and strategy Milind Sarwate told CNBC-TV18 that the margins would remain under pressure in short-term.

The company had witnessed 15% growth in volumes in Q1 and 14% growth in Q2. Moreover, he indicated that the company expects to sustain double-digit volume growth for FY12. The company’s margins from foreign business were lower compared to the domestic market, he added.

Here is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying video.

Q: The street is encouraged by your 14% volume growth this time around. How much have Parachute and Saffola grown?

A: Parachute, which is our mainline stock-keeping unit (SKU), has grown by almost 10% in volume. Saffola has also recorded a good growth of about 16%. Hair oils have shown a very healthy growth of about 26%.

Kaya’s same store collection has gone up by 16%. In international business, we have had a growth of about 19%, but there is also an inorganic growth in the international business.

The volume growth in international business is a little muted. Otherwise, we are doing quite well on volume growth everywhere.

Q: How much did international consumer products (ICP) contribute this time?

A: ICP has contributed a substantial part because it wasn’t there in the last years books. In the first half, it would have contributed around Rs 70 crore turnover.

Q: Was the slightly volume sluggish growth due to Egypt and Middle East?

A: Egypt and Middle East have had unrest for quite some time. In Bangladesh, the inflation issue continues and we have taken price increases. We have recorded a very healthy value growth of about 16-17% there, but the volume growth has been very flat.

Q: The domestic volume growth that has come in at 14% is above what the street was expecting. Do you expect this read to continue? Is this your planned strategy of keeping on supporting volumes, while you can take a slight hit on pricing?

A: Absolutely. In September, when we explained our strategy to the street, the whole plan was to log on to the long-term growth which India offers as a consumption story. To do that, we have to focus on volume growth because that is the only way of earmarking yourself into the consumers' wallet.

Volume growth will be the main step. We had a growth of about 15% in volume for the first quarter. We have had a 14% growth for the second quarter. It may not be possible always to sustain these high numbers, but a double-digit volume growth is something which we will achieve and keep achieving for a long time to come.

Q: What were your margins in the overseas business this time because it has been lagging the domestic margins? How have the margins played out over there?

A: The margins in the overseas business have been lower by about 400-500 basis points than domestic. During this quarter, they were between 10-12% depending upon the geography. In the more evolved geography of Bangladesh, the margins would be higher. In the lesser evolved geography of the Middle East, which is also a very competitive market, the margins would be lower. Vietnam is an emerging market, so the margins would be lower. The domestic margins were affected in September, but on the whole, Marico group was at around 1,200 basis points, which is 12% margin. This was lower than what we did the same period last year, which was 13.8%. There has been a fall in the margin percentage, but it is explainable by the unprecedented cost push in our underlying inputs.

Q: What's the expectation of that? We have seen Kopra decline sequentially, though it’s still up quite significantly. All of the other inputs like rice bran and other inputs are at a life high. What's the expectation? Should we expect a slight cool off given the harvest is now come in?

A: Kopra is 50% up as compared to last year. There has to be a point, when it starts falling, but we don’t know when it would fall. There have been some other discontinuous developments like linking of the fuel price table with the fuel oil price table or oil emerging as a speculative commodity in some areas of the world. We have had far too long inflation in Kopra, so there should be some respite. We might have to take a call that time as to how much of the price fall to retain and to pass on to the consumer. Given that, we’ll keep chasing volume growth and even pass on the entire fall from time to time.

Q: Have us seen any kind of improvement in your market share since you haven't increased prices while most of the competitors in a rising raw material environment have? And going forward, do you see any pricing improvement particularly in Parachute and Saffola?

A: Parachute and Saffola have around 53-54% market share of their respective categories. It is difficult to expect them to move up dramatically, but in a high inflation scenario, the smaller players who have been riding on a price umbrella by the larger players, they typically tend to suffer. You would have seen that the higher volume growth that we have attracted, even after taking prices up as compared to a year and half ago, that high volume growth is also due to the fact that the smaller players have gone out and many of the consumers have actually moved into Parachute kind of brands. I wouldn't say that there is a strong market share increase because of this, but there is definitely an expansion of the market and we keep on getting that 53-54% of that incremental market.

Q: On the marketing spend, ASP to sales was at 9.7% this time. Will Marico proceed at this rate? The tax rate was expected to be higher year on year-on-year, but it’s come in at about 20.5% this time. Are you looking at this rate in the coming quarters as well?

A: The income tax rate was expected to hover around 20%. It will stay put at that 20-20.5 or 21%. No major shift in any strategy, which will cause a purl in that part of the P&L account. Coming to the part of advertisement and sales promotion (ASP), we have to recon the role of statics in this. If our turnover has gone up by 26%, statically, even if you spend the same amount as last time, the percentage would fall. Last year the same time, our ASP to sales ratio was 12.2% and this time it is 9.7%. Even if you retain 12.2% and sales go up by 26%, the number comes exactly to 9.7%. The amount of expenditure has remained virtually the same. It’s because of the higher turnover that the percentage appears smaller. There have been some events which we may not have participated. In the first quarter, we did not advertise during IPL. There would be some major cost savings that we would have achieved. There has also been media inflation, so we have to watch what we spend upon. In the long run, 9.7% will give way to a higher rate. We will have to invest in news products and put brands on a strong wicket. I don’t think this is going to be the secular rate. It will be definitely move up.

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