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Dabur India Ltd
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Ladies and gentlemen, good day, and welcome to the Q2 Results Investor Conference Call of Dabur India Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Gagan Ahluwalia. Thank you, and over to you, ma'am.
Thank you. Good afternoon, ladies and gentlemen. So on behalf of the management of Dabur India Limited, I welcome you to this conference call pertaining to the results for the quarter ended 30 September 2018. We have present here Mr. Sunil Duggal, CEO Dabur India Limited; Mr. Mohit Malhotra, CEO India business; Mr. Lalit Malik, Chief Financial Officer; Mr. Ashok Jain, VP Finance and company secretary; and Mr. Ankush Jain, Head of Financial Planning and Analysis.Now we will start with an overview of the company's performance by Mr. Duggal, followed by a Q&A session. I hand over to Mr. Duggal.
Thank you, Gagan, and good afternoon, ladies and gentlemen. Welcome to Dabur India Limited's conference call pertaining to the results for the quarter and half year ended 30 September 2018.Consolidated revenue from operations grew at 8.5% and the domestic FMCG business reported growth of 8.6% on the -- on the back of volume growth of 8.1%. Sales growth ex Foods was 10.2%. Health Care vertical reported growth of 10.6%. Health Supplements grew by 12.3% led by double-digit growth in both Chyawanprash and Honey. Digestives category reported growth of 10.8% on the back of good growth in Hajmola tablets and Pudin Hara. [ In residence plus ] marketing inputs and distribution expansion contributed to driving this growth. OTC & Ethicals grew by 7.7%. OTC products such as honey, [ Honitus, Lal Tail, Shilajit oil ] Posted good growth, backed by marketing initiatives and [ acquisition. ] HPC vertical posted growth of 10.2%, led by strong performance in Health Care, Home Care and Skin Care. Hair Oil category grew by 11.1%. Volume market share of hair oils moved up 120 basis points vis-a-vis same quarter last year. Shampoo posted a robust performance growing by 49%. This is the fourth consecutive quarter in which the Shampoo has grown at 30% plus.Oral Care category grew by 3.9%, with growth of 6.2% in Toothpaste. Red franchise continued to perform well, driven by increasing penetration, aggressive marketing and visibility initiatives. Babool had a weak quarter due to high competitive intensity. However, our overall market -- branding market share in Toothpaste category continues to increase with 50 basis points gain over the last year. Home Care category grew by 10.9% in this quarter backed by strong performance of Odonil and Sanifresh. Odonil posted strong double-digit growth with Odonil Zipper adding to the momentum of the brand. Skin Care posted growth of 11.9%, driven by strong performance of the Gulabari and Oxy bleach portfolio. Foods business reported growth of 1.4%, primarily impacted by the shifting of the festive season to 2Q, due to which sales of [ this pack populate ]. Profitability in Foods continues to see improvement on account of network optimization and lower input cost. Media spend, tactical consumer promotions, modern creative focus, e-commerce and new product continue to drive the sales. Driven by these initiatives, our market share in the J&N category increased to 56%, an increase of 400 basis points over the previous quarter.International Business reported growth of 8.9% for the given quarter. Egypt market continued to perform well with constant currency growth of 27%. Sub-Saharan African business posted constant currency growth of 16%, while SAARC markets grew by 13%. Turkey reported growth of 16% constant currency, although the valuation of the lira impacted the translated INR growth. GCC markets had a soft quarter on account of consumption pressure and sharp decline in categories in the region. Operating margins in International declined by around [ 150 ] basis points, on account of increased BTL and adverse currency impact. Consolidated operating profit increased at 7.4%, and operating margin was heavy at 21.2%, which is near peak levels in the history of the company. While media spend for this quarter was lower due to the shifting of the festive season, the overall marketing spend, including promotional expenditure increased by 11%. Indirect overhead, short-term, increased due to increase in sales infrastructure and higher [ people ] charges, as new [ esoc ] cycle started from April 2018. Standalone operating profits posted growth of 10.3%, while operating margins improved by around 40 basis points. PAT increased by 8.4% in standalone and 4.1% in consolidated. While the bottom was a little soft on account of festive season timing and margin pressure in international, overall, the margin trends appear to be steady. In spite of inflationary pressures on account of higher crude and weakening rupee, we have been able to hold on to peak operating margins. Going forward, we will continue to invest strongly in advanced solutions and infrastructure and enhance our visibility, penetration and market share.With this, I now open the Q&A, and invite your questions. Thank you.
[Operator Instructions] Our first question is from the line of Abneesh Roy of Edelweiss.
My first question is on the shampoo business 30% growth in previous quarter and 49% in Q2. So how is the profitability here? Because you've mentioned strong activations and visibility drives. And my sense is there is some inflationary pressure also here. So is this strong growth largely because of this effect and promotions? So is this sustainable? Who are you gaining market share from?
Yes, I think 49% growth is, obviously, not a sustainable one, it's often [ a competitor meets our pace ]. Fortunately, the margins from Shampoos are reasonably constant. We've been able to get some operational efficiencies to mitigate the margin pressures and the continued promotion -- sorry, the input inflation and the consumer promotions. So not much of an issue there. Having said that, obviously, 49% will not happen quarter-after-quarter. But still we are looking at double-digit growth coming from Shampoos for a long period of time. I think the distribution initiatives are already impacting the growth of this portfolio. [ Vish ] now is about 5 million outlets in Shampoos, which is incredibly high. And we are the dominant players in the rural markets and many parts of North India.
So who have you been gaining share from?
I mean, I can't say where because the share gains actually are not reflecting in these trends, but there's always a lag. And always, I think that [ sachet ] market share are not fully reflected in the [ instance ], because much of this business comes from the rural heartland, which is not really a decent territory. So we are at around 5% volume shares and -- I don't know where we are gaining it from, but the shares are moving up in volume terms gradually and steadily.
So now coming to the overall volume growth in the domestic business, post the results, when you met the broader group of analysts, you had said, the optimism has improved and every quarter in FY '19 should be a double-digit volume growth. Now, in the first quarter itself, it's a 8% volume growth. Now the base in December quarter is 13%, so that's a high base. In that context, do you still maintain your commentary that it will be double-digit volume growth in every quarter?
Let's put it this way, we did an 8.1% volume growth in Q2 on a base of around 8%, 9% in the base quarter. So now, having said that, we did do 10% plus growth in both our core HPC and HC portfolios. In beverages, we actually declined by almost [ 3% ].Now, if you see the whole change in the purchasing pattern from Q2 to Q3, you will see a underlying growth, even in the Foods business, above 10%, double digit. So the portfolio as a whole, accounting for that seasonality shift, which is a matter, which will affect in the third quarter, is actually still in double digits. So I'm actually recently satisfied with the performance of the domestic consumer business. And I'm still very optimistic that this year we will be recording double-digit volume growths.
In the past, you have said whenever liquidity crunches happen in the broader economy, there is some impact on the distributor. This time, the impact is quite extreme. It's as bad as maybe 6 years back. So are you seeing some impact of that especially in the wholesale and rural markets, any slowdown because of that?
Well, I think it's beginning to be felt. The liquidity crunch has happened only in the recent past. In fact, which will be felt going forward. But having said that, we have also reduced our pipeline stock and distributor investments over the last 1 year by a huge amount. So I don't think our distributors are stressed. If our distributor pipeline had been at 1-year old level, then there would have been a problem. We would have to cut down pipeline, but we have already preempted that. So I don't think the liquidity issues will hamper business as long as the underlying demand is strong. Liquidity will not play a major role.
My next question is on the Toothpaste. You have done well in the Red Toothpaste. So what percentage broadly, will be Red Toothpaste of your total Toothpaste category? Second is, your DNA, as a company have changed in the last few quarters. You want to be as aggressive as any of the other companies in other segments. We've been that in Juice, Honey, Red, Oil and other segments. But in Babool, we see many quarters that there is a high company intensity from the other player, there you don't respond. So what is the reason with Babool that DNA change hasn't happened?
It's easy to defend high margin trends. And obviously, there is some reluctance to defend low margin trends, which Babool is. Now, having said that, this competitive intensity, which has happened over the last quarter or 2, caught us a little bit by surprise because everybody is moving aggressively into the INR 10 price band, which earlier on was really the domain of Cibaca and Babool. [ There have been many releases there ], including [ HFE ], including Patanjali, and so we are now going into that. So at INR 10 is a [ level of frock ]. And I'm not too surprised that we are losing some ground there, [ price-wise. ] Now what are the [ reports ] which we are doing here? It's completely reinventing the rule and the process will start on a pilot still from this quarter. And perhaps, we will roll it out on a national level as well by the end of the year. So that will help in, at least, regaining some of the lost ground in Babool. So ultimately, the focus has to be on the profitable brands. Red just continues to grow and we will further invest in Red to make it grow even faster. And we have been looking at other higher margin options and not just focus on the INR 10 point. We can sell unlimited amount of Red Toothpaste at INR 10, but that's not really a choice, if you want to [ exercise that ] because, in a sense, destroys some of the brand's profitability.So Babool will be similar INR 10 economy offering. But I think, we will rework the value proposition in a much more meaningful manner in the quarter ahead, to make it more appealing to the customer.
And to answer your question on the composition of Red portfolio, it is around 65% of the total [ in ordering case ] .
The value [ savings ].
The values...
[ Toothpaste is red ]. So the margin profile, which are emerging from Oral Care are actually very good [ now ].
And volume, it will be around 50%?
Yes. Around that much.
And sir, last question, how has Odomos done? There is no mention of that in the presentation, are there...
It's not done particularly well. I think the insecticide piece this year, as we all know has not been very, very good, there's been very few of the outbreaks and epidemics. And the mosquito incidence has been low. So if not -- if I'm not mistaken, Odomos declined [ marginally ]. But that is very -- an outcome of the mosquito infestation.
Sir, my question was is that -- [ since you need ] disruptive innovation has come there, incense sticks which has pesticide in them...
I think they are not on incense sticks. I don't think Odomos and incense sticks really converge. This is a very urban franchise and more affluent, [ particularly with school going kids. The incense ] franchise is very rural, and perhaps the mosquito coils are already the victims of incense sticks, more than anything else, and maybe the oils. There is the mosquito repellent oils, paper, could also be a victim. But I don't think [ badees ] and Odomos is really convergent there. I haven't seen a single rural household -- urban household using incense sticks. Everybody knows that they are very toxic.
We'll take our next question from the line of Sameer Gupta of India Infoline.
This is Percy here. Sir, this quarter the difference between your volume and value growth is only 0.5 percentage point, so they implied price increase post promotion, et cetera. At the same time, your overall portfolio mix has actually, sort of, improved because Food, which is a low margin product has sold less. Babool is, which is a low margin product, has sold less, et cetera. And despite that, we have a gross margin hit probably because the pricing has not come through. And the third thing I observed is that advertisement has gone down. Now of course, so this is seasonal to some extent, the reason which you give. But the whole picture seems to be as if there are higher promotion than expected and lower ad spend than expected and that is affecting sort of gross margins but you are saving the EBITDA margins to some extent because the ad spend is lower. So my question is how do we see this going ahead into let's say, Q3, when your ad spend actually will increase on account of seasonality? I don't know if the implied price growth is going to move up significantly, from the current 0.5 percentage point you have. So Q3, actually, I have a lot of concerns on whether you will be able to deliver a good EBIT margin in Q3 or not in this context, sir.
It will be a challenge and the gross margin pressures will start emerging from this quarter. Having said that, I think the operational efficiencies should mitigate part of those. As the mix improvement like you've seen in [ we know, let's say, ] Oral Care portfolio, should also mean that we delivered better than usual gross margin. But there is every possibility of some small shrinkage in gross margin, which will mean that some of it will travel into the EBIT line. Now again, the challenge before ourselves that -- do we defend volumes and seek growth in double digits at the topline in terms of volume growth here or do we defend the operating margins. My choice would be, and always has been, is to defend the top line, but without incurring any significant bleeds in terms of margins. So that's how we will play it, we'll go at this -- we will see the situation. We will try to trim some of our promotions as much as possible. For example, in honey we have trimmed our consumer promotion from 30% free to 20% free, and every possibility that we, we have basically gone further. Juices, of course, has been an area where huge amount of promotional intensity has been there consequent to the disruptive innovators. But incumbent -- sorry, the challenges. And -- but having said that, we have been able to defend shares with 1 of the dual share by 200 bps in 1 year. So now that has come at a cost, but I think this is the virtuous price to pay. But I don't see any big implosion in EBIT margins, there will be pressures in the next quarter or 2. And after that we will see that situation. But it's critically important to grow top line into double digits.
Right, sir. Would you be able to give us an idea how much was the actual price increase on the portfolio level on a Y-o-Y basis this quarter?
In the region of 1.5%.
Okay. So 1.5% is price increase and 100 basis points is probably the promotion being higher Y-o-Y?
Yes, [ damage ] related and promotions.
Okay. So sir, in this kind of environment where we are seeing input cost driven by crude and currency inflating. And typically, if I look at the history of Dabur over the last decade or so, we have been a very easily been able to take 3% to 4% price increase on an average on an annual basis. Then especially in this in inflationary environment why are we tracking much below the average as far as the price increases are concerned?
This quarter, as we indicated, I think the price increase are the price increase proxies, which are promotion reductions, will begin to happen. Now, how much they happen, it's very hard to say, because we also have to defend and improve share. So we will see how it goes. Like I said, I don't think there'll be any unsettling surprises on this front. But you [ won't be ] seeing any strengthening of that either. But we hopefully will be able to deliver a good volume growth.
Understood. And last question, sir, if I might. The Foods portfolio, which you said, growth is only 1%, 1.5%, is it purely due to seasonality? I mean would you be able to give an idea what was the growth in July plus August put together?
I don't think you should see July, August, you should see the spillover of what's September sales were last year has gone into October. And we estimate it to be around INR 25-odd crores. So if you do the math, you will see that Foods portfolio would have grown in double-digit, had that sale happened in September. This is all very conceptual, but since this is Diwali impact, so it's a little bit easier to measure the impact. So as I said earlier, the underlying growth in our Foods business is -- at this point in time tracking double digits. And hopefully, you'll see validation of that in the third quarter.
Our next question comes from the line of Amit Sinha of Macquarie.
Sir, just wanted to understand the higher competitive intensity remarks, which you have made in the press release. Is the intensity higher and is restricted only for Oral Care and the Foods business? Or is it across your categories?
That's contributed substantially in Foods and Oral Care. But of course, it spills over in both, say, Hair Oils also, but not to the same levels. Hair Oil has been there for a while. Foods emerged around 3 to 4 quarters ago. Oral Care has emerged in the last 1 or 2 quarters. So there's been overall higher incidence of this level and it's all at the [ A&P ]. So whether it's Hair Oil, whether it be INR 10 is really being invested in by most companies, Oral Care, where INR 10 is really, again, the area of focus for everybody. And induces, of course, this, massive change in [ normal rates -- ] buy 1 get 1, by the challenger brands. So we haven't [ agreed ] with that, I think the [ bill ] is quite satisfactory, all 3 categories, whether it's Juices, whether it's Oral Care, whether it's Hair Oils, we have defended our share and improved it substantially in Hair Oils and Juices. But obviously, it comes at some margin cost. And I think that's a virtuous thing, to defend the market share. And we'll continue to do that. But I don't see any, like I said earlier, any major issues with regard to our operating [ profit, ] we'll be able to [ be very good there ]. There may be some contraction or some [ subtraction ], but it would be within the limits of what we think is normal.
Sure. Sir, in the analyst meet, you had mentioned that the overall growth in the Juices segment has been a phenomenon. Is -- I mean, this was maybe the number till July or mid of August. How has that progressed in the last 2, 3 months?
I think the growth may have operated a little bit based upon triangulation from various sources. But [ the instance ] shows strong double-digit growth -- it showed, by the way, strong double-digit growth for us, too, because [ there is the ] numbers that [ we've been doing ] shares. So we are growing ahead of category. Of course, those numbers don't converge with actual sales now, but there's always a lag and then there's the fact that we tell you primary sales, [ and recent reports ] specialty sales, not even secondary. And sometimes there is a big disconnect between the 2. But yes, I think the beverage category is going well. I don't see any slackening of the demand at this [ size ]. But let's see going forward, how it goes.
Sure. Lastly, sir, on the Oral Care business. Again, 2, 3 quarters back the commentary was that the natural Ayurvedic form will continue to gain significant market share. How has that progressed in the last 2 quarters? Because our growth rates have come down a bit. Even though, Red has done well, but the overall portfolio has tapered down in terms of the growth rate. Do you think that the aggressive competition from some of the players will slow down the process of conversion?
I don't think so. I think that the actual disruption has actually come from the Ayurvedic sales and whether it's Colgate or whether it's Patanjali, everybody is investing aggressively in the Ayurvedic space at INR 10 price point. And that has caused some damage. So we have to now see how do we react to that. And how do we reengineer the whole. Now we do have not come down Red and movement into this INR 10 price point in any aggressive, kind of, way. So it's a very high-margin product. And we intend that it continues to fuel the profitability of this portfolio. And like I said, Babool [ will need this. ] We have plans for that.
Our next question is from the line of Vivek Maheshwari of CLSA.
My first question, starting on the double-digit volume growth, which you guided at the time of analyst meet. At that point of time, the understanding was that it is going to be a pretty much every quarter for the next 3 quarters. Now, the seasonality which you just mentioned -- one, was that, was you, did you not build into -- build that aspect when the guidance was given? Number 1. And number 2, you mentioned that Foods will be double-digit in the next quarter. So does that still mean for 9 months you'll -- because including first quarter, you will obviously, be double-digit, given first quarter was 21%. But 9 months, do you still stick to double-digit volume growth guidance?
I never indicated that we will do double-digit every quarter [ and that's an error ] which should never have been -- never happened. I said that there would be volatility and I did caution you that our second quarter will be a little soft on account of the Diwali season. I mean, we saw it coming. So it was not something which was unexpected at all. So the delivery of volumes at 8% plus in this quarter is pretty much in line with what we've thought. We may have expected it to be 9% or 10%, but that is a very small number, which we are talking about. Now I did say that 10% for the year is something, which I'm very certain of and we will attempt 10% for [ DOI, ] and we will -- when we discuss this matter in end of Q1. Now 10% in 9 months may or not happen, it could happen I suppose. But certainly, a double-digit volume growth for the year is something which we are decently certain of. I think the visibility this quarter is -- looks to be good. Fourth quarter, again, it's very hard to predict because there is underlying volatility in the market. There are issues with regard to consumption, which may trend up, may trend down, may trend sideways. It's really hard to predict. I think what is very [ interesting ] is that a lot of this growth was predicated on the back of big time stimulus happening prior to the elections by the government. And the recent events, kind of, tend to put a question mark on that. Does the government have the fiscal headroom and the appetite to simulate the rural markets substantially, because that might affect the [ fifth ]. Now, these are indicators, which we have no control over. But there has been a little bit of tapering down of sentiment between the time we have -- between today and the time we spoke last on account of the underlying demand. So therefore, while visibility is there to some extent, at least, for this quarter, it becomes more blurred as we look into the future. Now, demand could accelerate in the fourth quarter, it could taper down or anything in between. It's very hard to say.
Okay. Firstly my apologies, if the understanding there falls on my part.
[ Not at all ].
On your commentary about rural and whatever you described now. You're certainly less optimistic than what you were, let's say, in August, when we met you, just around 1.5 months back.
At that time there was a very optimistic scenario. I did mention that this is a scenario, this may not happen, but there is every likelihood of demand ramping up very strongly, running into predictions. I am a little bit more moderate on that front because of the economic situation today, which is definitely worse than over the last 3 months or so. And therefore, the stimulus start, [ and there are some ] questions. Now, even without any lack of huge stimulus, I think we can still move this year at double-digit volume growth and if the stimulus happens, which may or may not, then volume certainly could trend up. Also, I think, at that time, which was in the month of July or August -- July, the monsoon outlook was a little bit better than what it ultimately panned out to be. I think the monsoon issues have been, sort of, overhyped, that it has been a great monsoon. Actually, it has been a patchy monsoon. So a little bit of rural [ certainty ] in much of all that. So yes, we have moderated our volume growth expectations, but they still remain, I think, significantly bullish at this point. And I see no reason why [ we ] should be able to deliver what I've said.
Sure, sure. On the -- again at the analyst meeting, you had spoke about new launches initiatives that you are taking 15 clusters launches and all. Everything from that perspective, anything because macro is, let's say, less -- looking less bright compared to what it was? Or there will be some changes in your launch pipeline and what you wanted to do at that point of time?
We are not ready to make changes from what we had lined out. We actually rolled out a [ visualization pilot ] in northeast by doing some localized activation, et cetera, and thinking Northeast as a pilot. And there we've seen a growth of around 30% or in terms of [ planning, ] a relatively small to actually roll out to the [ plan in their numbers ]. But I think it's a very successful rollout. And we are planning to roll out the NPD initiatives also as planned at the time. And we're not planning to mute them in any which way.
Sure. And last question on advertisement, because and NPD, if that continues, would we see an increase in A&P strength as we go ahead into the second half?
Yes, it depends upon how many products we launch. And they take up a lot of investment, as we all know. We see -- I think, a lot of these launches will be determined by the strength of underlying demand. And if the demand is strong, they will be more inclined to launch a large number of products. If it's not, then obviously, a lesser number. But there would be a lot of activity on new products particularly in the end of third quarter and the fourth quarter.
Our next question comes from Prakash Kapadia from Anived PMS.
Most of the questions have been answered. Just on the Hair Care segment, if you could throw some light, which segment are we getting market share? What is happening in the overall Hair Oil market, can you help us?
So gaining share in both Hair Oil and Shampoo.
Yes, Shampoo, you did mention about.
Yes, so even Hair Oil we have gained share, 115 -- 120 bps, which is pretty significant for a very large category. So I think our aggression in Hair Oil amongst the various flankers to Amla has paid a lot of dividends and we continue that path. We attract, accelerate that trajectory of growth and defending our volume shares. So we are pretty optimistic. We've also now launched a major foray into the coconut oils sales, both value-added and plain coconut oils. That's also contributing a lot to growth. So this is a change in strategy, which we have implemented over the 1 year or so, which is generating very good results.
We'll take our next question from the line of Naveen Trivedi of HDFC Securities.
So my first question is on the lower demand trend, considering like you mentioning that the stimulus is now is basically stalled and [ retail services tax ] position. Are you witnessing any difference, gap, which you are witnessing between rural and urban? How big a difference right now is there been rural demand and urban?
Rural still is tracking ahead of urban and the demand is steady. I don't think you should be too alarmed at [ what the demand would do ]. What we presented, a possible scenario of [ imported demand ] of tracking it to the high, I mean into the high teens, that is not happening. But the demand is still much better than it what was 1 year ago. And I think that's something to be very grateful for. So rural demand is still ahead of urban, but we are seeing good demand in modern trade and e-com, even in urban centers. So overall, we really don't have any issues with the demand situation. It is not as good as we would have liked it to be, but it's a lot better than what it was 1 year ago.
So what is the difference right now between urban demand and rural demand?
It's around, what 4%?
[ Around 4%. ]
Around 1.5%, yes. It's tapered down a little bit [indiscernible] between 2% and 4%. It's come down to around 2% now -- 1.5%, 2%.
Okay, and my next question is now the Colgate [ Specialty ], they mentioned that they are also relaunching their flagship brand. So how do you see now the more competitive intensity in the Oral Care side?
We just have to deal with it. We have dealt with competitive intensity in beverages and Hair Oils, and so many other things. There is nothing, which is new or something that should -- which we can't deal with. There is intense competition in every area and [ some around profit ] most. As you know, the difference in Hair and Oral Care. We have our plans. We have our strategies. We have our pipeline of products. And I'm sure we will do much better than the category.
Okay. And the last question is, if you can like share the how has been Babool [ in response to the ] revenue contraction this quarter?
[ No. We stopped moving at a ] revenue expansion. In Babool [ this contraction ], we don't discuss that number. So there's been a fairly high contraction in Babool, a reasonable increase in Meswak and a very good increase in Red.
Our next question is from the line of Nillai Shah of Morgan Stanley.
Sir, I heard your comments on the operating profit margin and the gross margins to the earlier person who asked the question. But I see that the large part of the margin contraction has actually come from the International business, not so much the India business.
It is definitely in the context of stand-alone, where there was a little bit of margin compression happening. But yes, you're right. The substantial amount of margin contraction has come from issues with regarding currencies and the sales translation thereof.
So could you throw some more light on that, what's transpiring out there in terms of cost and how you're mitigating that going forward?
Yes, sure. So I think, as Mr. Duggal said, with regards to the exchange, we have seen a very deep devaluation in countries like Turkey [ where a particular devaluation happened. ] And also in countries like Egypt and Pakistan, we saw the devaluation. So during the local currency there they've grown very well, but when we translate it into Indian rupee, the overall impact of the exchange is eating into the margin, I think number 1. Number 2 is, [ Indonesia even we have also ] more on the account of BTL, of the incentive in order to get the sales and move ahead on that. So that is, also has an impact on the margins, and the price increase was not in line with the overall inflation arising out of currency. So these 3 factors put together have an impact in the international market on the margins.
Can the pricing be a temporary phenomenon? Or is it more sustained given the competitive intensity out there?
As far as the pricing is concerned, it will always have a lag between the cost increase and the price increase that we take so we will find that getting to some extent offset in the subsequent quarter.
And when we start lapping the currency devaluation, a, and b, when the demand revival begins in much of the MENA region, you will see a sharp turnaround in performance of the International business. That could be 2 or 3 quarters away, but it will happen. The categories have been declining at double digits and they have been doing so for the last year or so in most of the MENA region. That ultimately, will reverse because the governments are now starting to put in stimulus to drive the local economies, to drive some consumption and I think that we will turn up some [ improvement ] in the next 4, 3 quarters. We only hope that there is no further drops in valuation -- currency devaluation, because those are some things we can't handle. But if we start lapping the devalued currency in the second quarter of next year, you will see vastly improved performance emerging. And structurally, we have been through this [ issue ] in Egypt 2 years ago where there was massive devaluation and obviously, sharp compression in our margins because of that. And we've recovered that almost fully. Gross margins now back to 50% in Egypt, they were down to less than 40% when the currency issues were at their peak. So you have just got to ride it out. And hope that the currencies will remain basically stable. And the operating performance I must highlight, particularly in every country in which we operating in is absolutely outstanding. We did have a business review of the international business and we saw market share improvements in category after category, country after country. Egypt with a category that was declining by around 15%. Now the category is growing by around 25%. And that's very, very significant. Pakistan likewise. Turkey we are growing at 18% Now, if temporarily you lose it through translation, well, I think you have to just ride out the storm and make sure that your operating performance do not suffer because that's the one which will carry you forward over the long term.
Sure. The second question is on the Oral Care, but again, sorry to hop on it. But reviving or trying to improve the value proposition of Babool versus launching a new product, which you had discussed a few times in the past. What's your take on that now?
We will do both. We'll do both. We don't have to do it simultaneously. But I think the immediate job is to repair Babool because that is proving to be a drag on the portfolio. Now that may not require the kind of investments which will be there for the new product. But [ you look at Meswak, ] a consistent [ proposal ] for both simultaneously. So we'll begin with Babool and shortly after that take on the new product.
Our next question comes from the line of Amit Sachdeva of HSBC.
So one small question, again, going back to Oral Care. Whenever I look at the trajectory of Oral Care from 2016 first quarter, FY '16. It has been an exceptional performance barring just 1 or 2 quarters; one, was [ bmon ]; and second was, perhaps destocking, which we saw in -- for the first time we've seen numbers come down so much. Now, obviously, the problem is Babool, which perhaps may have contracted 15%, 20%, I don't know the exact number, but there's a sharp contraction. Now, when we -- and clearly Red has done very well. So when I -- when we look at, say, the next few quarters and you said Babool will take time to fix or trying to solve its problem. Do you see that given that rest of the piece of the Oral Care has done really well, are you of, sort of, implying that growth rate in oral would be nowhere close to what you have been doing in the past, it would be more like a 10% now, even if some improvement happens?
Well, over the next quarter or 2, it will maybe moderate. I would still expect double-digit growth happening in Oral Care. It may not be at the peak levels But then they're lapping a very high base off last year. Oral care base never contracted [ exceptionally on 2 ] quarters. Base quarter was very high, I don't remember the numbers, but I'm sure they were 20% plus. So we've got a steeper hill to climb here. I think you would know -- again, I'm speaking [ when the call updates ], I think you would see resumption on double-digit growth, couple of quarters from now.
Okay, got it. And largely driven by Babool? Or you expect some other new products?
No, it will be driven by Red. But Babool, I think, will stop shrinking. Our immediate task is to stop the contraction of Babool. And then of course, to resurrect the growth path. But even if Babool does not grow at all, our overall portfolio does grow in double digits very comfortably.That is what the situation was over the last few quarters, that Babool was in a sense flattish. This quarter, because of higher base of last year, it showed a fairly high decline and it brought down the whole portfolio. So I'm not too worried and especially since my other HPC brands are doing so well, whether it's Home Care whether it's Skin Care or Hair Oil or shampoo, whatever. They lift up the whole portfolio growth and keep in mind that too much attention has gone in Oral Care, but our HPC portfolio grew by 10.2% and that's not -- nothing to be sneezed at.
Got it. And any Red Gel has started contributing now? Or is it still very small?
It's still small. I don't think it moves the needle on the numbers any significant amount.
Just a small thing, once again, when I look at the standalone performance. Obviously, the A&P spend was a tad lower, but employee cost has surged suddenly 22%. And this is also from 16% last quarter as well. Is it something we're missing? Is there a one-off? Or is there something that is a new normal?
I will tell you very clearly what has happened. [ Comp increases have been ] reasonable, I think there is not really deleveraged the whole P&L. Our -- we added 200 people in as part of project Buniyad which has meant a certain cost, which was not there in the base. So that's been one element. The larger element is actually stock options. And we are entering into a new tranche of stock options from this year, which were then granted at the rate of [ 3 ] -- [ 3.50 ]. And the base, [ well, same ] stock options were given at [ 1.90 ]. Now, there is no cash out here, so it's -- while it's a P&L item under [ IOH ] There is no cash out. But it does drag down margins by substantially swelling up our [ IOH. ] Again this is not something [ to ] structure. When we lap it next year, we'll be lapping again current [ surprise that we haven't exercised ], then you will not feel this pain. So I think we will be getting the effect from [ IOH ] next year, so there are many headwinds this year, which are let's say, not of our creation but something which are in-built into the business model, which will perhaps evaporate next year. Sure.
And sir, what was the quantum of [ 1.90 ] of these stock options getting vested, and getting recorded this quarter, what was the quantum here?
And so I think overall differential cost per -- at consolidated level is around 12 crores, this quarter. Still this is [ net of a 50 crores headroom esoc ] so I mean, that's quite a bit. Whether the employees get this stock option, which is of course totally performance-driven, we still have to provide for them in the P&L. No, stock options are not granted as one-year, last year [ rewards, ] and you reverse the provision, then you reverse it only at the fourth-year. That's how the model works. So this is our P&L item, which is not a cash [ one ], but something, which is a part of our accounting standards.
So would you expect that to still pan out over the next quarter? It was just one-off, there's still more...
It will continue for the next, it's [ 3 crores ] approximately will happen over the next 2 quarters. And then it will start getting down over the next [ further ] -- because we have a double-whammy here. We have to give a disproportionately higher charge on this expense item in the first year. I think it's 29%. Next year it will be 27%, then 25%, then 23% [ behind that ]. So the problem is magnified in the first year. But I would encourage you not to get too upset about it. It's very virtuous. [ It's paid out as well ] to stock [ price ] clients. It's paid out a little bit to employees, it's all for a good cause.
No that's perfect. We like stock options.
I'm glad you do, so do we.
[Operator Instructions] Our next question is from the line of [ Saadat Shah ] of [ Solidarity Investments ].
My question again is pertaining to the Oral Care. I know it has been asked a lot of times today. But my -- where I'm coming from is coming from, you said that you have had a recent shift from defending profits and now we're going towards defending your share. Now in the natural segment, which we've seen a strong growth trend and acceptability in consumers in the last 4, 5 years, Dabur always had an upper hand given that we had a strong natural portfolio. But now, competitors have started investing aggressively, they're innovating, getting out more offerings, in a space which is also growing. So what I'm trying to understand is that how will Dabur be able to maintain and grow its share from this base in the coming medium- to long-term now?
See, we're far more aggressive in defending shares than what we were in the past. In Hair Oil, it took us many years to begin to defend because we were trying to defend profitability. In Oral Care, it is probably going to take us a couple of quarters to do it. So you have to, again, that much is the minimum time required to reengineer your portfolio. So the attack, which we will be doing from whichever strategy we have will be far quicker and far more intense than what we did in the past. So that's really the change we have done in terms of the way we work.
Okay, fair enough. So I'm not looking for a short-term, like 1, 2 quarters kind of [ public outlook ], but I'm thinking let's say from the time of 3, 5 years. Are we looking at adding to our product portfolio and getting more launches up ahead, given that some competitors are already attacking from all sides?
No, we have plenty of very high growth drivers, which may be small, but are doing -- take our Health Care portfolio, which nobody talks about. But many, much of that portfolio is growing very, very well. Our OTC business, driven by the advertised brands like Honitus, and Stresscom and Pudin Hara is growing may be[Audio Gap]With innovations, which we are doing. And we're not [ a bullseeder ] company. We are a broad-spectrum [ efficiency ] group, and we have to see which strategies work where. And sometimes we may choose to reduce investment in certain categories and increase in the others and that's part of the plan. But Health Care has been, I think, extraordinarily good performer in this quarter and they have -- we're looking at great growth coming from Health Care in the future. But to give a case in point, Honey, which you see in the numbers and they're all at 20%, 25%, 30%, kind of growth because we have defended here. We met the challenge of competition. We improved our value proposition, and we got our share back with interest. Simply -- [ no excuse again, ] which nobody feels what we're doing. We increased our competitive intensity to all time high levels, still well below what our competitors are doing but adequate because the incentives of brand is there. And we are back to 56 share, we had dropped down to 51, 52. So the defense part is there, but we can't do it blindly and by doubling down our premium brands, we never do that. We do it in a circumspect manner and put a lot of planning and thought. And typically, we win that back.
Right, right. Okay, that's great. My second question was on the A&P spend, I'm seeing a shift from the A&P as a percentage of revenues from, let's say, 12%, 11% to about 8% or 9% right now. So has that anything to do with the accounting standard shift to IND AS [ netting ] promotions off revenues? Or are we -- our A&P as a percentage [ has fallen particularly ]?
Sure. If you look at the report there, we do have a decline that we've seen of 8.4% in consolidated, around 3% standalone. But when we look at all the components that is the media, consumer promotion, and paid promotion, we've actually grown by 11.2% in consolidation and 6% in IND AS standalone. The reason primarily, as you rightly pointed out, is that the consumer and promotion and paid promotion gets reduced from the topline now in accordance with the IND AS accounting standards. So therefore, what you see, the visibility is finally on account of this. The media spend, which is declining in this quarter, primarily because of the [ planning ] where we have going to be more, kind of, focus on the media going forward in the current quarter compared to what it was in previous quarter. But when you look at the mix, we have spent more on the consumer and paid promotion. And therefore, at an overall level [ in the basket ] we have increased our spend at consolidated and standalone. And when you see only media as the line that you see, you see a decline there.
Our next question is from the line of Mehul Desai of IDFC Securities.
This is Harit from IDFC. Just 2 questions. Firstly, you know on the pricing side, if you could just, in the health sector you said 1.5% is what was the pricing in Q2. So have you taken any further price increases as you've gone into Q3 to, kind of, adjust for the gross margin pressure likely going forward?
We've actually taken the price increase to the extent of 1.5%, and a couple of price increase in the current quarter which only impact will be seen in the next quarter. So you'll see a price increase of almost 1.5% to 2%, coming -- in the coming quarter also.
But that is all the impact also will be there. So shouldn't it be less than 1.5% to 2%?
Yes, the 2% broad based. It accelerates from 1.5% to around 2.5% -- 2.5%.
And price increases are something very practical, whenever we see an opportunity we take up prices, even if they aren't planned. And we are now on the lookout, on the prowl for increasing prices wherever possible especially if the input costs are high.
Understood, sir. Second question was on the OTC and Ethicals business. If you see, the OTC Ethicals growth have not been probably over the last few quarters as compared to what we were expecting and we have called out in the last quarter or so that we are doing a lot more in terms of new products and trying to push some of the smaller brands to probably become potentially larger. When do we see this starting to [ materialize ] in terms of growth and in terms of your plan over the next 2, 3 quarters? When do you see that actually coming through?
Actually, that's already happening. The branded OTC products, Honitus and Pudin Hara, are showing great growth as I mentioned earlier. These are the ones in which we are investing in. We are not investing across the whole portfolio because we don't have the bandwidth to do it all at one time, it will happen in stages. But where we're addressing the [ -- we see the pools ] of investment come up in a very meaningful manner. And the prescription portfolio is something, which is not growing very well. It [ grew ] 5%, 6%, but that is almost par for the course for this prescription portfolio. The whole game is how many of these products can we take from prescription to OTC, [ bag ] them and then advertise them and grow them. And I think that trajectory is being followed quite well.
Our next question is from the line of [ Sanjee Singh ] from Tamohara Investments.
Sir, after listening on the commentary, just wanted to understand in the current scenario the priority of the firm will be to look at volume growth double-digit that you are looking or to protect the margin, that's in the next 1 or 2 years perspective? Second question would be, if you can just again highlight issue over the MENA region that you see in the International front. The issue, could it be for a couple of quarters or could it be longer than that? And the third question is...
Yes, please proceed.
And the third question is regarding the tax benefit that we have. If you can help me to understand how long and what are the areas -- what are the, kind of, objects, benefit we continue to have with lower tax benefit currently that we currently have?
Let me answer the first 2 and Lalit will answer the third.The first one is, given the choice between defending market share and defending margins, the choice is very clearly we will protect market share. But ultimately, management has to balance the two. We need to improve our market share, but not let margins, sort of, spiral out of control. So there has to be some moderation in our margin outlook, while they may trend lower, but they cannot been in any catastrophic downfall here. Because it can be very hard to recover margin which are lost. I think margins will trend down sharply only when there is very high levels of inflation. Otherwise, they will either remain where they are or trend down in a smallish, kind of, manner, which is controllable. And if that happens at the cost of double-digit volume growth, I'm willing to make that sacrifice.Second, the MENA piece, I think, is going to rebalance, so by either the first quarter or the second quarter of next year. I think this year we are going to face continued stress on account of the [ currency ] slowdown and the currency lapping issues, but this will reverse early next year. But even so, I think while the margin from International business will remain under some pressure, I don't see huge stress at the top line, because there are many parts of International business, that is actually doing very well. The Sub-Saharan Africa business to give an example, the SAARC markets to give you another. So there's a lot of moving parts here and many of them are moving very well but the margin issue is overall, is not looking too good for I mean, this year. Because the Turkish devaluation of 40% that happened this year is very, very tough. Recently, the Pakistan devaluation of 30% has also been very negative for the business. And there may be smaller devaluations happen in many parts of geographies. So I think, as I mentioned earlier, we take a long-term view of this. And overall, I am very carefully watching this, the operating performance of the business. This a business [ that is traveling ] on the ground because of the stresses, that is already performing well and driving growth in volumes, driving improvement in market shares. And in that -- I mean, that situation actually we are doing fairly well. So we just have got to ride it out, 2, 3 quarters of pain, and I think it will be back to -- it should be back to strong growth in International. Unless, of course, the currency takes another [ face-change ]
Sir, sorry to interrupt. What are the elements or what are the triggers that we as the investors would like to know to be able to track for MENA development, which you think would be the trigger to change -- the factors, the issues?
I think you should watch out for currency. And you should watch out economic strife. And economic and political strife. Let's say, Saudi Arabia -- the situation there is in the worst case scenario may deteriorate, which can impact the economy because of the politics. You may have the situation with the Egyptian currency if the Egyptian market also falls, which can again have a negative impact. So these are possible scenarios. But on the other hand, we maybe -- we will definitely be lapping the currencies so the drag will not be there in the next year. A lot of moving parts here. And believe me, it's hard to fully predict how it would happen.
So is the operational performance is what you're looking at as [ significant ] parameter. Can we look at the volume growth you have and the targeted volume growth there...
We probably have 0% volume growth and 20% pricing, because the attrition is 35% and the category is declining 20%, 25%. Egypt, where we have 25% growth, the volume growth is maybe at 10% or thereabouts. And [ apparently price, ] again, inflationary pressures are very high. So in International, we don't look at volumes so much, we look at market shares, which again, is a derivative of volume, and we look at the revenues and the margins. So that's why we never give any numbers [ due ] for International volumes because it cannot be aggregated in any meaningful matter.
And the last question on the tax benefit.
As far as India is concerned, our effective tax rate will continue to remain lower, which is currently around 21%, 22% for next 5 to 7 years, that's what we can see as of now, [ even with the ] tax exemption that we are going to continue.
Our next question is from the line of Chanchal Khandelwal of Birla Mutual Fund.
Most of my questions have been answered, but coming on to the, on the -- last time, at the analyst meet, you had highlighted that every year you take 2 to 3 brands, which is [ INR 100 crore], you like to scale up the brand. So just if you can highlight -- if there are a 2, 3 brands you have taken this year or you are talking about taking them this year and scaling it up?
So we've basically taken 3 brands. First is the Honitus brand. Second is Pudin Hara. And third is Lal Tail. All three brands. One operates in the cough and cold area, the other operates in the Digestive area, and the third in the [ OTC ] areas we are in. We think we're in all the 3 brands to gain share ahead of the competitors and drive growth.
Understood. And also, direct distribution. I can see it in the presentation, you have increased the direct distribution. So what's the target year? And will it not help you to gain the volume growth over [ literally, from a 2- to 3-year ] perspective?
Are we talking about increasing the direct distribution from 1 million outlets to 1.2 million in the first 2 quarters? We've already increased it by around 60,000, which will definitely help us. And that is why you see the rural growth there. They are coming through on the back of the distribution increase in the [ top office ] and the [ super-shoppers network ] also. So definitely will help us shore up volume growth.
Sure, sure. So given this context and given that you highlighted that rural will not be as [ warrant ] as you are talking about...
It may not be. I mean, the jury is still out. We still have to see how the stimulus happens going forward. So I don't have any huge strategy as to how rural volume growth will emerge. And it may be actually better than expected now.If you take the [ nisdak ] numbers, slight tracking down in the month of September, of overall category growths, [ while it was very warm ] in July and August, it went down a little bit. Nothing to be alarmed about, which gives a little bit room for caution, that it is the start of the trend. Will it continue to taper down or is it just a blip and it will trend up again? Very hard to predict.
Sure. Just lastly. Sir, to look from 2- to 3-year perspective, which is the category? I mean, Oral Care, you say you will do well. Which is the category which you can scale it up to become a bigger category? And be an investment growth driver for Dabur?
The OTC category definitely. I think this is where visibility is very high in terms of upside. So of course, it's a smaller scale. But still -- but otherwise there's no reason why we can't grow reasonably well and in some cases very aggressively every category in which we consist. I don't see any category in which we have any structural disadvantage in terms of not growing. And the reason why I say that is, one, is, of course, our ability to execute, which has improved over the years. And also, that our portfolio is all herbal and natural. Now, 35% of personal care, I have seen some numbers recently is, actually now herbal and natural [ of the mix, ] 35%. I mean, this was never the case in the past. The Health Care is progressively moving into a herbal and natural state. Of course, of prescription will remain dominant there for forever. But herbal and natural will be -- beginning to be increasingly meaningful in an environment where people are seeing alternative solutions. Beverages, again, the whole category is moving towards providing beverages from the ones without any such [ benefits ]. So we are at the right place. And given our ability to execute, I think, there is no reason why we shouldn't grow ahead of the pack for a long period of time.
Sure. I [ would more than likely ] but point is given that, where you are placed and what you can do in the natural and herbal platform, I would think that you would have a more pricing power than what you highlighted because even the cost inflation. I tend to believe that given consumers are willing to pay for the herbal and natural platform, the pricing power should have been a little higher. But you are saying it will be difficult to pass on the entire cost.
I think we're looking at good gains in trajectory and good gains in shares. Once the share gains come, the pricing power can be unleashed. But sometimes it is difficult to price product at a high premium right from the beginning. We need more [ improvement ] to pick it up, validate it as we did with Red which started off as a discount to the market leader, and is now emerging to the premium to the market leader because of the franchise which we built. So these are all technical things, I don't think -- we don't see pricing as a strategic tool. It's a weapon, which you choose to build a franchise.
So the idea is to gain volume, market share and then probably build up your margins.
Yes, in many cases, not in all, but in many cases that is often the strategy. So you sample, you give LUPs, which are low margin but you develop a franchise and then people start buying into the franchise and are willing to trade up to the bigger SKUs and other margin generative products, et cetera.
Our next question is from the line of Gaurang Kakkad [ of Haitong International. ]
So my question, again, is on the pricing bit. Also I do understand that we have taken a price increase of around 1.5% and there will be further price increase, which will be mean to 2.5%, going ahead. But sir, historically as we have seen, we have taken price increases in the range of 3% to 4%, which is also not very meaningful. And I think most of the problem that we are facing right now is maybe due to those price increases. So why the conservatism on the price increase bit, sir?
I think it's significantly driven by market forces. Also taking prices up in isolation of your competitors can often hurt the whole business. So we do it whenever required and I think the price increases they have been in again in the region of 4%, 5% this year, at least at the exit levels. So I'm not seeing -- like I said, pricing is not a strategic weapon for us, it is more an enabler to drive business growth. Again no, you see despite the lack of pricing, et cetera, we're sitting on 24% operating margins, in the India business as earlier referring to India business, 24% operating margins -- 23%, sorry, is close to all-time highs is not a bad place to be in. So I think this margin obsession should be moderated a little bit. You should be a little bit cautious of margin erosion but not seek margin enhancement in the current situation.
Our next question is from the line of Kunal Vora of BNP Paribas.
A couple of questions. First is on the -- you had mentioned a couple of quarters about [ prototypes within ] Toothpaste, like where we are on that?
In progress. Mohit, you want to speak about it?
Actually, we have proof-of-concept for a couple of prototypes. And I think some consumer test are actually ongoing, and we're fine tuning our mix to be tested in a couple of geographies. Right now, we cannot disclose the time line as to when we will be rolling it out in the marketplace but definitely, we're working on it and very soon we will be certifying the final mix.
Sure. Second is, can you talk about the trends in modern trade and e-commerce and in short, how are things going there?
Modern trade and e-commerce is growing very well for us. I think modern trade growth is ahead of 25% for the business as compared to GT delivery of almost 3x of our GT growth would be. Even cash and carry [ challenge ] is doing very good for us. And e-commerce is actually the star among all the channels. It's growing at the rate of 140%, with the last year. So we've seen great traction in these new channels, it's good for us. And that's the one that is actually driving the urban growth of the business.
So e-commerce is what, it's about 1.5% now?
Yes, e-commerce will be in the range of around 1.2% to 1.3%, which should be exiting the year at 1.5%.
I think the current quarter was 1.4%. And the way the trajectory is going, it should be closer to 2% as it exits. Because we are growing 150% over the last year, it's very exponential this growth. So we are a great believer in the future of e-com. I think it will be a big part of our business 3 to 5 years from now.
Sure, sure. And lastly, how is Patanjali doing in your categories? Oral Care, Honey [ and toothpaste? ]
In Honey, we've got our share back with interest. So I don't think there's any threat from Patanjali in Honey. But they still remain a player in Oral Care and I think we should not see them as having faded away. He is doing a lot of work in terms of building an rural franchise with the INR 10 and it seems to some extent he will succeed because there's a big rural franchise for INR 10 toothpaste. So with oral care, he still remains. In other categories quite frankly, we don't converge very much so I don't think there is much meaningful impact.
So would we [ own shrunk ] in other categories like Chyawanprash meaningfully?
No. I would say we have actually done very well in Chyawanprash.
I think they -- Patanjali will lose share?
Patanjali [ -- our share has grown. ] They have shrunken in Chyawanprash and I don't think they...
Honey.
Honey, of course, and there was, I mean -- in other categories, there was not too much convergence.
Our next question is from the line of [ Anirban Sahu ] of [ NT Research. ] [Operator Instructions] As there are no further questions from the participants, I now hand the floor to Miss Gagan Ahluwalia for closing comments. Over to you Miss.
Thank you everyone for your participation in this conference call. A webcast of this call and transcript will be posted on our website and we will be happy to address any further questions.