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Dabur India Ltd
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Ladies and gentlemen, good day, and welcome to the Dabur India Limited Q3 results investor call. [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. On behalf of management of Dabur India Limited, I welcome you to this conference call pertaining to results for the quarter and 9 months ended 31st December 2017. We have with us Mr. Sunil Duggal, CEO, Dabur India Limited; Mr. Lalit Malik, Chief Financial Officer; Mr. Ashok Jain, Vice President, Finance and Company Secretary; and Mr. Ankush Jain, Head, Financial Planning and Analysis.We'll start the call with an overview of the company's performance by Mr. Duggal, after which the Q&A session will open. I now hand over to Mr. Duggal.
Thank you, Gagan, and good afternoon, ladies and gentlemen. Welcome to Dabur India Limited's conference call pertaining to results for the quarter and 9 months ended 31st December 2017. Comparable consolidated constant currency sales growth was 12.9% for the quarter. Domestic FMCG business witnessed comparable growth of 17.7%, driven by strong volume growth of 13%. Profit after tax reported growth was 13% for consolidated and 16% for standalone business respectively.The category growths being discussed in this presentation refer to the underlying growth after adjusting for GST impact. The Home and Personal Care vertical posted growth of 23%, led by all-around strong performance of all categories. Oral Care grew by 23.2%, with growth of 26.1% in Toothpaste. Red franchise continued to perform well, driven by increasing penetration, aggressive marketing and visibility initiatives. Babool and Meswak posted strong double-digit growth and market share in Toothpaste category reflected an increase Y-o-Y.Hair Oils category registered growth of 16.7% with both Coconut and Perfumed Oil segments performing well, despite continued decline in the CSD channel. Excluding CSD, Hair Oil category grew by 21%. Perfumed Oils reported growth of 13%, including CSD and 17.6% excluding CSD. Corresponding growth in Coconut Oils was 32.8% and 35.7%. Market share in Hair Oils moved up by 90 bps vis-a-vis the same quarter last year.Shampoos posted growth of 56% on the back of re-launch of Vatika shampoos. The brand was supported by focused marketing activities and ATL spends. Home Care posted a strong performance growing by 36%, backed by high growth momentum in Odonil and Sanifresh brands. Odomos had a muted quarter on account of relatively lower incidence of mosquito-borne diseases and lower institutional sales.Skin Care registered growth of 14.5%, driven by Gulabari Rose Water, which grew in strong double digits. Supply issues hampered growth of Gulabari Cold Cream. Fem and Oxy Bleaches posted robust hike in growth. The Healthcare vertical reported growth of 16.6%.Health Supplements grew by 19.5%, led by strong performance of Chyawanprash and Honey, despite slowdown in the CSD category. The category recorded healthy 27% growth net of CSD. Dabur Honey reported growth of 33%, including CSD and 40% excluding CSD, and also gained market share.Digestive category performed well, growing by 19.3%. Hajmola tablets and Pudin Hara reported double-digit growth. OTC and Ethical grew by 8.7%. OTC products such as Lal Tail, Honitus, Ashokarishta and Dashmularishta Asavas posted good growth, backed by marketing initiatives and activations.Foods business was flattish this quarter, mainly on account of high base of last year, when the business had grown by 52%. In addition, Diwali gift sales got impacted as Diwali came earlier and the gift pack loading shifted to Q2 instead of Q3. Although sales growth was muted, profit margins in Foods show -- saw good improvements on account of lower consumer promotions and network optimization.International Business reported constant currency growth of 5% during the quarter. Saudi Arabia, which has been under pressure for the last few quarters, witnessed a strong revival with growth of 34%. Overall, constant currency growth in GCC markets were 20%. Egypt witnessed high growth of 45% and Sub-Saharan Africa 21%. Translation impact of INR 66 crores impacted top line. However, this impact is reducing as currencies are becoming comparable to last year. SAARC business posted good growth, led by Pakistan and Nepal.Consolidated operating profits increased by 28% and operating margin expanded from 18% to 20.5%. See, if we exclude the GST impact, improvement in operating margins were around 180 basis points. A&P spends in the Domestic business saw an increase of 31.6%, while A&P spends in International business were lower due to business environment still not being very supportive.SG&A expenses reflected some savings on account of cost synergies. PAT reported growth of 13% instead of higher depreciation and lower treasury income. Post the GST implementation, the channels had seen some disruption, which seem to have stabilized. The implementation of E-Way Bill mechanism is likely to throw up some more challenges in the future. However, the business is on a strong footing with revival in volumes and momentum of brands.We will continue to invest strongly in our brands, distribution and other infrastructure to grow ahead of the market and enhance shareholder values.With this, I now open the Q&A and invite your questions. Thank you.
Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Abneesh Roy from Edelweiss.
My first question is on the Foods business. If you could tell us how is the market share, what has been the impact of ITC? And what percentage of Food business is culinary and if you could discuss the supply issues, what exactly is happening there?
10% of business is culinary, 90% is beverages, so it's substantially dominated by beverages. In terms of competition, the challenges have not really come from the higher-priced competition like ITC, but it's very deep discounting by the mid-level players like Paper Boat, et cetera, which have been able to gain some share on the back of these proportional activities, and also a lot of value players emerging in this segment. But keep in mind, a very high base of 57%, 56% growth or thereabouts last year. The Foods business is not really materially impacted by GST -- by demonetization to that extent. And also the fact that a lot of the sales come from the Diwali gift packs, which this year happened substantially in Q2, whereas last year it was Q3. So there is a base issue on that account. Now going forward, I think we would see stabilization of beverage volumes. A lot depends upon consumption, recovery, et cetera, in urban markets. But definitely, we will see growth ahead. We hope it will be double-digit growths, not to be taken as a given. But what we'll be doing is that we are sitting on substantially enhanced margin in the Foods business on a Y-o-Y basis. We will be willing to sacrifice some of those margin gains to drive the top line stronger and we are beginning that journey now; the results, I'm sure will come.
On this margin sacrifice strategy, will it help in combating a small player like Paper Boat, I understand you had launched a product in the category of Paper Boat, I think Hajmola Cooler, so how has that done? So, do you expect that this will be enough to combat them?
We think so. I think Paper Boat, in its new avatar, is no longer that single-serve format. It is really 1 liter and basically, on the same platform as our beverages. So, there's no huge difference in terms of proposition given by Paper Boat in the 1 liter, which is the one which is being discounted and what we have. So I think we need to lubricate the trade more, we need to advertise more. And there is obviously a strong consumer preference for our brands, which should translate into business once the price levels are a little bit -- more stable.
And sir, this culinary business, what was the specific supply issue?
Well, we -- this is entirely outsourced. We don't make any of the culinary products ourselves. These are the vegetable paste, food pastes, and coconut water -- sorry, not coconut water, coconut milk and powder. All these are outsourced and some of our co-packers, they had working capital issues consequent to GST, other issues. So, we were very reliant upon them. And it was entirely a supply-side problem. There was no inherent issue in terms of demand.
Sir, my second question is on the Toothpaste business. You have grown 26%, 2 years CAGR of 10%, which is still a very good growth. Now, you and Patanjali are essentially in the Naturals. Now, competition scenario is changing with Ayush, which they have called out, that in Toothpaste it seems to have started off well. And even Vedshakti of Colgate has gained around 100 bps market share. So, do you need to respond to these? And would you say that the worst of Patanjali in this and in some of the other segments where you compete against Patanjali, worst seems to be behind?
Well, I don't think there was much of a Patanjali impact on our Oral Care business. We consistently grew the Red and the Meswak franchise 20%, 25%. Babool was a bit of a laggard, but then Babool also has staged a sharp recovery over the last 2 quarters. So I don't think that was very material. It was very material in Honey and I think that we have recovered almost entirely the lost ground by just giving a better product at a sensible price. So, the 33% growth in Honey, 40% if you exclude the Canteen Stores, is a very visible sign of that recovery and this is 2 quarters in a row of growth. So I hope the trajectory will continue. So I think the competition effects have been, I won't say entirely eliminated, but substantially mitigated.
And any comment on Ayush and Vedshakti, would you need to respond or do you think your product is differentiated...
No I don't think -- I think we have got very strong products with very strong growth paths. Having said that, we need to do a little bit more in this category and you will see that happening very early in the next year.
And sir, last question from my side. So in household insecticides, we have seen the market leader also struggle for the last 4, 5 quarters, you also called that out. So I have 2 questions here. One is, why -- earlier it was thought that consumer has made this as a habit, now suddenly every company is pointing towards seasonality? Second is, of course, in terms of the out-of-home, has the category expanded with Godrej coming in there and you've also come out with a roll on. So, how do you see this category, currently it's quite small, but where do you see this from a longer term?
Well, household, I mean, insect repellents, mosquito repellents are not really a habit. I think that's wrong to say so. When you have mosquitoes visible in the air and they start biting you, you'll start using these products. And when there is an epidemic, you start using them even more so. But when there is no such thing, like in winters in North India, then you'll stop using them and that's a behavior which nobody can change. So, when there is such a situation happening, then you'll have high usage. Well fortunately, there wasn't much evidence of any epidemics, dengue et cetera, in the northern part of this country, even the South. So, the overall insecticide table came down and I think the result of Godrej reflected the same situation as what we are in. And coming back to your personal application category, it's highly underpenetrated. I think total category size will be around INR 100 crores, which is ridiculously small given the share -- the size of the problem. So in a sense, having somebody else come in would serve to enhance perception and increase market size, so we would welcome that. I think it requires more than just 1 player to grow this market.
Our next question is from the line of Sameer Gupta from India Infoline.
This is Percy here. Sir, on 10th November, there was an announcement of GST rate cut in some of the categories and it was applicable from 15th. Most FMCG companies obviously cannot change the dates -- sorry, prices et cetera, within a period of 5 days, so most companies have staggered the price changes over the next 15, 20 days. Now the market leader has said that they have parked in escrow a certain amount, which they gained in that changeover period and doesn't belong to them. So what have you done in terms of passing on the benefits of that sort of lower rate to the consumer in that 15, 20 day period, it would have taken for you to change the pricing, et cetera?
What we did is, we with immediately effect, we reduced the prices to the stockists, right, that we did without any pause. Obviously there would be some stocks where the older price would exist, but we have written adequate amount of communication to our stockists as well as heavily advertised in the newspapers informing them of the price change and requesting them to pay only the lower price. And then the changeover, which we did was -- also happened very rapidly. So I don't think we have any exposure at all. Our books are open, anybody can have a look and I think we have taken whatever action which was required to deal with this whole anti-profiteering issue.
Okay. So you're saying that basically for the short period of time that MRPs could not be changed, the difference was passed on to the distributors as additional discount sort of?
And communicated to the consumer. [ So ] we don't believe -- we did discuss this issue, we don't believe there is any need to provision any amount towards any new eventuality. Our books are very open to anybody who wants to scrutinize them.
So, just wanted to, in that context, understand your gross margin expansion. I mean, Y-o-Y it's expanded very significantly and even Q-o-Q there is a decent expansion. So, what has driven this expansion, when generally crude and such inputs are moving up and you also haven't, I think, taken any significant price increases?
Well, let's take standalone material cost change, which is 360 bps, right. Out of which 70 bps -- correct me if I am wrong, Lalit. 70 bps is on -- entirely on account of the GST-related issues, which are not really material, because then your numerator comes down and your margins improve -- denominator comes down and your margins improve. So out of the balance 290 basis points, 150 basis points is in account of reduction in [ CPEP ], right. And the balance...
Balance is because, from the last year there has been 2.4% price increase, so 50% of that roughly 1.2%, is the effect.
So the balance is a mix of price increase and material deflation. And in Q3, we are still sitting on a small level of deflationary costs. So it's really on account of that and perhaps a little bit an account of mix. The [ Foods ] has come down low margin, HPC has gone up higher margin. So, it's a lot of moving parts here.
Okay. So is this the quarter, I mean Q3 FY '18 is the quarter in which your promotions have gone down materially or it's gone down in 2Q itself and just on a Y-o-Y basis, Q3 has gone down or is it gone down even sequentially?
No, once we -- we did massive promotions in Q3, which spilt over into Q4 of last year. We realized that that's not really the way to go. GST also made consumer promotions less attractive, because you have to pay full tax on them and not get any credit. So net-net, it made sense to kill consumer promotions and to increase ATL. So ATL spends have gone up at 37% -- 31% and CPs and TPs have gone down by a similar amount. So, we are rebalancing the entire A&P portfolio. What is visible to you is advertisement and publicity, which have gone up very substantially.
So basically you are saying these margins are sort of more or less sustainable, it's not as if it's just flash in the pan?
Inflation remaining the same, yes. But we have every reason to assume that inflation is going to pick up starting in the fourth quarter, particularly on account of petroleum derivatives, using -- we're seeing sharp increases in LLP. Coconut Oil is already on fire. So both -- Coconut Oil is of course the outlier, big gradient product which is very, very inflationary. But, all the oil derivatives are now kicking in with higher costs. So, we'll have to deal with that. I think we'll see a minor uptick in inflation in Q4 and then perhaps more substantive in the quarters ahead.
Okay. And my last question is on demand. Sir, this quarter numbers are fairly good, but if I look at your 2-year CAGR for most of the categories, it's low-to-mid single-digit sales growth. Of course, there are a couple of exceptions like Home Care and Toothpaste is also almost 10%. But otherwise, mostly it's low-to-mid single-digit CAGR. So, just in view of that underlying demand situation, your growth aspirations of a high single-digit volume growth would mean that the underlying demand needs to improve from the current levels quite materially. So how confident are you of sort of achieving...
That's one way to look at it. The other way is that you just improve market share. So even if the environment which is not supportive of growth, which is the situation today, to be very honest, we can still show good growth even on a normal base on the back of market share gains. So the reality of the situation is that there has been a sharp trending down of FMCG growth rates. Just to give you a data point that the growth rates peaked in Q1 in terms of volume at 13.9%. Of course this 13.9% trigger we should take with a pinch of salt, it is obviously much lower than in the past. But subsequently, they've trended down to 8.5% in Q2 and 5.7% in Q3. Now these are hard numbers in terms of FMCG. Our categories in which we operate are similar and I think that is something which is -- cause enough concern. We do hope that consequent to tomorrow's budget, there would be a sharp reversal of this downward trend, because this is really a part of the whole rural distress, a gradients stress, et cetera, et cetera. And we will be able to ride a much higher level of secular growth and then coupled with the market share gains, we should definitely be able to get to that high single-digit volume trajectory. Not to be taken as a given, but every reason to expect that it can happen.
So Sir, what will drive this market share expansion?
Better execution largely. What we have done is consequent to -- and I've mentioned this in my last con call, this project Buniyad which we had, which meant that we deploy a substantially higher number of people on ground in rural areas by dividing the portfolio around the middle into the 2 components of HBC and HC. Foods is not really material in rural, has given a big fillip to our rural growths. Rural growth this quarter was 23% -- ahead of 23% in a pretty stressed rural environment. So it's really execution and market share gains which will -- that's the only thing we can depend upon. We cannot depend upon category [ with ] growth reviving if we keep using that as a sort of excuse to justify low growth, that's not going to work. So we have to outperform.
Our next question is from the line of Amit Sinha from Macquarie.
Sir, my first question is on the Oral Care business and despite a significant step-up from some of the large competition in the Naturals and the Ayurvedic space, your growth has remained pretty strong. Just wanted to understand from you that how much of this market share gain has been on account of your execution in some of the distribution steps which you have taken and how much of that is coming on account of the Ayurvedic, Natural trend, which is emerging in the country?
Well, hard to say how much. It's obviously coming from both. We are gaining share in the aggregate sense, and of course, the Naturals space is growing ahead of the non-natural one. The competitors other than Patanjali are still very, very small. So I don't think they have really moved the needle in terms of growth for us. And I think the Patanjali effect, which was perhaps at its peak around a year-ago is now ebbing a bit. It still is doing well in Toothpaste, I'm not denying that. But we are now getting back whatever losses we had in some of the markets like UP, where he had gained some share at our expense, we are getting the share back very rapidly.
Okay. And there have been no -- absolutely no impact on account of the big launches from some of the other players?
They aggregate to 0.5%, 1% in terms of market share. So I don't think that's a very material level where it can upset our growth rates. It's only Patanjali which grew from 0% to something like 7%, 8%, literally in a matter of few quarters. That could have had an impact. I think our growth would have been even higher if he had not been here. But having said that he has further, in a sense, expanded the whole herbal phase and we can take advantage of it. So whether it's in Honey and whether is in Toothpaste or in personal applicator insecticides, often the advent of competition is very positive for market expansion and growth and we've seen every evidence of that. Patanjali did help us to expand the Natural space to much beyond what it was originally envisaged.
Shop-wise, I mean, just wanted your commentary in the longer-term, let's say for the next 5 to 10 years, I mean where do you see this -- the Naturals Ayurvedic space in the Oral Care category to be in the overall scheme of things?
Well, it's hard to guess and I think we keep pushing the numbers northwards. Now, I would say that, let's say by 2022 that the Naturals space could be as high as 40% to 50%, 5 years from now, 2023. So, I wouldn't have said that even a year ago, but definitely the preference for natural products is very strong, almost unstoppable and there's no counter from the folks who are manufacturing the regular products, because they can counter it by having high-priced specialist products like Sensitive, et cetera, et cetera. But those are beyond the reach of vast majority of people.
My second question is on the Hair Oil category, and if I do a 2-year CAGR, then the -- I mean third quarter FY '17 was exceptionally bad for you, the entire Hair Care. So just wanted your commentary on how do you look at these numbers. Is it still weak and you have specifically mentioned about strong Coconut Oil performance. So what is the price hike taken there and how much of the growth is because of volumes?
Well, it's almost entirely volume growth, except for coconut of course where there's been some small -- some price increases. But it's been driven really by LUPs. So I think our volume share growth has been very substantial and looking -- going forward, I think our volume shares will continue to grow -- definitely grow ahead of anybody else. The challenge will be to continue to maintain or increase the value share and that's -- I mean that's going to be harder, let's put it this way. The volume share growths, I think we have now got out act together in terms of both distribution; this project Buniyad was very instrumental in pushing our low priced Hair Oils into the deepest interiors and that process will continue. But yes, there would be pressures on the top line in terms of overall [ de-growth ].
Our next question is from the line of Arnab Mitra from Credit Suisse.
Firstly, on the International business, so 2 parts to it. One is, from -- going ahead, how much does the difference between the constant currency and the reported growth narrow down, given your basket of currencies in your view from the fourth quarter onwards, based on whatever is the current situation? And secondly, what is the issue in Namaste, because of which there is again a big negative dip on the CC and how do you see that situation evolve over the next few quarters?
Well, to answer your first question, we had around the INR 90 crore transition loss in Q1, similar in Q2. Q3, this quarter, which we are talking to is INR 66 crore. Next quarter we anticipate it to be INR 25 crore, okay. So that gives you the trajectory. After the next quarter I can't really hazard a guess because there could be shifts which I can't envisage. So therefore, the currency -- and a lot of this INR 25 crores next quarter is going to be actually on the rupee strength rather than on the downstream currency weakness. So the rupee versus -- we're going to have, out of this INR 24 crores, around half is going to be from lets' say, the Turkish lira to the dollar and half of it is going to be dollar to rupee, assuming that the rupee continues to remain at current levels. So the overhang of currency is going to be substantially, if not entirely, eliminated by the fourth quarter. So that's one big monkey off our back because this was hurting top line of International. And the second big positive is Saudi Arabia, which again was literally on oxygen last couple of years. We have done major changes in Saudi Arabia, recovered growth substantially -- improved by 30%-plus this quarter and we hope that strong growths will continue in Saudi Arabia. So that's one big reversal. There is some setbacks to Algeria, Libya and Yemen; these 3 countries which cumulatively account for around INR 50 crores a quarter, they have been -- sorry, INR 30 crores a quarter, they have been almost reduced to 0 levels because of internal strike or other issues. But having said that, we do believe Algeria and Yemen would come back, not to normal, but to better than earlier performance in the fourth quarter. And then let's see going forward how does it look. Sub-Saharan Africa, both for Namaste and Dabur is doing extremely well. So we're growing around 25% in dollar terms, so that's a very big plus. Egypt is doing spectacularly well in their own currency, but up to this third quarter, we lost most of it in translation. Egypt grew by 46% in Egyptian pounds, but minus 5% in INR. Now, with the Egyptian -- and that's a big market for us. So with the Egyptian pound normalizing, we should see very strong growths in INR from Egypt coming in Q4. Namaste remains an overhang, but the pace of deceleration of the business has now come to a halt and I think we would be plateauing out at almost 0 growth levels in Q4. So that's -- while that may not be status of situations, I think the pain of Namaste would now come to an end and we would now see how sharp the reversal of that business can be in the year ahead and I'm not saying it's going to be easy, because North America will continue to remain stressed. But we are seeing, like I said, very good growths in Sub-Saharan Africa, which should take away some of the pain on North America. So that remains the only issue. The other issue which we are facing is currency in Turkey, which again is the only currency which is not really restabilized, which is continuing to weaken and that's going to be a little bit of a headwind from Turkey. But overall, if you put all the pieces together, you will see substantially improved performance from the overseas business in Q4, and we hope that, that will continue in the quarters ahead.
And on -- so while clearly the top line will recover, what is the outlook on margins there, because they will obviously be [ input contradictory ]?
The margins will mirror the top line, because one of the issues with regard to currency depreciation is their gross margins come down, because you import a lot into the country and the importation cost is high, you can't pass it on to the local market in entirety, so your margins shrink. So our margins in Egypt shrank by 10% or more than 10% and I think we should be able to recover most of them now with the currency stabilizing. So the bottom line also would look good. I don't have a clear visibility about what the trajectory is, but the first cut numbers do show that International profitability will be, again, a strong growth on a Y-o-Y basis, starting from this quarter.
And one bookkeeping question on -- I mean the reason why I just wanted to understand the other income drop this quarter and how should we look at that going ahead?
Ashok will answer that.
Yes, the main reason for that in the base quarter, there were certain capital gains booked due to some sale in the base quarter which had not happened in the current quarter.
But this quarter there is no one-off, so this is a...
And also the rise of interest rates have lower the yield, so...
And there is one-time profit gain on account of sale of investments to the tune of INR 16 crore that made the difference. And also the interest cost is forming up, which has an impact on [indiscernible].
And there are some mark-to-market losses on account of the -- not here, okay. So this pain will remain as long as the interest rates continue to harden. We would see lower growth in non-operating income.
Our next question is from the line of Vicky Punjabi from JM Financials.
This is Richard here. Mr. Duggal, you've partly dealt with this in the previous question, but I just wanted to get your broader high-level thoughts on the topic of International business. A few years back, of course, a lot of the Indian companies went to overseas with, I guess, the objective of these regions providing a delta to the overall growth profile versus the India rate of growth. But if you see the last few years, they actually proved to be [ decretive ] and extremely volatile. There are of course a lot of valid reasons to this which you just mentioned to the previous question. But in light of all these, how do you now look at International investments. The short question is that, are you as structurally bullish about going International as you would have been some years back?
Yes, I think Richard, what we thought we would get is, immediate gains from acquisitions and that obviously has not happened. But having said that, the long-term strategic reasons for doing the acquisitions, Namaste really to build a franchise in Sub-Saharan Africa more than anything else, they remain intact. And I think without Namaste happening, we could not have built any substantial presence in South Africa. I mean, if we didn't do Namaste, we just had to do something else, but we couldn't have done it on its own. The black consumer is very different from what we're used to and we don't have the knowledge to deal with the consumer, now we do. So, if you take say, a 10-year perspective, I think these are good deals. If you take a short-term perspective, they do look a little bit upset. But while I think -- I don't regret these acquisitions, obviously with the benefit of hindsight, we would have executed them a little bit differently than what we did. But I think, if you take the long-term, we will definitely benefit from them. Sub-Saharan Africa is a big price and Namaste is a perfect entry point into that market.
So, if you do see -- if you are given an opportunity for another International buyout, you will continue to evaluate those, despite the kind of...
We certainly would, but having said that, we have gained a huge amount of experience. Remember these were our first 2 acquisitions outside India. So there was a learning curve which we had to go through and now having been through that we are far more prepared to see the underlying risks and to deal with them and to take preemptive action to deal with them. For example, in Namaste, we didn't see this huge natural waves coming, so we didn't map it out properly. We weren't used to that ecosystem and we weren't used to that pace of change. So, we won't be caught napping, I think, this time. We'll do our diligence in a far more structured manner and I think after having gone through this learning process, some of which has been painful, it would be foolish just to disregard it. But like I said, we'll be much better prepared.
So, if you look, let's say, over the medium term and let's say 3 to 5 years out in your own business plan that you're drawing up, do you still envisage a situation where your current basket of International businesses, do you think that basket is going to grow faster than your Indian business?
Well, the last full year has grown slower. In fact, this year on a Y-o-Y basis -- quarter sorry, our International business has shrunk to 27%, down from 30% a year ago. So this is really the Indian business which is moving the whole needle.
No, I'm saying that what's your expectation for the next -- okay now that...
Honestly, I don't know. I mean, we deal with the International growth on a case-by-case basis. We pursue deals, which we believe are good, we walk away which we don't think so. So far after Namaste, we haven't done any acquisitions, even though we have been looking all the time. So it's very hard to put a number to it. I mean, I still think that the current trajectory between 3/4 and 2/3 India and 1/4 to 1/3 International is probably the band in which we'll operate, but this could change.
And one question if I may on Foods margin. If a lot of the festive packs got advanced to Q2 and I guess these packs are relatively lower margin products, what's the reason for Foods margin of Q3 being lower compared to the level seen in Q2?
No, I think the gift packs don't have any material impact on margins. The net margins are similar, a couple of points here and there.
Mainly because of CP.
We did give massive CPs in the base quarter, if you remember that. That's one. So the CPs we have taken off the table and that has partly led to this vastly improved margins. We've also made network changes, we've got rid of a lot of third party co-packers and moved that production in-house in Pant Nagar and that has also been better in terms of...
Net area based exemption.
And we got some area base exemptions in Pant Nagar. So the margins have expanded and the strong rupee has helped, because a lot of concentrates are imported, so we get them at a lower price because of the strength of the rupee. So that's the real reason.
No, I was actually talking about the 15% clocked in Q2 of FY '18, which has come down to 13% in Q3 of FY '18. I am just talking about quarter-on-quarter.
Yes, actually it's a product mix also, because the 200ml has a lower margin versus 1 liter, so what you see is that we have more 200ml this quarter versus what we had in the Diwali gift packs earlier. So that is one of the reasons on the mix side.
No, I think that 2% is not very meaningful.
I think, one should look at it in the context of Y-o-Y where I think 8% has moved to 13%. That is really the big change. Couple of percentage could be just a small mix issue or maybe -- and part of it yes, you're right on Diwali gift pack, but like I said, it's not a big number.
Our next question is from the line of Vivek Maheshwari from CLSA.
My first question, sir, is on the margins. So you mentioned something, in case if, let's say, crude and all the crude derivatives remain where these are right now, you mentioned you will be able to maintain margins. Is my understanding correct?
Yes. I mean, I think in Q4, we should be able to, because the inflation -- we're still sitting on a substantial amount of lower-priced inventories, which we'll be consuming and our margins are around consumption, as you know. Now, going forward, once this whole anti-profiteering overhang and all is over, we will take our prices in line with the inflation numbers and that would happen early in Q1 of next year. We haven't really done that mapping in terms of our price increases, but Q4 will be fairly subdued. Q1 I think -- if inflation continues the way it is, Oil prices remain at this level, Coconut Oil prices again remain at this historically high levels, then we'll check our prices.
So basically, if I understand you correctly, where the spot prices are in general, you need a price hike to basically manage margins, right?
Yes, I mean where the increases -- the input cost increases are in strong double-digits, we need a price increase. There is no other way we can maintain the margin profile.
And this anti-profiteering issue, what you mention why, let's say, one is I'm not very clear so, I heard you on CNBC also a while back and you mentioned about, you are not very clear how do you take up prices, what authorities will look for? Do you need to have a product-to-price list or basically the calculation around how much is the inflation, et cetera. Is there any concern on that or by first quarter you think that concern will be behind?
I think that concern will disappear in the first quarter. At this point in time, since this is very live issue, it's better to be out on the side of safety and not take up prices, even if the input costs are hurting, which like I said, will not be doing so meaningfully this quarter. But as to the end of this quarter they will, but we can postpone it by a few weeks. Just to not cause any issues with the regulators. So whatever we do there will be -- since anti-profiteering are not going to disappear, we'll have to justify those increases with the detailed calculations in terms of -- and the rationale behind those price increases. So we'll take that also into cognizance. So, proactive price increases, I think for the next few quarters may not be that easy to get.
Okay. Are there rules which are formalized on this issue, because I mean, the way in which crude let's say -- if that is the only one variable if you take, the way in which crude prices have moved up, I mean let's say, in a market like India, you should be allowed to take up prices, right. There should be no concern as long as -- and once you've passed on the GST impact, it's each up to the industry or the company to take up prices, right?
Absolutely. I think, see the fact remains is the anti-profiteering only says that when the rates were reduced from [ INR 28 to INR 18 ], the benefit was to be passed on to consumer. But it doesn't prohibit or stop any company in terms of increasing their prices if the input cost is going high. So that is very clear. The only question is that if there is a rate reduction, had we adequately passed it on and that's what Mr. Duggal was stating is that we have taken adequate step to ensure that we are passed on all the benefit that we got to the consumer, and therefore, there is no impact. And while going forward, if there is any inflationary pressure that will come, that will be evaluated in terms of increasing the price, but that probably will happen in the first quarter, because we are sitting on some inventory, which is at the [ low end ]. Whatever the situation, even in the first quarter, we'll have to build the detailed rationale and a case for price increases by having visibility over our value change, so that there is no disconnect. But we'll see how the anti-profiteering issues shape up. At the moment, we have -- there is not too much other than a couple of notices here and there.
And if I may, just one follow-up on this. When you say you have to have a case, basically that's for your internal working or you have -- every time that you take up prices you have to ...
No. Well, let's put this way. If I do any price increases in this quarter, I will first make sure that there is a detailed rationale to support the price increase, so that I don't fall in foul of the regulators. Going forward, obviously, this is not going to continue forever. We are in a free market. But we have to see, manage the sensitivities which are there, and I'm sure they won't last for long, perhaps by the end of this quarter anti-profiteering would become redundant, because other aspects of the value chain would then begin to factor the margins.
Second, quick comments on wholesale and CSD for this quarter. Like you mentioned last quarter, what was the growth in both these or de-growth in both these channels, please?
Well, the CSD, it declined by 22.5%, which was a big, big drag.
Sorry, how much sir?
22.5% was the decline in [indiscernible]. Okay, let me give you a break-up in terms of various channels. This is interesting. The distributors -- what you call, GT distributors, general trade distributors grew by 13.7%. This is the distributors whom we sell in urban centers and then who sell to retail and to local wholesalers . Super stockist, which is really the rural wholesale, grew by 26%. Modern trade grew by 17.6%, so not spectacular, but above the stockist growth. [ Action Carry ], which is modern wholesale grew by 16%. Food services, which is enterprise, grew by 73%, but then this is not a big, it's only 1% saliency. Paramilitary; again, 1.4% saliency, grew by 27%. Other institutions grew by 12.2% and Canteen, which is the big daddy in terms of enterprise, the B2B business, declined by 22.5%. So all these growth you see are net of CSD and CSD is very material in Chyawanprash, in Amla Hair Oil, Honey and -- that's Chyawanprash. So these 3 is very big and that's [Audio Gap] but the big 3 are Chyawanprash, Amla Hair Oil and Honey. So the growth, which you see which are already good are despite this overhang of CSD. And of course, GST impacts everything including juices, where it's got a 2%, 3% saliency and Oral Care everywhere. So, I think we managed the CSD deceleration quite well by tapping into other channels, particularly the rural wholesale, which 26% is a very high growth.
All the numbers are, I presume, like-for-like adjusting for GST in the base as well?
Yes. They all adjust for GST. Everything, which you hear now will be adjusted for GST.
And last bit on Chyawanprash. How did Chyawanprash do in this quarter, if you adjust for CSD?
12.2% overall, and net of CSD, it was 20%.
20%. So, again -- but 12.2% if you include CSD. This is again adjusting for GST. So again it was a great growth, despite the fact that the winter has been fairly subdued in the North. So we are pretty happy with the way Chyawanprash has performed. We did not really pumped into much money behind the flavors and the variants, because we felt that we should wait for another year till like the market has totally normalized and our own financials are back on track to really then implode into it. So next year we'll have a massive program of investment behind the Chyawanprash franchise, which we did not this year.
Our next question is from the line of Aditya Gupta from Goldman Sachs.
Couple of questions. One on Oral Care, so you mentioned that the growth is driven by increasing penetration, maybe channel-wise or geography. So can you shed some more light on how much more scope for this penetration-led growth is remaining, how much ground you've covered already?
Well, it depends upon the rate of conversion now. I think the penetration in terms of geographies, while still a lot of headroom still exists, but that won't continue forever. So it is really going to be a conversion game, how much can we convert from the regular non-herbal Toothpaste into Toothpaste and everybody is playing the same game. The recruitment is from the regular products. Now, who does this conversion best will be gaining the most. I don't think the Toothpaste category is growing at more than the high-single digits. So the herbal, if they're growing at 20%, 30%, I don't know what Patanjali growths are, but the multinationals, of course, on a zero base, they've also done some growth. So the slice of the pie is increasing, but in our case, we do the recruitment for us from our competitors. In the case of the multinationals, they probably will have to do recruitment from their own franchise.
And secondly, just on -- you mentioned that E-Way Bill is now [indiscernible] in the near term, so but -- I mean, the elementary details I guess, but, I mean, do you expect this dip impact to be a month or longer than that and will it be homogeneous across your categories or would some categories be more impacted?
Yes, 14 states have implemented the E-Way Bill from tomorrow. The big one is UP of course, and then most of the southern states have done it. I think all the 4 southern states are implementing it. Then there are a couple of smaller states in the Northeast et cetera. But the material one is UP for us. And I don't know, I mean, it could be disruptive because, it is very restrictive. Any movement above 10 kilometers and any consignment size of more than INR 50,000 has to be supported by E-Way Bill. Now, while the process is reasonably simple, but even doing that, given experience with GST, will definitely be a challenge. So this has come as a bit of a surprise. We were fully prepared for Intra-State E-Way Bills, because that is really entirely in our own hands. We shift from factory to the CNFAs, which are controlled by us. So no excuse there, but then suddenly 2, 3 days ago this Intra-State, which we're expecting from June came and there's a little bit of concern about its impact in terms of day-to-day movements, even let's say within a city like Lucknow moving a shipment from point A to point B, if it's more than 10 kilometers, has to have a E-Way Bill. So it's pretty complex and there are so many issues with regard to this E-Way Bill that if I am selling a delivery van having say 25 cases, which is INR 50,000 from my stockist to maybe 30, 40 retailers, in which -- what form does the E-Way Bill take. So, because the E-Way Bill has to specify a certain consignor and a consignee and if there are 30, 40 consignees, what you'll do? So, it's another issue, which again, I think we'll navigate it, how long it will take, I don't know, but there is some concern here.
[Operator Instructions] Our next question is from the line of Anuj Bansal from AMBIT Capital.
I just had a question around the OTC Pharma range. So the growth seems to be relatively muted as compared to most other categories. So A: anything specific about this category which could have led to the lower growth? And secondly, there has been a big product launch, which has been in the work for few years around this whole range where products around diabetes, cholesterol, blood pressure, arthritis, et cetera, have been under development, so any updates on when can we expect a larger launch in this product range?
To answer your second question first, around 10 products under the ethical range have already been launched. You may not have seen them, because they have been launched through the prescriptive route. So they are products for liver, for stress, for arthritis, for [indiscernible], very good products, very safe and efficacious. But we still feel it is prudent to incubate them through the prescriptive space for a couple of years before we take them OTC. That's why they are not very visible, but if you want to see some of those, you can go on our website or Gagan will tell you -- give you some more information about them. So these are some very exciting and very promising products, which we will take to market through media whenever we feel it is right. At the moment, we are still scaling up our prescription infrastructure. We've got a new team on-board to deal with it and we would look at highly accelerated pace of supporting this whole detailing framework in the current year -- in the next year.
So sir, has this launched gone national now, because I believe you had been test marketing them in couple of states. Is the prescriptive route and the launch [audio gap]
Yes, it's still regional and what we are doing is, we are putting different products in different regions, because through the prescriptive route there is a limitation in the number of products you can take to the practitioner, it's typically 4 or 5. So we are doing something in some states, something in the other and then we'll see which ones are most suited to take to market when, and there will be a lot of learning's from this whole exercise. But there is a whole ethical piece is going apace. There is a lot of attention and disproportionate attention on the part of the management towards this particular initiative and we are pretty happy with the way it's performing.
And on the overall growth rate for the category, anything specific about this category, which has picked up growth?
Very hard to say, but I think the growth rates would definitely be in the double-digits from next year onwards.
Our next question is from the line of Harit Kapoor from IDFC Securities.
So just had 2 questions on the International part. Firstly, just on margins, so both the acquired businesses, Hobi and Namaste have, over the years, seen a shrinkage in margin and probably towards the end of last year, margins were at all-time lows at the EBITDA level. Just wanted to get your sense now that you are looking -- hopeful that these businesses are going to stabilize and grow going forward. What's the specific outlook on improving margins here?
Well, I think the Namaste margins are already showing signs of improvement and we will rapidly scale up the margin delivery from here. The challenge is more on the top line rather than on margin, because we have cut costs now tremendously over the last couple of years to support the smaller business size. And the Sub-Saharan Africa would support margin growth also substantially. The challenge is more with Turkey in terms of margins, because the currency issues still remain relevant there and this is the only currency, which is continuing to show signs of weakness in the entire basket. So the moment currency stabilizes, our margins will improve, there is no doubt about that. But it's very difficult to improve margins with a depreciating currency. The price increases which you take can never compensate for the margin erosion on account of the weak currency.
My second question on the International front was, a large part of this International business has been developed organically over the last few years. Just wanted to get your sense on whether you see cross-pollination opportunities from these, some of the successful International launches to India and is there an opportunity there sitting possibly in the future in next 1, 2 years that you can think of or something you're thinking of going forward?
Yes definitely, I think from the Dubai franchise, there's definitely a lot of cross-pollination that can happen in India and we will begin to do that with Hair Care products like -- high-end Hair Care products like serums et cetera. Now that e-Com offers us a window to go to consumer without the whole issues with regard to trade, that's probably a good platform and it will become increasingly powerful as the years go by to introduce new products without the issues which you have to deal with in selling through the traditional trade. So, the cross-pollination happen; between Namaste and Dabur, quite frankly, there's very little -- because that is worth for black people and so it's not really relevant to the Indian consumer. But the cross-pollination of Namaste is really happening in Africa from the U.S. and that's really the reason, like I said earlier, we bought this business. How do we populate Africa with Namaste products which -- and have the whole learning's from the Namaste business to leverage the Africa opportunity.
Okay. My last question was on India and on really the underlying rural-urban trends. I know you have touched on the fact that rural growth for you is quite strong, but that was really led by your internal initiatives. Just wanted to get your sense on the environment that has tracked in rural over the last maybe 2 or 3 quarters as well as urban and the thoughts going forward?
Yes, like I said, the growth which -- a lot of the growth which you've seen across companies are really a base issue. And going forward, it could -- stimulus could lift the whole growth trajectory into a different orbit or it could not, depending upon what the budget et cetera presents. So I think we really have to be prepared to slug it out in terms of better infrastructure, better execution to -- and therefore share gains to drive growth. I still think that double-digit growth in rural markets, even in a very slow burn environment is eminently possible for us. We do believe we have world-class infrastructure which we've built over the last 1 year or so in rural India, in particular, to deal with the challenges of low growth.
Our next question is from the line of Nillai Shah from Morgan Stanley.
Just 2 questions from me, sir. Could you comment on the recent management changes at the mid-managerial level between India and the International business and what triggered that?
Well, I think, we are building up, for the next year, in terms of succession planning and we have a strong desire to do it from internal resources, rather than to recruit from outside. So this is part of a cross-pollination process that you move people around, give them exposure to different geographies, challenge them in a different operating environment and that would reveal the quantities which we require for orderly succession from within. So it's part of a very carefully crafted process which would have happened couple of years ago, but then this whole issues with regard to demonetization, et cetera, et cetera put this process back by 2 years. But now we are back in the game as far as business is concerned. It's the right time to hand over different businesses to different people. I would have not liked to do it when we were in a crisis situation, which was there 2 years ago up to now. But since the business has now stabilized, this is the right time to make the move. And we'll progress it in a manner which we are comfortable with, at a pace which we are comfortable with. We have outside help also from leading a HR company. So I think it's been very well crafted and we believe that it would lead to orderly succession in the years to come.
And just taking off from the earlier question on cross-pollination, you had started the process with the baby care portfolio, but it seems to you have got lost somewhere. Is it just an issue of timing or you've changed your views on that?
I think it's the issue of prioritization. When we -- Baby Care was really going to piloted in the MENA region, particularly in GCC. That was where we would have got the learning's to transmit it to India. The India initiative was really around a baby oil, which is different from Lal Tail, which everybody may not like to use. But we did pilot the Baby Care initiative 2 years ago in the Gulf, but then the Gulf business fell apart with all these issues with regard to the MENA economy and the Baby Care was the first casualty of that. So we withdrew it, like we withdrew some other products also and we shunt the business a little bit to its core. Now, with the MENA rebalancing, we are really looking at Baby Care once again with some level of seriousness. So when we make the brand plans for next year, we will definitely have Baby Care as an initiative. How much will we progress it, I don't know. And that's another example of cross-pollination. If you get it right in the Middle East, we can transplant the learning's into India and have a baby care business here. But it's a very tough category to enter and we may choose not to enter it, because if our focus is shifting towards healthcare for adults in terms of lifestyle management, lifestyle disease management, we may put more of our resources there, we can't spread ourselves too thin.
And last question, in terms of the next 2 or 3 years for the India business, where do you expect the max acceleration in top line growth to come from, which categories, broadly speaking, without getting into the brands also it's okay, but just which category? I know Toothpaste is one of them for sure, but what else apart from Toothpaste?
Yes, the most of the growth may continue to come from HBC and Foods. But in terms of long-term strategic rebalancing of the portfolio, the move is towards healthcare. So healthcare may not be significantly impacting the mix or margins or profit over the next say, 2, 3, 4 years, but it is a long-term strategic imperative. Now, many of these initiatives are slow burn, so we got to be looking at a horizon which is 5 to 10 years, rather than 3 to 4. So I don't believe that while healthcare may -- sorry?
Sorry, for the first time hearing, you talk about market share gains, so you obviously have your plans drawn up in terms of which categories you're going to target. Healthcare you have in the past said it is slow burn, so that's impossible that can drive that near-term high single-digit growth they're looking for. So which other category are you really gunning for? You've done very well in Toothpaste, but apart from that what else?
No, we look at share gains in all the key HBC categories, and then we look at share gains in Healthcare categories like Chyawanprash and Honey and then we look at sizing up the whole space, say digestives for example, where we have strong brands, but comparatively small. We are not looking at market share there because that's not a relevant metric. But in -- let's say, digestives and cough-cold, we would be looking at very, very high levels of growth and high levels of investment. So we're going to pressure investments, give disproportionate investments to a few brands and I don't know what they are, because that will emerge over the next few weeks. But these are 3, 4 brands which are currently perhaps in the INR 30 crore to INR 50 crore segment, but very scalable and which enjoy inherently high margins. And then we'll be putting in substantial amount of resources, disproportionate resources. We may lose some money for a year or 2, but I think if you're able to scale them up, then the fruits of that investment will be very high. But definitely the way to grow, assuming that the category growth remains subdued and that's what the situation today. The only way to grow in the big HBC category is through market share gains.
So what you're saying is, in the big HBC categories, the precise plans for which categories, which brands will be drawn up only in the near future?
Well, a couple of weeks from now. That's when the brand plans will be grafted. It's already being worked on. Now we just have to see it at the senior management level, and then prioritize as to what brand gets what investment. Obviously, we can't afford investment across the whole portfolio. So some will get high level of nourishment, some won't. And that's really the trick in picking the right horses which can take you to that desired level of growth.
Our next question is from the line of Anubhav Sahu from [Antique] Research.
I wanted to understand from you, is there any regional differentiation in rural growth you're picking up or is it too early to call a trend?
Sorry, I didn't get that exactly, what did you say?
Any regional differentiation in rural growth? mean this quarter it hasn't got, but is there any regional pattern...
I don't know whether it's structural or whether we can extrapolate it. But let's say this quarter and maybe the earlier quarter before, we got very good growth from East and South and comparatively low growth from North and the West. But like I said, you can't read too much into it. These things keep changing.
And sir, by any chance, would you have the last year's number for distribution sales growth mix?
Yes, we have some numbers in terms of the direct reach -- distribution reach, which has gone up around 10% in last -- 7%, 8%, sorry [Audio gap] which was a big milestone and the growth really in terms of reach has come from urban. One thing to be clarified that this whole rural outreach program is not to expand distribution, which we believe we have adequate. It is basically to get more SKUs into the whole distribution funnel and that's why we divided the sales organization down the middle. So we now have 1.02 million outlets and touch points. We had 941, 3 months ago, so that's a big increase. And most of the increase has come from urban actually. The rural is more in terms of quality of distribution rather than in terms of numbers. I think in numbers, till the market revise, and till the category growths go ahead, there is no point in increasing the number of touch points, because the cost of reach will become unsustainable. So we've not really increased the number of touch points in the rural for the last, almost 2 years. The environment didn't support that initiative. But as and when rural growths increase, we will scale it up. It's not very difficult to do.
Okay, sir. And sir, just to understand the base effect, last year Q3, what was the growth from super stockist channel and the general business channel?
I don't remember the number. But definitely the super stockist which is the rural wholesale channel has grown at 2x business and was substantially ahead of us. So there has been huge rebalancing in terms of our channel mix with canteen going down, urban wholesale going down, rural wholesale going up, modern trade increasing reasonably well, e-Com even though the pace is very low, increasing exponentially. So it's a very mobile situation and I think directionally we are moving -- our dependence upon urban wholesale is lessening at a dramatic pace. I personally think E-Way Bill is going to deal a big-big blow to urban wholesale, because when they ship their products across their clients or even when they sell it without -- within state lines, it's all cash dealings and the E-Way Bill is basically there to stop this kind of stuff. So we'll have to further accelerate our rural outreach in terms of rural wholesale also urban more touch points, et cetera, et cetera. But things are changing very rapidly on the ground.
Our next question is from Latika Chopra from JP Morgan.
Mr. Duggal, just one question. Your commentary on rural was a bit more cautious than rest of the peers who have reported earnings so far. You have talked about the rural market growth rates are fairly subdued, all the growth has largely come from your own efforts, while others have talked about a gradual improvement. Why is there this divergence, so to say? Or is it that the more -- the bigger players are basically doing better in rural versus others?
Well, our rural growths, Latika, this time were 23%, 24% over last year, so it was a spectacular performance in rural. Why I'm being a little cautious is, because the headline numbers and that's the only data we have access to which is meaningful show a sharp deceleration in the growth rates. Now I cannot ignore this metric, while our growths are good and hopefully will remain good, but there is no -- we have to be prepared that the growth rates may not -- the inherent growth may not support our business growths and we'll have to do something extra. So I don't want to be lulled into some kind of complacency that growths are there, we just have to walk in and take it. We'll have to fight -- we should be prepared to fight for the growth through market share gains. Now like I said, tomorrow could be a very, very different environment where rural economy will take pride of place in the budget and then we would see the acceleration happen and we would -- but there is no harm in making that extra effort, and I always believe that be prepared for the worst and don't be -- try to be overly optimistic. So that's really the way we run our business, it's looking at the worst case scenario.
Right. And the numbers you're referring to are Nielsen numbers I'm assuming, right? The Q1, Q2, Q3 numbers that you talked about earlier?
Yes, that's right. mean every category is just showing the same trend in FMCG. So you can get these numbers yourself and see.
No we don't get access to them anyway. Thank you.
Don't, but I'm sure you'll have your numbers.
Thank you. Ladies and gentlemen, that was the last question. I now hand the floor back to Ms. Gagan Ahluwalia for closing comments. Over to you.
Thank you for joining us for this conference call. A webcast and transcript of the call will be available on our website. We will be free to address your further questions, if any. Thank you, and have a nice evening.
Thank you, members of the management. Ladies and gentlemen, on behalf of Dabur India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.