Marico Ltd
NSE:MARICO
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Marico Ltd
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Ladies and gentlemen, good day, and welcome to Marico Limited Q1 FY '24 Earnings Conference Call. We have with us the senior management of Marico represented by Mr. Saugata Gupta, MD and CEO; and Mr. Pawan Agrawal, CFO. [Operator Instructions] Please note that this conference is being recorded.Before we get started, I would like to remind you that the Q&A session is only for institutional investors and analysts. And therefore, if there is anybody else who is not an institutional investor or analyst, but would like to ask questions, please directly reach out to Marico's Investor Relations team.I now hand the conference over to Mr. Saugata Gupta for his opening comments. Thank you, and over to you.
Yes. Good evening to all those of you who have joined the call. Let me start by giving a flavor of the operating environment during the quarter that has gone by, after which I shall touch upon our performance, followed by our strategy and outlook for the year ahead.Volume growth for the FMC sector was in positive territory for the second consecutive quarter, led by steady growth in urban. However, evident green shoots in rural are not yet visible. Factors such as retail inflation dropping to sub-5% level late pickup in monsoons, hike in price, crop MSPs and higher government spending continue to give hopes of a gradual recovery in rural sentiment, although the extent of the impact of special distribution of rainfall and erratic weather patterns and rural farm incomes also have a bearing on sentiment in the near term. But so far, I think at least in the south and west of the country, the monsoon looks good.While companies are taking price cuts and reaction to moderating commodity inflation, pricing growth has been tapering off sequentially. And therefore, growth in the coming quarters is likely to be led by volumes. Food continues to lead the sector while mass personal care categories continue to exhibit a strong linkage to rural growth.Moving on to our performance during the quarter. Domestic volumes grew 3%, which is lower than our expectations. However, it should be read in the context of a couple of one-offs pertaining to channel inventory adjustments. Firstly, a sharp month-on-month fall in vegetable oil prices has led to trade significantly lowering inventory levels in Saffola edible oil, while we have taken multiple price cuts amounting to 30% year-on-year to pass on the benefits to consumers. As a result, Saffola edible has recovered partially on the low base of last year. Since offtakes have remained healthy and the worst of volatility is most likely over now, we expect growth in Saffola oils to be steady going ahead.Secondly, the final phase of trade theme rationalization initiated in post Q1 FY '22 to smoothen the SKU that was historically prevailing in the first quarter revenues of the core domestic business. Now that we have evened out the trade schemes throughout the year, we believe this will hold us in good stead over the long term in terms of managing supply chain and below-the-line spend more effectively. While volume growth in core categories of coconut oil value oil -- value-added hair oils are subdued in Q1 by this one-off impact and muted rural sentiment, we expect an uptick in those portfolios from Q2.Now that one-offs are out of the way, we expect volume growth to resume and improving trajectory from Q2, as indicated by healthy offtakes in Q1 and 85% of our portfolio either gaining or sustaining market share and penetration on a net basis. Therefore, we do not expect any impact on the growth aspirations for the full year as envisaged at the start of this fiscal and conveyed in the previous earnings call.Coming to our newer categories, we have made a positive start in the course of achieving our diversification target for the year with Foods and Premium Personal Care portfolio cumulatively contributing 20% of the domestic revenue. In Foods, our scale-up continued with growth in mid-20s. Growth in the core oats has been supplemented by healthy traction, newer categories of honey, plant based protein spreads and munchies. Consistent with the strategic approach of expanding our addressable market in value-added foods and nutrition segment, we are excited by the addition of the clean plant-based nutrition brand, Plix, in our portfolio. Plix is committed to the mission of making nutrition fun, ensuring the habit of incorporating clean plant-based super foods as a part of the healthy and active lifestyle. Plix's portfolio consists of products which are non-GMO's, vegan, gluten-free, cruelty-free and with a reusable and recyclable packaging.The brand has built an impressive franchise by upholding evolving consumer needs and sound business fundamentals and is now clocking an average run rate of INR 150 crores plus with a very low cash burn. It is evident that we are becoming a strategic investor of choice for founders to believe in growing sustainably with a watchful eye on profitability.Alongside the Food portfolio, the composite Premium Personal Care portfolio comprising Livon serum, Setwet male grooming and Digital First brand has delivered a steady performance as well. We expect this portfolio to contribute to 10% of domestic revenues in FY '24.As specific food and digital franchises attain scale, we are also charting a path towards making significant improvements in profitability and significantly reducing cash burn rates in our Digital business.Moving on to international business, which has been remarkably resilient despite varying degrees of uncertainty in the operating environment, Bangladesh extended its steady run with core portfolios performing healthily and more portfolios scaling up well. Vietnam faced some consumption headwinds. However, the underlying business remains strong. South Africa and NCD business have been quite consistent over the last couple of years. We'll continue to invest for growth in these businesses.Overall, business is poised to deliver double-digit constant currency growth in FY '24. For the consolidated business, revenue growth in Q1 was significantly weakened by pricing intervention in core domestic portfolio and currency headwinds in a few overseas geographies.We believe pricing deflation in the domestic portfolio is bottomed out and will now start tapering off. Therefore, we expect revenue growth to move into positive territory in the second half of the year.On the profitability front, gross margin and operating margin in Q1 expanded ahead of internal expectations, going to incrementally softer input costs while we maintain investment towards strategic brand building of core and new businesses. While we continue to invest in A&P and maintain our share of voice ahead -- share of market, we expect operating margins to expand to 20% levels in FY '24, higher than envisaged earlier.To sum up, despite a slower-than-expected start, we are confident of delivering improving trajectory in top line and earnings growth through the course of this year.Last but not the least, we always view the entire business operations through the lens of sustainability and our Sustainability 2.0 framework has been seeing encouraging progress towards across each of the 8 broad teams.Retail is the same in our FY '23 integrated annual report, which was released on our website 2 weeks ago, and hope it will make for a good reading. We firmly believe in creating shared value for all will lead us in driving sustainable all around and superior growth in the long term.With that, I will close my comments. Thank you for your patient listening, and I'll be most happy to take all your questions.
[Operator Instructions] The first question is from the line of Abneesh Roy from Nuvama Institutional equities.
My first question is on yesterday's acquisition. So in terms of the business click, what is the right to win? I see a very sharp scale up from INR 40 crores in FY '22 to broadly INR 106 crores in FY '23 and now ARR of INR 1.5 billion. So it's a sharp scale up. So in this kind of a format, there are a lot of other players. If you could also talk about the distribution, how much is physical, how much is online? And is there any kind of synergy benefits you see from your other digital business or, say, other acquisitions you have done in the last 6, 7 years?
Okay. So I think Plix is -- first of all, Plix is largely online. And therefore, obviously, one of the things that they expand. And we firmly believe that any digital brand needs to get a critical mass in the e-com and their own D2C space of fitting at least INR 80 crores to INR 100 crores, a certain level of set of consumers and level of saliency or awareness before it goes into omnichannel. I think while the current run rate of INR 150 crore is very encouraging, and I think it is right for going to omnichannel, I think there's tremendous potential to max out there.If I believe -- I think there are 3 things why we believe Plix is the right to win. And if you really look at -- one of the things we look at when we are doing acquisitions in the digital business is obviously brands which are sharply differentiated. For example, if you know, Beardo. Beardo is a Harley Davidson of male grooming. And even after 3 years, post our taking over, I think the brand continues to perform well. We look for founders who have a significant urge to build to last as opposed to just building to sell. And therefore, we look at also commercial savviness of the founders. We look at good unit economics because if the unit economics is not good for any digital brand, it will never make profit, whatever you scale up in. And so the fundamental things like whether you have a core set of SKUs, which are -- what is the repeat rate. So we have now set up what you call a digital quotient, what we do to evaluate brands. And I think our success rate, hit rate in meeting acquisition assumption is pretty high.Now coming to synergies, yes, I think the one move to synergy potential could be distribution. The second, as we now have a boutique of 4, 5 digital brands, there are a lot of opportunities for cost synergies at the back end, which the process we have just about started. So in a nutshell, I think quality of promoters, quality of the brand equity, how consumers love them. For example, if we look at the ratings in some of the things like Amazon and Flipkart of a brand, whether there is significant repeat rates, has the brand started making money to give you an example in both, say, male booming or Plix compared to some other brands, the burn rate is much lower. And therefore, I think these are the kind of things we look at, and we are pretty confident. And I think Beardo a perfect example. I see Plix as a huge mirror to what Beardo has done. And if you look at it, even in a so-called slightly tougher circumstances for e-commerce or digital brand, this brand continues to grow. In fact, it ended at INR 104 crore. It's a hit -- I mean, a current run rate of INR 150 crore, and the quality of the business is good. It's not about short-term tactical sales.
Okay. One follow-up there. So the scale-up has been good, and I don't think the number of years of this business has also been very long. So I wanted to understand in terms of R&D or patent or those kind of right to win, could you talk about that because this is a very exciting feel, but I'm sure a lot of other people also are trying similar kind of stuff. So what is the reason for the scale-up and is there an R&D angle to that?
Obviously, the product delivers. I think we -- while I'm not going to elaborate, I think any acquisition we do, we do a complete due diligence, look at strength. And as I said, that ultimately, in any business, whether it's digital, brick-and-motor the first thing, you need a product that delivers. You need a pricing, and I'm talking of classical marketing that is value seeking. You need a certain ability to innovate consumer understanding. I think they know how to operate the marketing funnel. So I'm -- I think -- and as I said, it's not only about the efficacy of products also about looking at the future pipeline, the ability to develop these products. And I think also, we look at the background of the founders in terms of their perspective on technology, product development and the fact that we are pretty excited by the kind of say, the team, which is there. And I think the question is that in any category, I think there would be people. I think nutraceutical wellness is an exciting category. The question is can you create scale and a profitable path to market, which creates a moat. And there is almost on #1 and 1 fast follower in any category, which will they survive over kind of a time.
One last follow-up on this question. Last few years, you have done multiple D2C acquisition, and you have given a lot of freedom at the local level, which is, I think, obviously required given the extremely different kind of business and a very different kind of scale also. So I wanted to understand on the earlier acquisition, how much of the Marico template has been put in place in terms of systems and process or still those things haven't been done because still, you want to give that culture -- that culture to remain intact?
So if we see one of the biggest things about Marico, which has been -- perhaps Marico has been successful by punching above its weight, and we believe that we want to be skilled insurgents and operate with owner mindset. Now coming to -- and that is the empowerment which we give is a part inherent part of Marico culture, which attracts a lot of founders to us because that has become a template for us becoming a strategic investor of choice where we partnered them into achieving their dreams and aspirations and a scalable, profitable growth model.Now there are 4 things which are nonnegotiable. First, obviously, portfolio, capital allocation, your entire compliance, quality and the way the manufacturing practices, those things are obviously nonnegotiable. We are trying in a process of now that we have -- and we also do a lot of cross learning. I think what we have not yet done is use 1P data, first-party data across all the 4 and starting cross-selling, that is something which would lead to huge synergies. But I think there are also -- we have started the process of cost management because -- and as you know, that we have created kind of a nano facility in one of our plants to actually start in-sourcing, which will also give possible potential margin benefit. So I think the process has started. It's a fine balance. But we don't want to completely run it like the core because the right to win in the core and the right 2 win at digital businesses are completely different. Having said that, once they cross INR 150 crore, and Beardo has already started the process, they are experimenting with omnichannel and brick-and-mortar where they're definitely having the Marico help is a source of competitive advantage.
Sure. That's useful. My second and last question is on your 20% Foods and Premium Personal Care, which has doubled in essentially 3 years. So here, my question is in terms of gross and EBITDA margin of this part of the 20%, how does it compare with gross and EBITDA margin of the legacy India business? And between the 2, if you could give us some color. I'm not asking for exact numbers, which one is better, which one is still work in progress?
So the Premium Personal Care, obviously, is a high-margin business. I think what we need to do is ensure that obviously, Premium Personal Care is high A&P. In the case of Foods, it's slightly lower margin, but we are cognizant of the fact that the fact that if these are brand -- very soon, the blended margin of Premium Personal Care and Foods should be equal to the gross margin of our remaining core portfolio, which is our legacy portfolio. And that process has been significantly focused on so that this happens within the next 12 to 18 months.
And if I were to just add, Abneesh, currently at a weighted average level, gross margins were definitely better than the overall portfolio. Now to talk about operating margins, currently, many of these businesses will be investment phase. And therefore, this may not be the right time. So once some of the businesses get a scale of INR 150 crores, INR 200 crores, it starts tracking well. So as and when these businesses will cross those scales, that will be the right time to look at the operating margins. But having said that, we are extremely focused in terms of driving the right gross margin for the portfolio and weighted average gross margin portfolio of the businesses put together is definitely better than the existing portfolio.
The next question is from the line of Percy Panthaki from IIFL.
My first question is on margins. So you mentioned that this year, you will do about a 20% kind of margin. If I look at your margins historically, this is probably the highest or close to the highest margin that you would be clocking as a company. So what I wanted to ask is on a medium-term basis on a 2- to 4-year kind of basis, do you see your margin stabilizing at this 20%? Or do you still see over that time horizon sort of expansion in the overall company level margin at a consolidated level?
So I think there are 2 things. One is, as I said, you are absolutely -- like we are pretty confident that we should be able to cross the 20% mark in margins this year. Now unless there is significantly black swan inflation that hits in simultaneously on copra, crude and everything in one particular year, I think it will start improving because there are 2 parts to it. One, I think in Food, for example, as we scale up, we'll be significantly starting the margin improvement program on Food because Food we are very, very mindful that while we grow Foods, we shouldn't get our eyes off the margin story. The second thing we are looking at is also, I think we have not done well in the premiumization, to be very honest. And premiumization, we are finally getting our act right, and therefore, we are going to improve this one. Number three, I think if you look at some part of the international business, obviously, Bangladesh is doing well. I think secondly, Vietnam also, we have now replicated some of the Bangladesh journey, and we are now replicating Middle East, North Africa. Middle East, North Africa, we didn't have scale, and therefore, we didn't have margins. But there are players who make 20%-plus margins in fact, some of the market leaders in that market make 30% margins. So that's another potential reason. So I would say margins is likely to creep up. However, in a year where there is a black swan, where you have a 30%, 40% increase in copra and crude hits 100, there would be some this one. But on a long -- medium-term basis, I will see margin keeping up. The other thing which is there, this is particularly happened in the last few quarters is that we haven't got the leverage -- operating margin leverage because of deflation, the revenue is down. Number two, I hope that by second half, the anniversarization of deflation of Bangladesh currency, which is leading to translation hit in both top line and your bottom line, that will also start somewhere neutralizing because as you know, the Bangladesh contributes to a significant portion of top line and bottom line in our mix. And that had a significant depreciation starting from Q1, but now it's settling down. So by Q3, that effect will start neutralizing.So overall, I think subject to no less one, to answer your question, yes, it will not -- there is a steady increase, but not -- you don't expect any hockey stick from here.
Sure, sure. Just a sub-question on that. While you are going to make attempts to improve the Food margins, I'm sure for the foreseeable future, they will, at the EBITDA level be below the company average. So therefore -- and this is a faster-growing segment. So even if the margin improves hypothetically, let's say, from 3% to 10%, but a 10% on a significantly higher base because it's a faster-growing business. Doesn't that put a drag on your overall company margins?
No, no. So that's why I talked about the PPC or the Premium Personal Care, which is serums plus male grooming, plus skincare and digital. Now they have the potential for higher EBITDA, okay? And number two in Food, at least in oats we have proven that we can deliver a kind of a core margin in EBITDA terms in oats because food, I think the ask is to how do I start hitting INR 150 crores, INR 200 crores each category. So the focus from now on in Foods, instead of launching 10 things, whatever we have and maybe we'll launch 1 or 2 things, is that how do I start doing 2 things? One is getting -- focusing on scale, for example, soya, munchies, can we get scale? Because Foods, the margin really grows with skill. The second thing which we have started, which we have not done is right now, you have individual set of advertising, whether Saffola oil advertisers, Saffola oats advertisers, Saffola munchies advertisers, Saffola honey advertisers. Very soon, in fact, over the next couple of weeks, you will notice the first signs of what I call a Saffola master brand advertising, which will also give you efficiencies in A&P rather than the fragmented A&P, which you're currently seeing in Foods.
Right. My second question is on VAHO. So when our fourth quarter results came out, you were very confident that this business is now on track for, if not a double digit, at least a high single-digit kind of growth. This quarter, VAHO is roughly flat. So just wanted to understand apart from the pipeline issues that you mentioned, I mean does that explain that entire differential between a 0 and a high single digit? Or is there some other reason for that?
There are 2 things. I think just not pipeline, pipeline has contributed some part of it. I think the second part what has happened is that we continue to see at the bottom of pyramid, high intensity this one -- because everyone -- see, this one interesting phenomena observing, obviously, while the food inflation is slightly softening and overall inflation is softening, the tendency towards focus on consumers buying LUPs and price point packs and therefore, competitive intensity and bottom of pyramid, which has again slightly increased, okay. Having said that, again, I believe that Q2 onwards, you will see reasonable improvement as far as VAHO number is concerned. In the second half, we'll go back to what we have talked about.
Right. Just wondering here, I mean, just thinking about -- historically, we haven't seen consumer trends being so fickle that they change in 1 quarter and then suddenly revert back in the second quarter. So what gives you confidence that whatever weakness you are seeing now will sort of reverse very soon?
I think it's not the weakness on the sentiment. I don't think if you look at the category growth levels, I don't -- in fact, it has improved. So if you ask me that is Q4 and Q4 plus, if you add Q4 plus Q1 and compare it, so let's look at Jan, June because -- and then compare it with, say, July, December of last year. There is a sequential growth. There is an optic growth. There is a market share gain. And therefore, if you look at Jan, June together on VAHO I think the story is better. And therefore, as -- and I don't think any consumer sentiment, this has happened, drastically is an offtake term run rate in terms of Jan, March versus April, June, there has been no significant difference.
The next question is from the line of Vivek M. from Jefferies.
A couple of questions. Can you, Saugata, talk about the secondary? We know the primary, obviously. Can you just talk about because of this channel issue and the measures that you have taken on the scheme -- trade scheme rationalization, what would be the secondary roughly speaking?
A couple of percent. I don't want to get into specific. And as I said, that is not an excuse for why you have done 3, okay? So I think it is a -- it will be a couple of percentage points higher.
And that will be primarily on in case of Parachute and VAHO?
And it's only in Parachute and VAHO, that's right. I'll tell you, so that you have a perspective that if you look at historically, long ago Q1 was 31%, we have gotten down to 27%. We want to take it down to 25%. So that should explain the thing.
So that also means because there is a destocking in this quarter, so this should unwind and then the late -- as trade promotions get streamlined, automatically, the revenues should also pick up in the next --
No, but I think it is also a good opportunity. Ultimately, it's offtake. Number two, as I said, that we want to mirror offtake and also that offtakes are smooth and offtake along with smoothening of all the secondary and primary. So I don't want to get into primary secondary offtake, but all I can assure you with that. I think given whatever trend we see that this quarter onwards, it will start improving again. But it's very difficult to get into that just because secondary was higher than primary last quarter, I will want to do that much. Because say, ultimately, we have to look at something which ensures and ultimately that we look at offtake and penetration as long as that is end market share protection. So I think primary is just a derived thing. So I don't want to get into looking at primary and secondary, but all I can assure you is that the numbers that will come from both Parachute and VAHO will be certainly better than what it is there in the Q1. Overall, volume growth will keep on increasing as we go towards Q2, Q3, Q4.
Got it. And just a follow-up, Saugata. So I know there are -- and again, these are dipstick survey, so may not be exactly accurate. But my understanding is that Marico, at least in the last few years that I have seen your trade inventories are quite at an optimum level or you can always get better for sure. But unlike some of the other companies who actually play with inventory a bit here and there. In that context, I would have imagined that there is no big opportunity to kind of streamline the trade inventory. Correct me if that understanding is incorrect.
I think we obviously go into what I call a pull-based system, which we do for our management. Having said that, you must be cognizant the one thing, which is especially urban distributors, when you have a lot of Saffola index, they have -- especially in this quarter where there was a 30% reduction in prices, obviously, the revenue would have got impacted, okay? So that leads to -- so therefore, we have to be mindful of our partners' profitability and other things.
Got it. The next question is on both specifically on Parachute and Saffola with whatever decision that we have seen, we are seeing. How do you see competition particularly from, let's say, regional lose in case of Parachute and somewhat similar to a bit organized in case of Saffola edible oils?
Parachute what happened in Q1 is obviously, there was a little bit of deflation. Fortunately, we believe that deflation is now settled in and there could be a sideway movement of copra into little more positive territory as we move into August, September, October. So therefore, I think that issue that was there in terms of slight this one on volume, that should be taken care of. The other thing which we are doing is, as I said, that we want to invest money to ensure that we -- for demand generation. So we are aggressively investing money behind demand generation. So you will see that even in Q2, Q3, Q4, there will be A&P increases while we commit turnover, deliver our margins of 20% plus. We will not deliver margins by having a cutting down Y-o-Y on A&P, okay? So I think that is what we are doing that we are putting things in place for demand generation and marketing in place so that Parachute this one and that one grows, and whatever value we can give to the consumers, we'll do with value. Need not be pricing, but other tactical means.Coming to Saffola, see, Saffola issue is this. Saffola offtakes are good. It was just that there has been a significant downstocking. We have to get into a position where there is a steady, what I call, steadiness of -- or less volatility in the pricing because people wait and watch and they don't stop. Now coming to offtakes and market share, I think the current pricing of Saffola, which is that the pricing model where the price premium, the price premium is more or less right now. So I don't think there is that problem in Saffola as a problem. And basically, what we need is a slightly more steadier and less volatile raw material so that -- so therefore, it is not a competitive scenario, it's more of an STR thing. And it always doesn't happen here because I'm just telling you that suppose I lose this year, I will again only gain back next year. It normally doesn't happen until the volatility completely ceases and people see steady things. And it's unlikely to happen because there are too many macro factors in the world, global political thing that impact sometimes oil, but we believe at least the deflation thing which kept on happening from the peak, as you know, that 30%, that will now keep on slowing down as we enter the consecutive quarters.
Okay. Got it. And last question, if I may, Saugata, on gross margin. So there is a smart recovery in this quarter. You are still at an overall level, you are still below, let's say, historic peaks. Where do you think the rest of the year in gross margin -- so do we see a stability in gross margins or there is still a leg up over here on this line?
So this quarter, we have expanded the gross margins about 450 basis points, 450 to 500 basis points. So going ahead, margins will not be as high as this one, but we still believe that at a full year level, it will be in the range of 300 to 400 basis points. And of course, a part of it will also get plowed back into investment behind and building. And therefore, at an operating margin level, what we are saying is that minimum we'll deliver 20% plus.
Right. But Pawan, just a follow-up. This quarter is 23% plus on EBITDA margin. So even if I were to take the same flattish number and the revenue line is now more streamlined, does that mean what essentially you are saying is that A&P spends can actually grow quite a bit because there's a step-up in staff cost in this quarter. So even if I assume the same run rate, I mean, at least in my model, at least in my model, at least I get a number which is about closer to 21% on EBITDA margins and not -- at least and not 20%?
Maybe also have to appreciate that margin of 23.2% is also because of the denominator effect because the revenues have not grown. It is in fact degrown by 3%. And as we move ahead in Q2, we expect that it should move to largely flattish trajectory. And from H2 onwards, it should move into positive trajectory. So that denominator effect will go away, number one. Number two, also, as I said, overall gross margin, we still expect that 300 to 400 basis points will be there. And yes, you're right, a large part of that expansion, as I said, the A&P expenditure could be high in double digits. And therefore, operating margin, I think 20% plus. So 20% plus is the bare minimum that we are saying. There is also a possibility that we might deliver slightly more than that.
The next question is from the line of Hasmukh from SUD Life.
Yes. So my question on margin has been answered. I have a second question on your Foods and Premium Personal Care portfolio. So that has come to now almost 20% sort of your domestic revenue. So if I take, let's say, 3 years out of a view, what's our internal target for this as a percentage of overall domestic revenue here?
So I think we don't have any further target. I think we should ensure that obviously, this part of the portfolio will be a growth portfolio. Having said that, what we are saying is that 2 things we are looking at in this portfolio, how do you grow profitably. So food gross margin needs to increase. And we'll also focus on the digital brands. In fact, compared to, as I already said, that if you look at Plix and some other similar brand in that space, you look at Beardo versus some similar brand in this space, burn rates are far lower. But at the end of the day, how do you get them into profitability space very quickly? So it's a combination of A and B and therefore, I would not just grow. I need to first get the profitability right and then grow.
The next question is from the line of Latika Chopra from JPMorgan.
My first question is on pricing. Clearly on Saffola edible oil, there is a fair bit of volatility, and we recently saw firming up of farm oil prices. Do you see that pricing for Saffola needs to be taken up this firmness seen? And how soon that can happen? And what are implication on revenue growth in the second half? I heard someone saying that Q2 could be flattish. But as you go into second half, does price inflation completely goes away in your assessment?
So Latika, it's very difficult to -- there has been very mild increase in our set of edible oils, which we used in the last couple of -- last week, actually. Now it's very difficult to say. All I can say is that this quarter, we had a 30% deflation. The deflation numbers will keep on decreasing. In the second half, that there will be no deflation. We might -- as we exit, we move into a slight inflation, and therefore, revenue growth will be volume growth or volume growth plus. We are also indicating that the volume growth will -- when we started with the 3, it will be more as we move into the Q2 and second half. But it is very difficult to right now say then that what will happen, whether Saffola inflation will happen. And right now, we are almost -- this is modeled on -- this is on the current pricing of Saffola.
Okay. So the current pricing of Saffola, you feel the overall revenue growth, which will turn positive in second half will probably have flattish to marginal positive pricing. Is that right to infer?
Yes, that's right.
The second was on your just comments on gross margins, I heard someone mentioning 300 to 400 basis points expansion for full year. I think [Technical Difficulty] 250, 300. And I think the question was saying, you had a 500 basis point expansion in Q1 and for full year, you are talking about 250 to 300 basis points. So should we now take it more like 300 to 400? And is it on account of the denominator catching up and probably some bit of mix effect as inflation comes back?
At a full year, you can consider that number about 300 to 350 basis points and not really for the rest of the year. So at a full year, you can consider 300 to 350 basis points. And more importantly, I mean, there'll be multiple levers which will keep on playing out during day, right? There are forecast. It's very difficult to have a right forecast. Even the best of the international agencies have not been able to get the right forecast for edible oil. So there are a lot of multiple things that will play out. But what we believe is that the 300 to 400 basis points, somewhere between 300 to 400 basis points could be the gross margin expansion. And if we get that expansion, we will continue to invest because we have a lot of new agenda that we have created and we'd preferably want to fund them. However, what is more important is that an operating margin level is 20% plus.
Okay. And the last question was on the modern trade contribution for VAHO and Parachute, if you could share that, any rough fence there? And are you seeing the salience of private labels and modern trade channel increasing in the coconut oil space? Any comments there?
I think we will not share -- we'll not be able to share channel-wise contribution for brands. But all I can say is that if you ask me whether the market share of Parachute is lower in modern trade, the answer is no.
The next question is from the line of Arnab Mitra from Goldman Sachs
My first question was actually on the acquisition again. So the difference I see with your past acquisitions is in the recent past is that this seems to already be at a reasonably larger scale of INR 150 crores ARR. And in the kind of product segment they are in, plant-based protein and things, do you see this -- I mean, at what growth rate can this go at from a base that's already INR 150 crore? Because it's a pretty large number for these kind of brands to achieve. And does it mean that being plant-based is going to be a bit of a niche within the protein and nutraceutical market or it's not necessary that these products will be a niche and the pricing could be competitive even though it's plant-based positioning?
So the way we see it is that if you look at India, I think India even plant protein is going to be a big driver of growth. And as opposed to the entry point in the Western markets where it has started off, a lot of plant protein has started off with meat and other things. Here it is a plant protein nutraceutical or plant protein in the phase of soya, which we are doing in food.Now coming to any nutraceutical if you have, there are 4 or 5 drivers of growth. So there is heart health, there is what is called weight management. There is diabetes or sugar management. There is gut health and bone health. So these are the 5 platforms of wellness on a nutraceutical brand works. So what we look at is that whether plant protein and some of the brands and incidentally, interestingly, Plix also has something we call it is a little bit of personal care, skin, food, in that territory. So what we looked at is that in all these platforms and that is how global nutraceutical brands operate, that can my proposition ultimately extend across all 5? And we believe that happens. And at the end of the day, there are some famous big start-up brand starts with something. You can always move to adjacencies, isn't it? Like Beardo beard oil is still 40%, but it's okay. I mean at the end of the day, we can move to adjacencies. You start with something and then it stands for, for example, it stands for nutrition with fun, cool nutrition. That's what the brand stands for and maybe it can be extended.
No, understood, understood. And a related question was, I mean, again, not asking exact numbers, but approximately, if you could share the range of gross margins that this category or this brand has. And is the INR 150 crore turnover fragmented across a large number of SKUs, or you see certain SKUs becoming sizable within this INR 150 crores turnover that they currently have?
I alluded to this, one of the things we look at for any good acquisition or a good -- which is a scalable is do you have a couple of hero SKUs with high repeat rate, a loyal set of consumers with a very high Amazon rating, which are the core of the brand. Because they are the guys will give you that what I call the foundation of growth. A lot of start-up brands launch 50 things and start to show growth. I think this one doesn't have that. There are a couple of SKUs, which contribute a significant portion of the -- this one story.The gross margin is high. I can also tell you that not many food categories can have a digital model because digital model unit economics requires a certain cost. This brand can afford to have a digital model which is profitable because of the gross margin. In fact, if you look at food, very few food categories can have a stand-alone digital model because food usually have lower gross margin.
Understood. And my second question was, you've given this INR 400 crore turnover, which is a combination of some of your older brands like Livon and Setwet and new age physical brands. Now my understanding is that the older brands which came from the Paras portfolio, they were probably not growing very well leading into COVID in the previous 4, 5 years, while the digital brands, of course, grew very fast in the post-COVID period. So how do you look at the growth of the overall INR 400 crore portfolio, especially in the environment that this year this year that Internet e-commerce growth is slowing down in Personal Care? And how do you think of the legacy? I mean the older brands like Livon and Setwet also contributing from here on?
So the way we look at it, I don't want to get visual on this one, but the fact is that the newer part of the portfolio, which is Premium Personal Care, Foods, Digital Brands, we would like it to grow by 15% to 20% every year from a medium-term basis.
And just one clarification, Arnab, this INR 400 crores does not include the Paras portfolio. It is basically the digital brands of Beardo plus just of our own in-house digital brand.
Okay. So you're saying it does not include Livon and Setwet?
Yes. However, when we are saying that our contribution from the Premium Personal Care and Foods, that will become 20% by end of year, '24, that definitely includes the Paras portfolio as well.
The next question is from the line of Sheela Rathi from Morgan Stanley.
I just had one question, and this is more on the medium term, I would say. Saugata, the question is from your lens, what is the current positioning of the Saffola brand in the minds of the consumer? And I tell you why I asked this question is basically, company has embarked on this diversification strategy in the last few years. So is there a thought here that over a period of time, we could be thinking about reducing our exposure to edible oil because it kind of adds to the volatility in the business. So I just wanted to hear your thoughts on that.
You're absolutely correct. I think -- my dream is that another 3, 4 years from -- food becomes higher than edible oil in the portfolio, okay? Because that way, we will de-risk this commodity. And one of the things we internally track is how much we -- over the next 5 years, we'll continue to do a commodity derisking, which we'll do on our portfolio because at the end of the ultimately sadly oil and water doesn't mix. And in the Personal Care, it is far less volatile to your commodity and because we give our RM percentage as a percentage of net realization needs to continue to decrease, and that is something we track over the next 5 years.Now coming to Saffola specifically, I think Saffola, if you look at the history of Saffola, it was completely anchored on heart health. It started off -- and if you look at the 1994 advertising, it was on fear. So it was for the sufferer. So it was curative. It went into preventive. And now I think Saffola is a way of healthy life and ultimately, food, it gives us stated values. And I think one of the things we are trying to do is that we are also trying to ensure that how does Saffola, besides expanding our total addressable market, is that coming from a sufferer to somebody wishes to what I call adopt a healthy way of life? It's like taking anything which is better for you. So Saffola will enter categories with an option which is better for you. And that's how the brand will keep on growing.Having said that, obviously, the core brand, which is the Saffola oil that heart equity is too strong and we will not completely obviously ratcheting the heart equity. What we are saying is, it is for a healthier heart and as opposed to somebody who has already a heart problem.
Understood. So we will continue to have this brand, but the endeavor would be to continuously increase the exposure towards other food businesses?
Yes. And therefore, the brand becomes from denial to happiness from having far more food values moving from individual sufferer to family. I don't think it still will encompass kids, but I think that's the next step. But I think it is more of saying that you eat what you want to eat, but eat healthily. And therefore, Saffola gives you options, whether it's breakfast, if it is snacking in between meals or meal substitute.
Understood. Just one more bit on this, and I asked that question also is that how is it positioned in the mind of the consumer? So today, when a consumer buys Saffola Oats, is this because they know that Saffola edible oil is a healthy oil and that's why they're buying the oats product also because it comes from the same brand? Is there that salient, which is still there in the mind of the consumer?
See, very interestingly, the number of households who buy oats are higher than number of households who buy oil, as you know, because oats is a price point at INR 17, okay. Now I think, obviously, the primary driver for the consumer to buy Saffola continues to be health. It is no longer just heart health, it's health. And therefore -- and the taste is the discovery. And therefore, if we look at the ragi chips, for example, and as we are investing in millet in a big way, and you will see some of the things which we are doing on millet. We believe that it is offering -- so we are one of the learnings when we -- in 2010 or '11, we prototyped a snack and it bumped. And one of the learning is that Indian consumers will never at all compromise taste for health. And therefore, all the products which we designed for Saffola, first, we ensure that it beats its parity on the taste benchmark. Health, anyway it is presold as far as Saffola is concerned. So taste is actually a discovered and a surprise benefit which we want to drive.
The next question is from the line of Shirish Pardeshi from Centrum Broking.
I'm on Slide 7. And I'm just doing and reading the numbers where you have given PCNO number, which is minus 2% volume, minus 5% value and VAHO is flat in terms of value. It just more curious, if I track the journey of last 8 quarters, about 8 quarters before there was a down trading and VAHO was doing significantly well. You alluded that now the VAHO is -- I mean the entry point VAHO has seen a lot of competition. In terms of consumer behavior, I just wanted to understand, I mean, I'm not looking at the primary number, but on ground, if you tell me something about is the consumer shift is primarily affected in the mass end of the product is because of food inflation? Or there is something more to it, and that's why the even VAHO is not showing? And related question on that, how the category has evolved or declined in terms of value volume over the last, say, 4, 5 quarters?
Okay. So let me just address it in 2 parts. So if you look at the last time I'm talking alluding to the last couple of quarters, 5, 6 quarters. So what happened is whenever there is -- unlike some of the other personal care categories, in the case of value-added hair oil, it has -- it is somewhere mirror some of the mass personal care categories where there is significant amount of rural consumption and agnostic consumption in terms of quantity across different LSM classes. So whenever there is inflation, so compared to say premium skin care and other parts of the Personal Care portfolio, VAHO or so, say, these are the -- while detergent obviously has a premium end of it, which is the liquid detergent and other. These kind of categories may get impacted far more. So what we have seen actually, if you look at the start, there has been downgradation. In addition to that, what happened is that there have been significant intensity into the bottom of pyramid. Now even if the organized players, which are not participating intensively, I mean, in the sense that one change that happened, which we noticed from Q4 as some of the organized players in VAHO started raising prices. The trade intensity, which is the below the line, actually, so the pricing got transferred into below-the-line spend. Secondly, some of the smaller players are also, therefore, aggressive. So what has essentially happened is the consumption, while it has grown in volume terms, the value, there has been a kind of a slight value degradation that has happened. Having said that, I think that's why I said that our task is to -- and we are already seeing that in terms of the fact that in the last 8 quarters, every quarter, we have got value growth, and we are now focusing on value market share. We have started getting value growth, and we have to, as I said, we are doing it, but it's still there's a journey in terms of doing a better job in the premium part of the portfolio. Now the premium part of the portfolio has now started just about growing, we believe, in the last 1 or 2 months, we've seen that growth.
Okay. Second question on the related PCNO. Have we dropped or taken any pricing action in this quarter, Q1? Or now you're forced to take some action?
No, I don't think so. Having said that, as I said, that we will -- we saw a slight deflation that happened in Q1, but we didn't take pricing action. That is perhaps one of the reasons. But the reason we don't want to take pricing action, we expected the thing to reverse, which is reverse because we -- taking frequent pricing action upset the rhythm of the sale, which we -- so we actually weathered it out this quarter, and we expect now things to be okay and our pricing to be okay. Because what we didn't want is take a pricing action, as I told you last time in the call that given that PCNO has STRs and a very widely distributed, it takes around 6 to 8 weeks of the pricing to realize. And then we shouldn't think that we are underpriced in the market, and we have also -- we have lost out on the margin and we lost out on volume in the first quarter. So I think we have taken that kind of a stance where we wanted to wait because this frequent price up and price down actually is not good for the brand and good for our rhythm of sales.
Ladies and gentlemen, we'll take the last question from the line of Latika Chopra from JP Morgan.
Just one question on overseas margins, they have expanded quite well. Could you advised --
Latika, your voice is breaking.
My question was on overseas margins. The margins are 29% plus this quarter. What drove this? And do you think this will be sustainable?
This was largely driven by, again, copra gains in Bangladesh. And the going ahead, that's the level of 25%, 26%.
Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference back to the management for their closing remarks. Thank you, and over to you.
To conclude, we had a close start to FY '24 on the top line front due to one-offs in the domestic business, but we draw confidence from underlying indicators of a pickup in domestic volume growth, followed by tapering off in pricing deflation from here on. The international business has been resilient, and we expect to sustain its healthy growth momentum. Given the accommodative input cost environment, we will continue to aggressively invest to drive an improving trajectory of growth in the core and newer portfolio. That being said, we should be able to deliver healthy margins on a year-on-year basis through the year.To sum up, the full year earnings growth prospects as envisaged at the start of the year remain firmly intact. If you have any further queries, please feel free to reach out to our IR team, and we'll be happy to address. Thank you, and have a great evening.
Thank you very much. Ladies and gentlemen, on behalf of Marico Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.