Marico Ltd
NSE:MARICO
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Marico Ltd
Earnings Call Analysis
Q1-2025 Analysis
Marico Ltd
Marico Limited, a leading consumer products company, hosted its Q1 FY '25 earnings call to discuss the quarterly performance and strategic outlook. The senior management, including CEO Saugata Gupta and CFO Pawan Agrawal, provided insights into the operating environment, key financial metrics, and strategic initiatives driving growth.
The company has witnessed a steady improvement in demand trends, with rural growth surpassing urban areas. The pricing growth turned flattish year over year, with significant upticks in both the Home and Personal Care (HPC) and foods segments. Premium segments outpaced mass segments, while alternate distribution channels continued to gain prominence.
In the domestic market, Marico achieved a high single-digit revenue growth primarily due to price hikes in the coconut oil portfolio. Innovations like Project SETU, aimed at increasing direct coverage in urban and rural markets, have shown promising initial results. The company is optimistic about sustaining an improving trend in domestic revenue growth, aided by a gradual uptick in domestic volumes and mild inflation in commodity prices.
The Parachute Rigids brand saw an 8% volume growth in market offtake, sustaining its market share. The Value-Added Hair Oil (VAHO) segment experienced a low single-digit volume decline but gained in market share. The foods segment registered a robust 37% growth, with the core oats portfolio growing over 20%. Digital-first brands like Beardo and Just Herbs also performed well, with Just Herbs tracking beyond the INR 1 billion ARR mark.
Marico maintained a double-digit growth trajectory in constant currency terms. The Bangladesh business held firm despite a challenging environment, while Vietnam showed recovery signs in HPC demand. The company plans to enhance its presence in MENA through the expansion of the hair oil portfolio and is witnessing healthy traction in healthcare products in South Africa. Additionally, the export business scaled to USD $25 million, further diversifying Marico’s international revenue base.
Marico is focusing on portfolio diversification to reduce dependency on commodity-linked margins. The company aims for a composite share of foods and premium personal care portfolios to cross 25% by FY '27, driving more profitable growth. The collaboration with Kaya provides Marico with exclusive rights to scale Kaya's range of personal care products outside its clinics, expected to be a INR 100 crore opportunity over the next 4 years. Additionally, the company is working on achieving a double-digit EBITDA margin for its digital-first brands by FY '27.
Marico is targeting double-digit consolidated revenue growth driven by market share gains in domestic portfolios, accelerated growth in foods and premium personal care segments, and a favorable pricing cycle in key domestic portfolios. Although some key commodities show a mild upward bias in pricing, Marico remains confident in maintaining its gross margins at FY '24 levels through pricing strategies and cost optimization initiatives.
Marico continues to forward its commitment to sustainability through its Sustainability 2.0 framework, which has shown encouraging progress across various initiatives. The company believes that integrating sustainability into its operations will drive sustainable and superior long-term growth.
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Ladies and gentlemen, good day, and welcome to the Marico Limited Q1 FY '25 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 anybody else who is not an individual 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, sir.
Yes. Hi, good evening, to all those who have joined the call, and hope everyone is doing well. I would like to start with a narrative on the operating environment during the quarter gone by, after which I'll touch upon our performance and strategic objectives going forward.
During the quarter, the sector witnessed -- continued to witness gradual improvement in demand trends with rural growth ahead of urban. Pricing growth, however, turned flattish on a Y-o-Y basis, while both HPC and foods witnessed an uptick. The pickup in HPC has been more pronounced over the last 6 months. Premium segments continued to outpace mass segments and alternate channels continued to gain salience vis-à-vis generated.
We expect volume trends to sustain by improving trajectory, aided by stable retail inflation, a healthy progressing monsoon season and the government's budgetary allocation towards boosting the rural economy. That being said, elevated food inflation and special distribution of rainfall will key factors to be monitored.
Moving on to our performance. The sequential uptick in domestic volume growth was led by a steadying trend across the majority of our portfolio, and partially reflected by the healthy trends in offtake growth across key portfolios. More than 90% of the business either gained or sustained market share and penetration on a MAT basis, however, the improving trajectory in the core portfolio would have been more discernible if not for the impact of ongoing stock adjustments implemented to support GT distributor ROIs and conscious holdback of inputs in wholesale and B2B channels in particular markets to prioritize direct expansion to Project SETU. The latter initiative ensured ease of direct selling in a [ range ] of outlets, instead of those retailers, where we are expanding distribution, picking up stuff from wholesalers or B2B.
Domestic revenue growth moved up in high single digits along expected lines, given the price hike in the coconut oil portfolio, which absorbed the residual base impact of price drops in Saffola oil. Pricing growth is likely to pick up through the year with Saffola price up moving into the base completely from Q2, and inflation expected in some commodities in half 2, particularly copra, which will further aid domestic revenue growth through the course of the year.
We launched Phase 1 of Project SETU in 6 days combining a mix of stronghold and opportunity markets. The initial results have been very promising with direct coverage expansion in urban and rural markets. These new outlets have responded well to the core and new portfolio. During the course of this year, we'll scale up Phase 1 markets as well as expand into some more states. In addition, to enhance direct reach and weighted distribution, we expect projects SETU to drive market share gains across categories in urban and rural markets as well as enhance assortment levels in urban stores, thereby enabling diversification and premiumization in the domestic business.
Delving into the domestic business, we shall touch upon the key trends in each of our categories. Parachute Rigids witnessed strong 8% growth in volume offtake during the quarter, which is reflective of the consistent market share and penetration gains witnessed by the brand. The reported volume growth, however, was impacted by the aforesaid stock adjustments in GT and in wholesale and B2B. The brand maintained its premiums and logged in 100 bps gain in market share during the quarter.
Flanker brands, including Nihar, Coconut Oil and Oil of Malabar, which compete with regional and some deep discounted national players grew in mid-teens Consequently, volume market share of the composite coconut oil portfolio, including flanker brands reached its highest ever level at circa 64% on a MAT basis. We expect the pickup in Parachute through the rest of the year in view of the visibly encouraging trends in market share penetration and uptake.
The pricing growth on account of actions taken so far will flow through entirely from Q2, and we could take possibly another round of price hikes in case of any further rise in copra prices during the course of the next second half of the year. Gradual escalation in copra price is positive for the brand as it affords us the opportunity to strategically leverage the brand's pricing power and procurement system advantages, thereby gaining volume traction and market share.
Saffola edible oil delivered mid-single-digit volume growth as stability prevailed in both input and consumer pricing. And the pricing base entirely catching up from Q2, revenue growth will track in line with volume growth. Offtakes for the brand has also remained healthy. Master brand advertising in Saffola initiated last year has been a positive step towards leveraging equity of the master brand and enabling far more efficient brand-building investments.
Value-added hair oil has been sluggish amidst competitive headwinds in the bottom of pyramid segment. Volume declined in low single digits, partly impacted by the aforesaid GT distributor stock adjustment and limiting wholesale and B2B in SETU launch markets. In fact, secondary sales and offtake grew in low single digits. While competitive intensity remained high, we have gained 50 bps volume share and 60 bps value share in Q1.
Brands such aloe and jasmine which play in the mid and premium segment grew well ahead of the category. We'll expand our participation in this segment of the category. Getting value-added hair oil back to healthy growth is a key priority for us, and we expect to make some headway this year through concerted action initiated by bottom-of-pyramid segment of the portfolio, and a gradually improving rural consumption sentiment in marked DTC categories and SETU-weighted volume growth.
Foods had a robust quarter and registered 37% growth with core oats portfolio growing at 20% plus. We kept up the innovation velocity with the launch of Saffola with a differentiated flavor format aiming to leverage the brand's equity in the breakfast segment.
The Plix plant-based nutrition portfolio and True Elements have also scaled up well. We expect to surpass our internal expectation, which we had set at the start of the year. We were able to expect a structural shift in our foods gross margin last year and expect profitability to inch up as we scale over the medium term.
Premium personal care sustained its healthy growth trajectory led by the digital-first brands. We expect the digital-first source brands to exit FY '25 at INR 550 crore to INR 600 crore run rate this year and striving to achieve double-digit EBITDA margin by FY '27. Beardo will hit double-digit EBITDA margin this year. Just Herbs is tracking well ahead of the INR 1 billion ARR mark, while the traction in Plix Personal Care portfolio has been encouraging.
Both Plix and Just Herbs have been scaling with minimal cash burn. We believe Beardo and Plix have the potential to scale up to INR 500 crores ARR in each, in 3, 4 years' time given the expanding and growing TAM of their portfolio.
The collaboration with Kaya enabled us to advance our play in science-backed personal care. We are currently working towards a smooth transition and now exclusive rights to scale up Kaya's range of efficacy-based personal products outside of its clinics. We believe this is a INR 100 crore opportunity -- revenue opportunity over the next 4 years.
And we'll add another growth lever to our digital-first business, thereby further accelerating the portfolio diversification agenda of the India business. And as you know, Kaya is a known brand and also it has high gross margins.
Our portfolio diversification objective has led to a mark shift in our revenue construct and reduction in the commodity linkage of margin and revenue growth. We will sustain the aggression to drive 20% to 25% plus CAGR in these portfolios and expect the composite share of foods and Premium Personal Care portfolio to cross 25% by FY '27, accompanied by a visible improvement in their profitability.
Moving to international business. We have maintained a double-digit consistent constant currency growth trajectory. The Bangladesh business has held firm in a challenging environment on the back of its broad-based portfolio and robust fundamentals. However, we remain watchful of the current on-ground situation.
In Vietnam, we witnessed some signs of a recovery in HPC demand and expect gradual improvement ahead. Myanmar has been under geopolitical turmoil, and the business may remain subdued this year. We continue to ramp up in MENA through the expansion of the hair oil portfolio in Egypt and the Gulf region and witnessed healthy traction in the hair care and health care portfolios in South Africa.
The export business has scaled to USD $25 million and continued its healthy run. The broad basing of the business has not only strengthened the growth perspective of the business, but has also added margin upside potential in the medium term and also consistently reducing the concentration risk in Bangladesh business over the last 3 to 4 years.
To sum up, we continue to gun for a double-digit consolidated revenue growth this year by driving outperformance vis-a-vis category and market share gains in the domestic portfolios, accelerated growth in the foods and the Premium Care portfolio and healthy momentum in international business, which will be supplemented by a favorable pricing cycle in key domestic portfolios. While key commodities are exhibiting mild upward bias, we are confident that we'll be able to drive -- we'll be able to maneuver margins through pricing, driving a more favorable mix and ongoing cost of optimization initiatives to hold operating hedging at FY '24 levels this year.
Last but not the least, we have always viewed our entire business operations through the lens of sustainability, and our sustainability 2.0 framework has been seeing encouraging progress across each of the 8 broad-based teams. We have detailed the same in our FY '24 integrated annual report, which was released last month, and I hope it will make for good reading. We firmly believe in creating shared value for all will aid us in driving sustainable around and superior growth in the longer term.
With that, I will now close my comments. Thank you for patiently listening, and we will now take all your questions.
[Operator Instructions] The first question is from the line of Abneesh Roy from Nuvama.
My first question is on the foods business, so very strong growth here. I wanted to understand if there is any one-off this quarter. And between the 2 new businesses of True Elements and Plix, would you expect FY '25 higher growth in Plix? And in True Elements, if you could specify in a very hypercompetitive and a lot of similar kind of brands how True Elements is now able to differentiate and thereby grow strongly.
So firstly, just to give you a flavor, I think it's -- as you know, last year, we took a pause in our foods business primarily to get the margin correction and also to get the entire supply chain and the sales system because, as you know, that our entire forecasting replenishment model and our supply chain was not geared to handling low shelf-life products. At the same time, we had an 800 bps correction in our margin.
And also this year, we are only focusing on a few things, investing behind only things like oats, honey, soya and breakfast cereals and snacking, which we are actually planning to expand with the launch of our INR 10 snacking product, which is [ Crunchies ]. So if I look at it, the organic growth is still high teens with oats doing 20%. Obviously, the growth in Plix and True Elements is slightly higher because of a lower base and Plix significantly driving multiple nutraceutical platforms.
As far as True Elements differentiation is concerned, I think it starts with their brand name, True and [indiscernible]. It operates at a slightly higher RPI. It is slightly more, I would say, the business that comes from OT versus GT compared to other food brands. And some of the new things which we are experimenting on, and as I realized one thing is that if we have to scale in foods, one of the things we have to do is to ensure some price points to drive growth. At the same time, Indianize some of the flavors and offerings, which True Elements have has started doing.
Having said that, the other thing you must realize, the digital brands enjoy the -- while they independently drive their destiny in terms of driving brand preference and sales, the significant expertise of procurement, supply chain, cost management and manufacturing processes of Marico, which gives them a certain advantage in terms of cost structure and pricing.
Sir, understood. My second question is on your international business. You have diversified away from Bangladesh, which is a good strategy in the current context. Another FMCG company said that past few weeks in Bangladesh has been quite challenging. It is understandable. My specific question is how are your EBITDA margins in Bangladesh versus say, the consol margins or, say, the stand-alone margins?
And second is how serious is the impact till now? Some color if you could give either in terms of manufacturing or in terms of demand and distribution. How big is the impact? I understand these are daily consumption, so this will come back. But till now, how is the demand in Bangladesh?
So I think, firstly, this strategy of reducing depending on a single country, expanding the full potential of MENA and South Africa or Southeast Asia started 4 years ago, had nothing to do with the current context. It is a gradual process, which we have been doing. And within Bangladesh also, we have been reducing our dependence on coconut oil and driving and successfully, a significant diversification of our portfolio into shampoo, baby and all.
See, I don't want to comment on the country. All I can tell you is that there has been significant black swan event in the past across our countries, across our portfolio, whether it's COVID, whether it's Ukraine, post-U.K. shrinkflation. What happens in moments of adversity, the strong get stronger and the weak get weaker.
So therefore, as I said that we have a very strong business, strong fundamentals. We have been in that country for 20 years. So I don't -- we have weathered different storms, so it's okay. I mean that is all I can say at this stage.
Sure. I'll follow up on that later. Last quick question on value-added hair oil. Other companies in that space are also facing the same issue. Demand is low there. I wanted to understand when a rural recovery is there, and of course, it's in the initial phase, in this category, where is the customer going?
Because in a lot of your other categories or maybe for other companies also, rural demand seems to be reviving and good benefit. But here, clearly, all companies are facing similar issues. So why isn't the customer in the rural reviving here also? And do you think we will come back once the rural demand picks up pace further?
So okay, let me just give you a color to this. I don't see that -- anywhere the category is behaving differently from other mass HPC categories. The thing that has happened in this category is perhaps because of certain competitive actions, all the action has happened in the bottom of pyramid where because of pricing and what I call BTL-driven growth, the average value growth of the category has come down, okay?
So in terms of sheer consumption in ml, it's not come down other than because of the -- in the case of the small packs, which are a price point impact of 10 and 20, there has been significant inflation. Now this anniversarization of this inflation will happen somewhere during the year. So if I look at -- even today, our volume growth, if I adjust with the one which is a SETU-led and the other stock correction, it's still in the positive territory. And if I compare it to the other HPC categories, it is still low single digits.
So I -- so you have to look at offtake growth. Our offtake growth is around still 3%. So I am not very concerned. I believe with the way -- and the second thing, specifically, what we are doing is, instead of going down the rat hole of just competing on below-the-line spend on pricing at the bottom of pyramid, we're focusing on our investments to drive now that the demand situation is improving, especially in rural.
So we are seeing some green shoots in brands like aloe and Jasmine. We need to participate slightly more stronger in things like hair fall. And therefore, we believe that, that part of the business, while it's not that high, if it starts growing at a higher level, the overall value growth of -- and we are chasing value growth in hair oils, and we are chasing value share in hair oils.
We are seeing the first turnaround where we have started gaining value share in hair oil. So I believe towards the back of the year -- back half of the year, we should see positive growth in both value and also the value share gain which we continue to have.
And one follow-up on that. The BTL being higher, is it due to any specific reason that it was picked up by those competitors? And those will be all regional players essentially, right, bunch of regional players?
I'm talking about national players who have gone into 0 ATL and high BTL-driven category, which is not necessarily the best strategy long term.
The next question comes from the line of Percy with IIFL.
My question is on the foods business. So while Saffola Oats is doing very well, we had launched a few other brands also. Can you give us some idea on how they are progressing, the honey, the noodles, the soya chunks, et cetera, where you see greatest potential, where you see that there is a little bit of a struggle?
And in terms of further categories within foods, would you want to enter in the near term? Or do you think you would want to consolidate the current categories that you have entered first?
Okay. Firstly, I think our endeavor is to grow food. And as I said, the diversify part of the business at 20% to 25% profitability, because we don't want to do for higher growth at the expense of profit. So 20% to 25% is the first destination, which includes obviously brands like Plix and True Elements, and we are exceeding that outcome, okay? And I think this is a great development.
Secondly, I think if you look at -- if I take all food into account, organic, it's still in high teens. Now coming to individual, let me just give you a flavor without getting into too much detail is that the category, honey category last season has not been the best. And it's just not us but some of the bigger players I'm sure has experienced the same thing.
Now coming to soya, again, soya is doing very well, and I think honey and soya are the ones which have scaled up. The only thing we are mindful of soya is that in terms of margin, it is not the higher margin compared to others, and therefore, we are not aggressively growing soya until we get what I call innovation kind of a solve, just like we have done in oats. Because had we just sold plain oats, that would not have made significant margin. Masala Oats obviously makes better margin than plain oats. So we are searching for a solve there.
Having said that, I think, we are going to aggressively participate in breakfast. You will see some more launches in this space also of Masala Oats space. And the other thing which we are now doing as the first time, we are prototyping a little bit of snacking in GT as we had done only MT and e-comm and quick commerce.
The other interesting thing is that we believe that our food journey has a significant upside potential in quick commerce. I think quick commerce as a channel is growing significantly. And food as an impulse category is a natural play there. We haven't played that much in quick commerce in Foods, but now we are going to play aggressively as far as quick commerce is concerned. And as you know that quick commerce in this country, this next 2, 3 years, it's going to be on a very, very good traction.
So overall, all I can say is that we are fairly confident of maintaining that 25% foods while sustainably improving profitability. And this will come both from organic or -- organic and digital brands, a mixture of, what I call the more this one brand.
Understood. Just another question on your growth construct. So if I basically look at your personal care, digital brands put together, plus foods, all this put together is approximately 20% of your domestic top line. And if this portfolio grows at about 20%, you should get about 4% kind of growth, which would be largely volume-led from this itself, right?
So I mean, how do we look at growth going ahead? So is it fair to say that, let's say, you would be targeting for India, a 7% to 8% volume growth, out of which half of it would come from this 20% portfolio, which is growing very fast and the remaining half of it would come from the 80%, which is more mature? And if this understanding is correct, then this quarter, what really happened for us to fall short of that number?
So I think two things we have to see. I don't think it's 4%. But anyway, I think two things. One is to take the correction which we have done in the stock correction, and I'm not even talking about the SETU correction because that's a secondary term.
The primary stock correction distributor, you can add 2% to the overall. Now this is 80% of 2% means, it's likely 2.5%, 3%. So if you add that growth, any case, this growth would have been around 6, 6.5 percentage -- 6%. So -- and that number is not 4%, that would have been a 3%. But having said that, going forward, we expect volume growth to definitely improve over the next corresponding quarters.
And also just to add, Percy, for example, Plix, we are not including in the volume growth because it is not in the base yet. So to that extent, Plix contribution has not gone into the volume growth. Now it comes into the base from next quarter, then, of course, we'll add the Plix volume growth.
Got it. Got it. And last question on margins. We are already at 23% plus this quarter. Are we sort of now maxed out in terms of margins at a consol level? Or do you see more growth drivers? Because do you fear at some point, the margins sort of become too attractive for competition or something like that? I mean how are you thinking about this whole piece?
So in a moat, which we have, we never do super normal profits. We certainly ensure that there is no disruption model in place. Having said that, I think you are right. This year, I don't think we will have any further margin expansion.
Having said that, there are structural ways to improve margin long term, because food and digital, as we talked about in the next 3 years, digital will get into a double-digit EBITDA. Foods is consistently -- and in fact, we have a proven model in the case of oats that oats delivered an EBITDA which is fairly decent.
So -- and also the fact that some of the other international businesses with scale like Middle East and South East Asia, it's actually inching up on the margin in the future. But this year, I think we should be able to maintain margins. That's the best case scenario, given the fact that we already peaked last year and the fact that there is some mild inflationary -- I think the focus is to ensure that how do we get into a double-digit revenue growth and aggressively drive the diversification agenda, which will also require some A&P.
And just to clarify, Percy, when we say whole margins, we are saying whole margin as compared to FY '24. Of course, quarter 1 FY '25 has delivered higher margins because we had some position gains on -- some strategic position gain that we had in copra and oil. So going ahead for this year, gross margins might moderate a bit because we expect certain inflation around the key commodity, but we are definitely committed to hold the gross margins at the levels of FY '24. And similarly, at operating margin level, we will hold the operating margin FY '24.
Next question is from the line of Vivek Maheshwari from Jefferies.
A few questions. So first, Saugata and Pawan on VAHO. Again, there are different reasons in different years. But generally speaking, that portfolio has -- and you have tried your best, you have explained in the past as well. But -- and the bigger thing is you are also gaining market share, right?
What is wrong with this category? Is there a possibility this is more like a structural issue, consumers not using hair oil? I just don't know. And at the value level, is there some market share loss? So at an overall level, you are gaining, but in case of market at the value level, is there some market share loss? I just want to understand what exactly is going wrong here.
So we are -- what we reported is our value share only. We don't track volume share in VAHO...
Sir, what I meant -- sorry, sir. What I meant was at the value -- as in at the bottom end, have you lost shares, for example?
Okay. I think -- I'll tell you what has happened. Obviously, the bottom end is where we have lost share because beyond the point, it doesn't make sense to forego profitability, and therefore, that some share loss has happened at the bottom of the pyramid.
I think what has happened, let me show that -- let me just tell you, the issue that has happened is post-2020, there has been -- and especially after 2022, Ukraine, this one, there has been a downgradation that has been happened because of 2 or 3 reasons. One, consumers downgraded from the premium part of the category to slightly this one. This was a combination of three things. One, I think far more attractive pricing and heightened competitive activity as a bottom end.
Second that had happened is shrinkflation. So if you look at it, this perhaps is a category where a significant portion of our -- the sale, especially at the bottom of pyramid is in 10 and 20. And in order to protect the 10 and 20 pricing, people, competitors and us, we have taken significant MLH drops.
Now one of the things we realized, and this is true in other HPC categories also is that when you take an MLH drop or a grammage drop to maintain price point, there are a lot of people, especially in rural and in the urban bottom of pyramid, they buy a certain frequency with a given outlay. So therefore, they've titrated the usage. This anniversarization of that is happening sometime during this quarter as we speak, sometime in August, September.
So we believe that in terms of both the volume or the consumption and given that we are seeing signs in the rural to edge up, I think this -- the category will show higher growth. As far as we are concerned, however, I think what we have taken a stance is that, yes, we are okay to forego some share at the bottom of pyramid, but we need to invest far more rather than following some other players who have just knocked up ATL to drive this one, which is not good for long-term category growth.
Because at the end of the day, I can be happy by saying my SOV is maintained, but the growth category will not grow if there is no investment in ATL. And therefore, we will start investing in ATL, into converting that money into volume growth. So we have seen some green shoots in other brands like aloe and jasmine. As I said, we need to aggressively grow. So therefore, going forward, at least the second half, we need to accelerate the value growth of both parts of -- that part of the portfolio because we will lose at the bottom of the portfolio.
Okay. Okay. Got it. And the other question is, Saugata, I mean, if I recall correctly, in the -- I don't know which year but I think a decade back or so, you tried Muesli, at that time, I think Kaya distribution. Also Marico did at some point of time. What do you think will be different this time compared to, let's say, the previous attempts?
Okay. First, let me -- at the end of the day, as you know, even in Olympic games, some people failed in Tokyo, succeeded here. So therefore, you might fail, but that doesn't mean stop doing it. I think first of all, we have got our food business model, including distribution, supply chain right.
When we tried moving some years ago, it was not a -- I don't think it was an issue on the product. I think we had a good product. This time, we have a superior product. But we were not the best in class in doing food distribution, getting our business model. So therefore, we are far more confident of doing food right, right now, okay? And I am reasonably confident.
Number two, Muesli as a category has grown leaps and bounds. Today, if you see it, it's one of the highest growing Muesli category. It has overtaken cornflakes as a category, so therefore Saffola by participation and also the fact that we have a significant -- I think our capability, operation capability as far as OT is concerned is much better today. Our chances of success will be better.
And I think for one tough failures, we don't give up because we are -- in fact, if you look at it, we have tried a lot in food and finally succeeded in food, okay? Now coming to Kaya, Kaya this time is different. Last time, what happened was, we did a brand -- sub brand called Kaya Youth. Kaya continues to sell in other channels. This time, it is a deal where Marico has exclusive rights to sell.
Kaya will stop selling in any other channel. Kaya will only sell in their clinics. For all other channels, which is e-commerce, modern trade, D2C and beauty GT, Marico has got exclusive right to sell. Earlier, it was two brands that we are competing, it didn't help.
Number two, I think our digital capability compared to 2019 when you did Kaya Youth O2 or Kaya Youth was far -- now today, far superior to do that. And I believe that this -- and therefore, given our digital marketing capability and other capability of our digital business, today, we stand a far better chance, and it's a much cleaner arrangement this time.
It's not a sub-brand or a prep line while Kaya continues to sell, it's an exclusive, this one. So all our existing relationships with Kaya had -- is taken over by Marico in terms of e-commerce sales and the modern sales. Kaya was actually virtually only e-commerce, but we are now going to get into modern trade and some of the beauty outlets over the next 3 to 4 months. So we'll start the process sometime in September.
Got it. And just a couple of follow-ups on that. So on Kaya side, when you are going to take that over, so what will be the existing revenues that will straightaway come to you, Saugata?
We don't want to get into that. All I can say is, it's a INR 100 crores potential in 4 years.
Okay. Got it. Got it. And on the food...
So just to give you another perspective, Kaya is a known brand. It has got existing -- Just Herbs is INR 100 crore brand. If we can do Just Herbs a INR 100 crore brand, there is no reason why Kaya shouldn't be 100-crore brand.
Right. Okay. The reason of asking, Saugata, this question was because the press release also says 4 to 5 years, INR 100 crore. And I thought if there -- if it is selling by the existing team, you could have reached there way faster than that, unless I'm missing something.
So currently, the scale is minuscule Vivek, and that's where our might will come in. And we will be able to grow the brand to INR 100 crores in the next 4 to 5 years. So currently, scale is not very large.
I mean, I think we'll be able to give a far better -- let's start doing it another 1 or 2 years. Digital business, we have surpassed our own aspirations and our targets. I'm sure we should be able to do that in Kaya. I'll be a happy man.
Right, right. And yes, I mean, point taken, you have done quite well on the digital side. Lastly, on the acquisition bit, inorganic bit that you have mentioned, and you have also articulated your confidence on the food side, whether it's on the margin or on the overall business. When you think about inorganic now, will it be more skewed towards foods then because any which ways have done quite a bit on the PC side?
Yes, I think at the end of the day, we look for opportunities which make strategic sense. I think as far as our digital is concerned, we looked at several adjacencies, which make market attractive, but we didn't organically have a right to win. I think Kaya was the last space which was vacant, which was what I call science-based skin care, which was vacant. We would have loved to otherwise acquire one of those brands, which -- and therefore -- but anyway, now we have the opportunity to sell Kaya.
So for business, I think, needs scale. I think one of the learnings for us is that there are -- I mean hypothetically, there are two routes of food. You take a regional brand doing very well, scale it up nationally or take on this one already, a scaled business. I don't think digital or digital-first -- unless it's a nutraceutical, because we already have Plix. I don't think the niche food brand makes sense to us, given our scale of our current food business.
Sure. So sorry, so in conclusion, your point is you want to build scale further? Or you want to go after, let's say, more, let's say, the thought process more around margins in case of foods or build scale? Sorry, I missed that part.
I think organically, we have to continue to build skill. What I meant was that if you want to be inorganic, it makes sense to get a little skilled opportunity rather than doing the founder-driven brand in food because it doesn't provide scale.
The next question comes from the line of Harit Kapoor from Investec.
I had three questions, I'll just say it out. One was on the exercise on SETU as well as some destocking at the wholesaler level or some channel management. Just wanted to know how long does this take where your offtakes and your pricing really start to kind of match each other? That's the first question.
So I think I would say a couple of quarters because SETU is continuing project. Let me just give you a perspective on why we are doing this.
See, normally, when you do direct distribution, you would get the sell range. Having said that, obviously through wholesale and B2B channels, the core brand, it could be Parachute in the South or Shanti online in the North. I mean, they anyway have indirect distribution. But if I have to get a portfolio and get critical mass, it is very, very important that I ensure that when the direct distributor goes to that, the pricing is attractive and the retailers don't say that, okay, I'm getting it in wholesale or B2B at a far cheaper price. So this process will take a couple of quarters.
Regarding the GT primary stock correction, I think again maybe 1 or 2 quarters again. And you must realize that -- and this is just not for us, it is for everybody. If you look at today, the growth of quick commerce that is happening, the channel that is getting impacted according to me is the urban GT because the entire quick growth is happening mostly in the top 8 cities.
And therefore, it is imperative for us to ensure that we protect the margins and protect the ROI of the distribution system because there's -- having said that, I think what will also happen is as we expand SETU, especially opening up food or say cosmetic or chemist outlets, which throughput our diversified portfolio, there's an opportunity to actually sell bigger range and at a higher realization because these are -- especially both food and -- especially personal care, like things Livon and others, which are at a higher realization, their turnover increases.
I think the biggest thing is yes, that's still on the growth, whatever growth they have are a fixed cost increase that happens in cities, like say, 8% to 10% every year. So how do I able to give that 8% to 10% turnover so that they maintain ROI?
Got it. Great. Secondly was on the 3-year sales plan for SETU, 1 million going to 1.5 million direct reach. I just wanted to get a sense about how does this reduce the wholesale mix from your channel sales from what currently to -- how much does it go down to?
It's very difficult, but I will tell you whatever 2, 3 things that happen when you increase direct distribution. Firstly, it increases range because what happens is the wholesaler or the B2B usually handles high-velocity leader brands. They don't have that assortment, okay?
The second thing in urban SETU will be able to also drive the diversification portfolio because we are opening up some of this. So I'll give you an example of it. If you see, go to Bengaluru or you go to Coimbatore or Kerala, you will see bakery outlets. The bakery outlets are -- we never used to service those bakery outlets. But today, if I have critical mass of food, which is basically some snacking, some oats, some plain oats, because plain oats is a big thing in the South, you can get into those outlets. We might open some chemist outlet because with hair fall, and like we have just started in 1 or 2 markets trying to take Plix into GT, for example.
So what will happen is that we will open these set of outlets which will give growth. Automatically, as I alluded to earlier, is that obviously, when my distributor opens a new outlet, that person has to sell Parachute or Shanti Amla also. And therefore, we want to make that sales process reasonably attractive but that guy doesn't have to reach. So these outlets which we're opening, it's not that -- nothing, no Marico stuff is available. Marico stock is available sporadically.
So it's very difficult to say how much wholesale will we do. But I think, consciously, what we are doing is that we are not disproportionately incentivizing wholesale or B2B but encouraging a direct sale. And I believe having a far more direct sales is a source of competitive advantage.
And yes, we will open 500,000 outlets, at the same time, we will also look at some outlets which are non-profitable to serve and close it down because they can be anyway serviced by -- if they're only stocking only Parachute small packs. We are most happy if they pick it up from wholesaler. There's no point trying to service the...
And last question was on the general industry question. You mentioned in your presentation as well as your opening remarks that the pickup in industry has been seeing more in HPC or foods. Do you look at this more as a base thing that HPC has been weak last year and before that as well? Or anything else to read into this industry trend? Because that's something we've been seeing across the board last quarter, quarter and a half.
I think the combination of both one is base -- if you look at it, last year's FMCG growth was driven entirely by urban. And obviously, the food is primarily -- packaged food is primarily urban, while HPC had a little more rural skew. Now that rural is recovering, maybe that's one of the other reasons. So it's a combination of a base and the way urban and rural is performing.
Having said that, I must say that at the premium end, urban continues to grow. I mean we are seeing significant -- like, for example, if you see the growth in our digital brands. And if I look at the food companies, our food growth surpasses all the food companies.
The next question comes from the line of Mihir Shah from Nomura.
Congrats on good set of numbers. Firstly, on Parachute, does Parachute need further price hikes? Last quarter, you mentioned that there's a possibility of another round. Is that done? Or there's another round in the offering?
Also, when we looked at the offtake volumes, they were much stronger than expected. I mean, I heard you mentioning that it will take a couple of quarters for this stock adjustment in GT to coincide with the primary sales. But given that the offtake is so strong, should one expect high single-digit growth going forward? Or especially you've taken the price hikes.
And also if you can triangulate how the competitive intensity is playing out? I heard that the flanker is -- flanker brands are growing in mid-teens, but other competition is talking something different. Can you talk a bit on these three aspects, please?
I didn't get your third question.
So apparently, there's a lot of competitive intensity in coconut oil, is what we picked up from the -- one of the other players. And there's a lot of deep discounting happening. We heard that you're mentioning that the flanker brands are growing in low to mid-teens, I think -- mid-teens, I think so. So maybe you can shed some more light on how the competitive intensity is panning out there?
So I think -- let me answer the third. So Parachute, let me just address the Parachute growth. I think as far as we have taken around 6% price hikes in Parachute, if there is further price inflation in the back half of season, we might take a little bit, but we expect a marginal inflation in copra. We will take that price hike. And as I said that we like this marginal commodity price increase because of our procurement and position. Building it actually helps us, so it's good for us in relative terms.
Now coming to the Parachute volume growth, yes, you are right. While we will continue to take some adjustments in both, for -- to facilitate SETU and some of the distributor ROI because we -- see, at the end of the day, I don't want to distributor ROI to suffer because of our supply share and working capital, because that's okay, it's not uptick. The uptick primary growth gap will remain a little bit.
Having said that, we expect Parachute volume growth to increase gradually as we move in the quarter 2 to quarter 4. And yes, you can expect mid-single-digit volume growth definitely coming in. I don't know after that, what happened in the second half of the year.
Regarding the third question. See, if you look at the overall, both Parachute is gaining market share. And overall, Marico CNO has gained market share. It's not that Parachute has got impacted. The so-called competitive activity has happened in certain markets, which are not Parachute natural markets. These are some markets in the North maybe.
But I would assume what is happening is that some of the smaller players are from unbranded, they maybe -- I mean, of course -- I mean, they may be suffering a lot. But I think it could be a little bit because of some of the competitive activity, there could be consolidation of market share amongst the larger players. But I don't think it affects Marico Parachute per se. But as I said, the flanker brands and Parachute continues to gain share.
Perfect. Secondly, on Saffola, it seems the pricing-led growth going forward in the second, third quarter will be closer to low to mid-teens. Do you see any pricing action here that you may need to take to ensure the volume growth trajectory is maintained? Or do you think that there's no need for further pricing action and the volume will still hold to make mid- or single-digit growth?
So just to clarify, what we meant is that the pricing will come flat. So the anniversarization of the price drop will come. So therefore, going forward, sometime during this quarter, volume growth and revenue growth is going to be similar.
The next question is from the line of Avi Mehta from Macquarie.
I just wanted to revisit this Bangladesh thing. Could you help us understand how should we look at the performance from a near-term perspective? Does it impact the portfolio diversification base in any manner? And I just want to kind of better understand how should we incorporate this bit in?
No, I don't think it's -- I think it's too premature to comment on it. And I think as I only said that if you look at India, Bangladesh, Egypt, everywhere, all the countries, we have gone through volatility. And as I said, that we always believe the strong get stronger and the weak get weaker in certain -- in these kind of situations. But I think it's -- let's revisit it after we see this quarter going by, yes?
Okay. So would it be fair, Saugata, to say that from our perspective of how we look at the business, this is something that should not significantly change the broader growth trajectory even from an annual perspective? Is that...
On a long-term basis, nothing is going to change. I think long-term basis, nothing is going to change.
Got it. Got it. And second is on the Kaya business, Saugata. While I understand the sales number, could you give us a sense of how the profitability would be shared between the two entities?
There's no profitability. It's just a model in which we pay a royalty towards Kaya. That's it.
So we will be -- everything accrues to us. Any rate that is available for the public that you could share?
So we won't be sharing the royalty rate publicly, but in standard terms, so it's not a very significant amount. And therefore, a large part of the profitability will be accruing to Marico.
The next question is from the line of Karthik Chellappa from Indus Capital Advisors.
I have two questions. The first is on the Value Added Hair Oil portfolio. If the premium and the mid segment is actually doing better than the bottom-of-the-pyramid segment, could you give us some color on how that impacts the margin profile of the Value Added Hair Oil business?
So let me just give you full color. But as far as the category is concerned, the bottom of the pyramid maybe is growing a bit more than the mid or the premium part of the category, okay? So if you look at -- you participate in hair fall or some of the other premium players there -- and I'm not talking of a quarter number, you have to look at from a 2-year, 3-year perspective, okay?
So what exactly happened is that as Ukraine happened and the shrinkflation happened, the category suffered. And because of shrinkflation consumption -- and the category suffered in the face of downgradation from the top end to the bottom end, okay?
As far as Marico is concerned, what we are saying is that we are okay to lose some share at the bottom end. And there, it is not so profitable. But I would rather invest at the medium and the top end and grow value share there, okay? Because they make much more profitable rather than getting into the months game, which we have been perhaps doing and trying to just fight at the bottom of the pyramid.
And technically, to answer your question, Karthik, yes, if my mid and premium is doing better and bottom of pyramid has declined, so weighted average gross margin for the quarter will definitely go up. But as Saugata said, we are anyways focusing more in terms of how do we drive the value share and value growth. So we'll continue to have that strategy. But to answer you, yes, the weighted average gross margin would have gone up.
Okay. My next question is one -- for one of the drivers of medium-term margins, I think Saugata earlier mentioned that the Middle East and South Africa also will start to see an improvement in their margin profile. Could you give us some color on relative to the international margins, how far is Middle East and South Africa today?
No, I think Middle East, as I said, that Middle East, there's a significant pool available for top line and market share, which we are doing. And Middle East is a profitable market, okay?
As far as South Africa is concerned, we have also improved the profitability. What I alluded to saying is that the structural profitability creeping up long term is these markets with scale continue to improve on profitability.
And we can assume that currently, these two geographies are probably tracking below your international margins, right, obviously?
Yes. So it is definitely below at this stage. But as Saugata indicated earlier in the call, that these are the structural levers that we see that this can improve the margins further as we go ahead. Because these businesses are growing at a very fast pace, we are getting scale, and the scale advantages will kick in. So it has improved from the past, but we still see there is a potential of improvement going ahead as well.
So structurally, Middle East CPG companies make high operating margin, but that will only happen through scale.
Thank you. Ladies and gentlemen, we will take that as a last question. I would now like to hand the conference over to the management for closing comments. Over to you, gentlemen.
Thanks for listening on the call. To conclude, FY '25 started well with some green shoots in domestic demand trend, robust performance of foods and digital-first brands and the international business maintaining its momentum. We expect to sustain an improving trend in domestic revenue growth on the back of a gradual uptick in domestic volumes, supplemented by pricing growth picking up as commodity prices may see mild inflation in H2.
We expect the continual broad-basing of international business to hold us in good stead. In adding to driving strategic priorities of aggressive portfolio diversification in India and overseas, and strengthening our GTM to Project SETU, we continue to strive towards achieving our target to deliver double-digit revenue growth and hold on to operating margins in FY '25.
So that's it from our side. If you have any further queries, please feel free to reach out to our IR team, and they'll be happy to address. Thank you, and have a great evening.
Thank you. On behalf of Marico Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.