Talking to CNBC-TV18, Sunil Duggal, CEO, Dabur, said the company is looking at 14 percent ad spends as a percentage of sales for FY14 and expects around 10 percent volume growth and 15-17 percent top line growth. It is even looking at small international acquisitions to enhance portfolio.
Below is the edited interview transcript of Sunil Duggal on CNBC-TV18
Q: How your margins may progress going ahead because in the quarter gone by at close to 19 percent your margins were the highest that you have seen in the past eight quarters and we have seen how the macro environment has slowed down quite a bit. Do you think these margins are a bit unsustainable in the second half of the year?
A: I think they are sustainable but it could be hard to expand them further. We will plateau off at current levels, in fact now on a year-on-year (YoY) basis there is hardly any margin expansion happening. We saw margin expansion happen in the first part of the year. It is now leveling off a bit, but we should be able to hold on to the margins for the next few quarters.
Q: Investors last heard from you, you said that consumer products, industrial growth has fallen to 3-4 percent; I am quoting from what you said and as per Neilson it is the lowest in the last three-four years. Is there any light at the end of the tunnel since that talk with your investors, have things improved at all?
A: They are looking up even though very marginally. We are seeing demand to be sluggish but nothing to get very alarmed about and last time when we spoke I do see demand reviving in Q4. I still hold on to that assumption that it will, but so far the demand is sluggish but still holding up especially the rural demand.
Q: The expectation was that good monsoon should ensure robust second half. We are almost 40 percent into the second half. Is the rural demand looking up?
A: Yes, there is a small uptick in rural demand in the last part of this quarter and I think the momentum would accelerate in Q4 because the full impact of the crops going to market and the money coming into the hands of the farmer will be felt now and should drive consumption logically. However, from the point of view of our company, we have managed to hold the demand side at a reasonable level given the macro constrains by the massive investments we have done in rural distribution also urban but mostly in rural distribution.
Q: How is the pricing power at this point in time? You managed to take a couple of price hikes in the first half of the year but are there more on the anvil in the second half given the demand situation you may have to hold back on that?
A: I do not think so. I think we would be able to take price increases to neutralise the inflationary impact. I do not think that serves as a tool to expand margins because of the sluggish demand but we should be able to hold on to the current margins through price increase and otherwise better management of cost and I do not think we will have to resort to any cuts in advertising etc to maintain the margins.
Q: What are you planning by way of advertising for the current year and the next year, if you have a budget?
A: The next year's budget has not been cast but current year should be in the region of 14 percent, which is a bit higher than what we normally do. I suspect next year's budget may not be significantly different from the current one.
Q: What should we assume by way of volume growth? You did 10.8 percent when you last reported your numbers. Would the overall full year numbers be better than that as well your total income was up 14.8-15 percent. So, full year should we expect better on both?
A: You can expect around 10 percent volume growth for the full year. It could be a bit higher than that but not significantly so. The revenue should be in the region of 15-17 percent and that is going rate so far and we should be able to hang on to it. I think it is going to be reasonable year, not a spectacular one but in light of the constraints which we have faced inflation, lack of demand etc, I think we have done reasonably well.
Q: If you had to breakup growth across categories you did some terrific growth in the home care segment, almost 25 percent. Do you think that would be a tall ask to hold on to or will it still be about 20-25 percent in home care, oral care etc?
A: Home care has been a fast growth area for us and I still think 20-25 percent is very much achievable; we should be able to do it. It is on the back of fairly small base so it is a bit easier to do it from that context.
The beverage portfolio has been the other driver and we still are looking at 20 percent plus growth there. The other ones are a mixed bag and there are quarters of good growth and quarters of average growth. Oral care has been doing reasonably well, hair care has been sluggish. So, the trajectory of growth, we should be able to maintain in the mid teens for the domestic business driven by around 10 percent volume growth.
Q8: Would you be looking for anything inorganic at this juncture, by the end of this year you are over Rs 900 crore in terms of profit in terms of cash profit over Rs 1,000 crore?
A: There is no shortage of cash; there is unfortunately shortage of targets so I do not think anything is going to happen in a hurry. We are still seeing valuations not cool off significantly despite the downturn in the economy which makes the whole task of justifying an acquisition very hard. We are looking at overseas acquisitions perhaps where we see better value but they would typically small in size served to round off our portfolio, gain access into certain markets, which are adjacent to our current market and not transformational. At this point of time we are not looking at those kinds of acquisitions.
Q: What is the share of exports or international business in your total revenues and do you see a leg up now that the dollar is so much expensive. Is the depreciation going to have a positive impact on your overseas earnings?
A: The second part of your question is yes, the weak rupee shows up overseas earnings. We get significant amount of translation gains. The overseas component is now around 30-31 percent and is likely to grow ahead of the domestic component. Therefore, it should reach around one third in the next couple of years and perhaps 40 percent in the next five-seven if we go along the same path as what we are doing. Having said that acquisitive growth whether in domestic or overseas can significantly alter the blend of domestic and overseas sales but we will have to wait and see how it emerges.
Q: Where will that emerge, domestic or overseas?
A: It is more likely near term overseas even though our preference is to acquire home grown companies and brands but the targets are very few and far and the valuations are way too high to justify any buy.
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