Dabur India Ltd. Earnings Call Nuggets: Modern Trade and Volume Growth

Dabur India Ltd. (DABUR.NS) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Modern Trade

Abneesh Roy – Edelweiss: Sir, congrats on the volume growth and margin expansion. My first question is on the modern trade, if you see some of the FMCG companies and retail companies, which have reported numbers, they are bonding towards a sharp slowdown in the same-store growth and store closures on a net level. So how much is modern trade contributing on an overall basis for the domestic business and which are the categories in which modern trade is more relevant, because if I see your Real Juice, we see a 29% YoY growth. So what’s the trend reversing in modern trade?

Sunil Duggal – CEO: For us modern trade actually did extremely good performance in this quarter. The revenue growth was close to 30%, again largely volume. So we don’t see any compression in terms of demand for modern trade. I don’t have numbers in terms of sales, pro-sale et cetera, but overall aggregate modern trade growth was more than twice that of the total domestic growth. So in our case, the two drivers of growth had been rural, which has grown close to 20% and modern trade, like I said, which is around 30% and the biggest drag really has been canteen stores department, which continued its decline. Urban markets have grown at a (date pace) double digits, but not as fast as the other two.

Abneesh Roy – Edelweiss: Regarding rural, are you seeing the trend reversal in any points, because it’s still 20% growth and how much of this growth is coming from your rural distribution initiative? On the market, overall, how will you see the rural market if you take off the distribution expansion?

Sunil Duggal – CEO: I have to say how much is due to the distribution expansion, but it’s significantly factored that part in because the rural expansion has been instrumental in driving rural growth. We certainly would have got 20% growth had we not done the changes, which we did a year ago and definitely it’s played it part.

Abneesh Roy – Edelweiss: But my next question is on the Oral Care, Premium Oral Care has done very well. If you could point from where we have taken market share especially if you see sensitive we have already strong players. So what’s the thoughts process Dabur has on the sensitive and the premium end of that end? Secondly, toothpowder 14% growth after many quarters, is it largely base effect?

Sunil Duggal – CEO: Well, we don’t have any sensitive toothpaste offering. We have two premium variance both are herbal in nature, Red Toothpaste and Meswak, and they are not as premium as the sensitive toothpaste, which are at the much higher price point. So they are more at the upper end of the popular segment rather than at the premium end. But these are high margin offerings and this is where we put our money behind and where we want to see growth. The third is economy variant, which obviously has much lower margins and that has been really not being pushed as aggressively as these ones, because we want to regain better margin profile for the economy offering.

Abneesh Roy – Edelweiss: So the toothpowder?

Sunil Duggal – CEO: Toothpowder has been actually this quarter was fairly positive around close to 15% growth, but largely price driven, the volume growths are not happening to that extent, which is only to be expected. So in a category, which is going and certainly is on a category in which we are investing behind.

Abneesh Roy – Edelweiss: Sir, on the sensitive would you say that its s relatively small market and already three, four players are there? Would you say like that, or is it a category in which over the longer-term even Dabur would like to have a presence?

Sunil Duggal – CEO: I think we would like to have a presence, and we would like to have a sharply differentiated presence as compared to the mainstream players, because there is a lot of noise and activity in this area. So we’ll have to be little careful about which direction we choose, but we do see Sensitive as being a very big category in the future. If one were to follow global trends, (where) sensitive is very significant in terms of the overall composition of the toothpaste franchise. So we are exploring the possibilities in this space.

Abneesh Roy – Edelweiss: Sir, my last question is on the Home Care and the Real business, both have grown almost 29%, 30%. So how sustainable is it, especially Real, I understand slight benefit will be also because of the full impact of festive season? In Home Care, how sustainable is this 30% growth?

Sunil Duggal – CEO: Well, I don’t think 30% growth is ever sustainable. So I do expect at a point in time growth to start leveling off. I think the first signs of some moderation in growth for the food franchise is visible. Our growth in the third quarter was lower than the first two. (That’s only to) be expected as the base becomes very big. The Home Care is showing a lot of resilience. This year the growth was driven by Odomos; traditionally it is driven by Odonil. So obviously the mosquito season was in favor of driving brand growth and may or may not happen next year. But overall we are positioned very strongly in both the segments. So I think we should be able to drive growth perhaps ahead of the rest of the portfolio but maybe not at for 2, 2.5x which we’re doing so far.

Abneesh Roy – Edelweiss: Any plans to make on the presence in (indiscernible) mosquito category more – in terms of more product presence?

Sunil Duggal – CEO: I think we will continue to be in the applicator space. So we will focus on outdoor usage rather than indoor usage. That is the space which has already been taken up. Also applicator brand should normally be differentiated from an insecticide brand because two have very different connotations in terms of usage and safety. So Odomos will remain applicator for outdoor usage and we believe there is a huge market potential waiting this year.

Volume Growth

Percy Panthaki – India Infoline: First question is on the volume growth, I know that you have given a range of about 8% to 12%, but would you be able to sort of give any views I do not interested quarter-to-quarter, but let’s say on a four to five year basis, what is the amount of CAGR volume growth that you can do in the domestic business and if you could narrow the range a little bit?

Sunil Duggal – CEO: Well, it’s hard to narrow the range to anything sharper than 8% to 12% and the reason for that is that inflation is unknown factor, so we’ll be operating other things being the same at the lower end of this band in periods of medium to high inflation and hopefully at the upper end of this band, when inflation is more benign. So I think that’s the way it normally plays out, of course there are numerous other considerations which one can predict. But I would still confine myself with the 8% to 12% band.

Percy Panthaki – India Infoline: Just wanted to know your views on any further acquisition, how do you see that over the next two to three period, two to three year period, would you say that the possibility of further acquisition is very low or do you think it’s possible?

Sunil Duggal – CEO: Well, it’s possible, but low, I won’t say very low, but I don’t think there is anything which is immediate or very compelling, but you never know this things happen unexpectedly we still would look out for an acquisition particularly in the domestic – for the domestic business we haven’t done anything for the last four or five years. So the business is quite prime to take on any acquisition and drive it forward, but early days and we still are really prospecting but nothing is coming up.

Percy Panthaki – India Infoline: So in that case, supposing if there is no further acquisition, do you see your dividend payout ratios going up in the future?

Sunil Duggal – CEO: Not immediately, I think for the next, I would say, two years, I don’t see any – any announcement in the payout ratio. After that we’ll have to kind of do a range at fees, and what the cash accumulations are, and if they are exceedingly large, I think there would be a need to pay it out. But certainly in next fiscal, I don’t see that happening. I can’t predict beyond that.

Percy Panthaki – India Infoline: So in the next fiscal, would you therefore use your surplus cash to repay the debt on the books or will it remain as cash?

Sunil Duggal – CEO: No, it would remain as cash because a lot of the cash will be raised in India, the overseas cash will be used to pay the debt which is all overseas. In India we have no debt worth to name. So India cash will remain in India to build (indiscernible) and the meanwhile there is a good amount of treasury income to be earned. But ultimately we’ll have to see how to deal with it.

Percy Panthaki – India Infoline: Just couple of housekeeping questions, what are the tax rates that we should take FY ’13, ’14 and ’15, that is one?

Sunil Duggal – CEO: Last year tax rate was a little depressed on account of that write-off which we did of the H&B business. So what you see now is the true MAT rate and that should continue and if there is something which is introduced finance year in terms of raising the level of MAT, that is not to be predicted, but otherwise we’ll continue at MAT for the four or five years at least.

Percy Panthaki – India Infoline: So safely we can say that your tax rates should not be more than 20% unless there is any (indiscernible).

Sunil Duggal – CEO: The 21% as we speak, actually it is little bit lower. 20.9% exit rate. So we’re around that much – it depends also upon how much profit we capture overseas, because overseas, particularly the Middle Eastern markets, the tax rate is lower. Yes, around 20% is what you should look at.

Percy Panthaki – India Infoline: Can you also throw some light on why the interest cost has dropped so much in this quarter, YoY and QoQ?

Unidentified Company Speaker: Yeah, I think it is primarily because in the previous year same quarter there was higher exchange rate impact, which if you compare it now with the current quarter, it is showing comparatively lower finance cost.

Sunil Duggal – CEO: Level of losses have come down.

Percy Panthaki – India Infoline: Even QoQ, it is down.

Sunil Duggal – CEO: Yes. But level of losses have come down. The losses are still there but the level of losses have come down both year-on-year as well as Q-on-Q.

Unidentified Company Speaker: There more of a convergence in the exchange rate than it was in the first two quarters.

Percy Panthaki – India Infoline: Sir, in QoQ basis, I don’t think the exchange rate would have significantly shifted, right?

Gagan Ahluwalia – Additional GM, Corporate Affairs: On a Y-on-Y basis there is more…

Sunil Duggal – CEO: Sequentially…

Gagan Ahluwalia – Additional GM, Corporate Affairs: Greater than the – yes.

Percy Panthaki – India Infoline: Yeah sequentially Q3 versus Q3.

Gagan Ahluwalia – Additional GM, Corporate Affairs: Yes, you are still looking at interest cost y-on-y.

Percy Panthaki – India Infoline: No, quarter three of this year versus quarter two of this year, so even that it has almost come down by half, so I think between these two quarters, the interest rate has not significantly moved?

Sunil Duggal – CEO: On an average, no, but in terms of the blend of the mix which has happened in-between the quarter has have undergone some change and that has resulted to the drop in the absolute loss.

Unidentified Company Speaker: Yeah, the ForEx losses in Q3 have been significantly lower than the previous two quarters and that is captured under this account head.

Percy Panthaki – India Infoline: So going forward what kind of interest cost should we take on a quarterly basis assuming that interest rates are – ForEx rates are constant?

Sunil Duggal – CEO: So if the exchange rate remains constant that we could take it at the similar level, but it will all depend upon how the exchange rate will pan out in the future.

Percy Panthaki – India Infoline: Similar to Q3 you mean?

Sunil Duggal – CEO: Yes. It should be lower, isn’t it? Now there is an increasing convergence in the exchange rate on a YoY basis. So YoY, they should be now even less than (rest) captured.

Unidentified Company Speaker: Yes. On a YoY basis, yes.

Sunil Duggal – CEO: Then it’ll kind of moderate itself by the first quarter. So fourth quarter should be a little bit lower…

Unidentified Company Speaker: On YoY.

Sunil Duggal – CEO: On a YoY basis and then sequentially.

Percy Panthaki – India Infoline: Sir, just talking about the absolute rupees million in (indiscernible) cost on a quarterly basis, would it be similar to what we had in this quarter?

Unidentified Company Speaker: It will be more or less similar.

Sunil Duggal – CEO: It will be similar.