Marico Ltd. Earnings Call Nuggets: Market Share Loss and Input Cost

Marico Ltd. (MARICO.BO) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Market Share Loss

Abneesh Roy – Edelweiss: If you see how the companies have seen sharp slowdown in the modern trade and if I see Saffola numbers for the past two quarters, from 12% it stripped to 6% and now to 4%. So in terms of the same-store growth in modern trade and overall net closures, if you can share some insights? Secondly, if you see the other competitor to Saffola had seen marked acceleration in volume growth in this quarter. So any market share loss not as per the initial numbers, as per your analysis, is there any market share loss?

Investors are making great returns as markets roar higher. Join the party. Click here to discover our Feature Stock Pick now!

Saugata Gupta – CEO – Consumer Products Business: See, I think as far as modern trade is concerned, obviously it’s not – we don’t keep a complete track of same-store growth category-wise. But in the modern trade sector, our growth this quarter in value terms was around 24%. As regards Saffola is concerned, I think which we have raised – which we have discussed earlier, what has happened was that the specific Saffola premium to Sunflower and therefore the pricing was unsustainable. We have taken a price drop in December which as you know, there are always a pipeline in the market and therefore it is actually getting a full impact of that price drop in the buying cycle of Jan and February. So I think with that price correction, which has been taken, we’re pretty confident that we will get back Saffola growth on track. I think it will take a little bit of time, but certainly by quarter one of next year we will get back into double-digit growth.

Abneesh Roy – Edelweiss: Sir, but one follow-up on this. Normally, we have a good modeling for this volume growth. So two quarters of slowdown and then this price cut, should I see this as that margin contraction in Saffola are so much that price cut was delayed because of that and if you could refer to that growth of the competitor.

Saugata Gupta – CEO – Consumer Products Business: See, I don’t think it was – because (delayed) we were waiting for a clear view of what should be the direction of the input cost prices, see as you know that most of the input costs are volatile by October, November you have a feel of the input cost of most of the seeds, whether it’s sunflower, safflower and all that. So once you get – I think we were able to take a much more firm decision, because at the end of the day we are dealing with brands and we are unwilling to take frequent price cuts of price increases and therefore given the fact that we took us for some time. As we regards some other growth actually, we don’t look at just quarter growth. There could be certain quarter some people could be growing. But in terms of our market share we believe that we are not loss significant market share. But as I said that we had a certain pipeline in the market and therefore we do have an off take tracker which is there, which we separate from Nielsen which has started to show the last buying cycle in January where you have started to pick up.

Abneesh Roy – Edelweiss: Both the December cut any recovery in January or is it pipeline would be there so it is too early.

Saugata Gupta – CEO – Consumer Products Business: That’s what I said, the January buying cycle which happened in the last week of January we are seeing a little upturn in the (off-take) tracker.

Abneesh Roy – Edelweiss: Sir, my last question is on the value added hair oil it’s again a diverse trend acceleration in the growth. So how sustainable is this and any one-off in this or is it largely the market share expansion which has accelerated here?

Saugata Gupta – CEO – Consumer Products Business: I think our hair oils strategy has been essentially of the value-added hair oil strategy has been a broad participation strategy in which actually plug all need gaps and ensure that, as the consumer upgrades, Marico has a more than fair share of that upgrade. We haven’t had a secular growth on our brands, including Parachute Jasmine, Hair & Care and of course, Shanti Amla continues to grow very well and we are fairly confident of delivering a 20% volume growth in the quarters to come.

Input Cost

Percy Panthaki – India Infoline Financial Limited: This is (Percy Panthaki) here. Congrats on a good set of numbers. Two main questions, one is on input cost, if I look at copra prices for (FY ’13) YTD, they’ve more or less been flat and of course, this being that time of the year, they’ve creeped up a little bit and they are higher than FY ’13, YTD average right now. But even if you remove that seasonal uptick and assume that sort of prices remain flat on FY ’13 average, it seems that not much of benefit in terms of cost deflation is likely to flow into FY ’14. Is this analysis of mine more or less correct?

Saugata Gupta – CEO – Consumer Products Business: I think it’s a fair analysis I would say, however, you must realize that there could be some variation from quarter-to-quarter. So for example, the base of quarter one last – this year was slightly high and then the prices started correcting. So there will some variation from quarter-to-quarter, but on annualized basis, you won’t get any benefit, significant benefit, that’s a fair assumption.

Percy Panthaki – India Infoline Financial Limited: So in that case, Saugata, do you think we might be giving up any sort of gross margin expansion because we are anyways dropping our prices, so whatever little benefit we had on cost in Q1 base et cetera et cetera that might pass through in terms of price cuts on some of your SKUs and therefore you might end up with nothing in terms of gross margin expansion, is that a possibility?

Saugata Gupta – CEO – Consumer Products Business: I think we have said this before that what we look at is long-term volume growth, because in any emerging market ultimately getting new consumers and getting existing consumers to consumer more in the long-term sustainable driver of growth. now our gross margin operates within a bank, obviously they would be chasing in a certain quarter and a certain, there is one that there would slightly higher gross margin and certain cases lower gross margin, but I think the long-term growth of Parachute which is 7% to 8% is the one which we seek to achieve subject to a certain band – margin band. So this is something which is still going to be comfortable for us as we move into the next coming quarters.

Percy Panthaki – India Infoline Financial Limited: My second quarter is on the corrective action that you have taken on the back of slight weakness in volumes that (indiscernible) actually I mean what has been your experience in the past and if any reason the experience is likely to be from past in terms of how quickly these corrective actions actually result in the volume growth coming back. I mean the reason why the volume is fallen is that there has been some amount of customers shifting or new customers who are coming to you going to other brands, so that behavioral change just because we have a taken a pricing action may not happen immediately, so what is your experience in terms of the time frame of that behavioral change and therefore volume growth is coming back?

Saugata Gupta – CEO – Consumer Products Business: See our household – our panel data suggest that we don’t have any customer shifting, but most of it is a deceleration in the terms of upgradation that has happened because of the price premium. Our experience has been that because of pipeline and other issues within six to eight weeks, you start seeing some results. As I’ve said that we have affected some price decreases in December, we’re already seeing some signs in certain modern trade, where we have (off-take) record of a little bit of loosening out.

Percy Panthaki – India Infoline Financial Limited: So, you do expect that the earlier comment you made of Q1 coming back, that is true for Saffola as well as Parachute?

Saugata Gupta – CEO – Consumer Products Business: That’s right.

Percy Panthaki – India Infoline Financial Limited: Just one data point quickly on Parachutes, would you be able to tell us the total volume growth, rigids and pouches put together?

Saugata Gupta – CEO – Consumer Products Business: See as far as pouches are concerned, the growth is around 1%. But as we believe that that is – during a deflationary time, we don’t – we have to ensure that even if there is a volume drop, it’s something which we start having a certain play between a volume and a margin. So, we believe that again as the inflation kicks in sometime in April onwards and in fact, you are seeing that thing having, we will get volume growths back. As far as pouches contribution is concerned, over the years it has started reducing and we are right now the pouches contribution to the CNO franchise only 15%, down from 21% around 18 months to two years ago. So, gradually, that contribution will keep on decreasing.

Percy Panthaki – India Infoline Financial Limited: So, I just wanted to know that there is no YoY volume decline in the pouches segment.

Saugata Gupta – CEO – Consumer Products Business: No.