Bajaj Consumer Care Limited (533229) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Bajaj Consumer Q2 FY '22 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note this conference is being recorded. I now hand the conference over to Mr. Manoj Menon, Head of Research, ICICI Securities. Thank you and over to you, sir.

Hi, everyone. A wonderful good morning and good afternoon depending on which part of the world you are joining from. At ICICI Securities, it's our absolute pleasure to host the 2Q FY '22 results conference call of Bajaj Consumer Care Limited. Today from the management side, we have Mr. Jaideep Nandi, Managing Director; Mr. Dilip Kumar Maloo, Chief Financial Officer; Mr. Kushal Maheshwari, Head of Treasury and Investor Relations; and Mr. Richard D'Souza, General Manager, Finance. Jaideep, sir, over to you.

Okay. Thank you, Manoj, for hosting this call, and good morning to everybody from India. My name is Jaideep Nandi, and I'm joined by, as Manoj said, Mr. D.K. Maloo, our CFO, Richard, who is our General Manager of Finance, and Kushal, who's our Head of Treasury, as well as some of my colleagues from the Management Committee. So let me take you through the performance of the company for Q2 and first half of the FY '22 before we open the house for questions. The quarter was a challenging one in face of category slowdown and rising input costs. After a robust sales in June and July, which witnessed high teen growth for the company, we saw a sharp decline in sales in the months of August and September. The company reported a sales turnover of INR 212.2 crores for the quarter, which is 4.3% lower over the corresponding quarter of the previous year. In hair oils, the sales decline for the quarter was 2.1% by value and volume decline of 0.7%. For the half year, the sales turnover was at INR 424.2 crores, a growth of INR 2.6 crores (sic) [ 2.6% ] over last year. In hair oils, the sales value and volume growth were 8% and 10.2%, respectively. The gross margin for the company was at 59.1%, which is 40 basis points higher on a sequential basis but lower by over 6% on a year previous quarter -- last corresponding quarter. We have taken calibrated price increases of about 5% during the year and are working on about 20 cost saving projects to partially offset the steep commodity price inflation. The drop in gross margin over last year was primarily due to sharp increases in LLP, RMO as well as packing material prices in the year. We have taken another price increase of approximately 2% with effect from November. We'll continue to keep a close watch on the commodity prices, demand conditions, competitive landscape and decide on further pricing actions in the future accordingly. The EBITDA for the company was at -- for the quarter was at INR 50 crores with a margin of 23.6% for the quarter. PAT for the company was at INR 47.3 crores against INR 57.3 crores for the corresponding quarter last year. The top line of the company was negatively impacted mainly due to 3 factors in the quarter. Geographically, South and West did well as a region for overall hair oils. This is borne out both by the Nielsen data. The company also reported double-digit growth in both these regions in this quarter. Unfortunately, these are underindexed markets for us. On the other hand, our overindexed markets of Bihar, UP and parts of Central India, and restricted mainly to these markets, severely declined in the quarter mainly in August and September for hair oils as a category, which had an adverse effect on the company. Secondly, as we have been witnessing for the past few quarters, the consumer down trading continued in the quarter with the Amla and coconut categories being the fastest-growing oils. Although our presence in these categories are low currently, our direction to complete and balance the portfolio in hair oils should derisk our top line in the mid to long term. Last year, with many rural markets slowing down, key wholesale markets, again, in the North and Central market -- central parts of the country saw severely reduced footfalls in August and September. Our company had double-digit decline in wholesale, while both urban, retail as well as direct rural saw near double-digit and flat growth in the quarter, respectively. With the market showing slight signs of recovery in October, we expect the demand conditions to be normalizing in the coming months. While the wholesale business has been a dampener to the performance, most of the key initiatives taken at the beginning of the year have been doing well. Broad-basing the portfolio to reduce our overdependence on Almond Drops, improving distribution reach in West and South as well as increasing the urban retail footprint in select cities in North, East and Central India have been yielding results. Both Modern Trade growth and e-commerce scale-up have been [indiscernible] as per our plan. Modern Trade registered mid-teen growth on the back of better store execution, assortment optimization as well as increase of distribution footprint. While August saw lower-than-expected footfall for big day events, improvements we're seen towards the end of September and October for Modern Trade. The e-commerce business for the company continued to scale up well with doubling in our business quarter-on-quarter and the business now contributing to nearly 4% of turnover. Listing expansion across key retailers, investments on brand visibility on key platforms, activation of the non-ADHO portfolio continued to yield results as per plan. More than 1/3 of the sales came from non-ADHO brands in B2C e-commerce, which is the highest ever till date. Almond Drops continue to get media support across TV, social media platforms and print media support in key markets. Promotional support through consumer offers and select SKUs across key geographies continued during the quarter. Bajaj Amla Aloe Vera has been scaling up well in select markets of North and Central India with over 50% growth in the quarter and over 70% on a YTD basis. Rural-focused TV campaign started in Q2. This was supported with print media and focused sales. Bajaj pure coconut oil, launched in select markets of West, East and South, has been getting good responses from the trade and customers. The product will be used to improve our distribution footprint in these underindexed markets to leverage the next set of launches in GT that is planned in the next few quarters. Urban retail continued to do well with growth for the quarter close to double digits on the back of retail initiatives and outlet expansion in identified top urban cities. The thrust to increase our retail contribution will continue going forward. In rural, focus has been to improve efficiencies through technology interventions, helping in brand route optimization and rationalization. With the expansion of portfolio, the focus has been to seed the newer brands in the rural markets, which are generating traction. The e-commerce business will remain a focus area for the company. We have just launched our new digital-first premium brand in haircare and personal care space, Natyv Soul. We'll be expanding our portfolio in the range in the coming quarters supported by both digital as well as influencer marketing. This will be supplemented with renewed thrust of our traditional portfolio in the channel. The digital-first brand, Bajaj Zero Grey, continues to scale up and will become an integral part of the e-commerce strategy as we scale up further activations and support in the e-commerce space. In the international business, UAE and Africa had a sharp decline due to travel restrictions, while Nepal and Bangladesh came out of lockdown and performed well with double-digit growth. International business will be taken up as a subarea from the next financial year. Various ESG initiatives are being taken to reduce carbon footprint and greenhouse gas emissions, especially in case of packing materials. There has been a reduction in consumption of approximately 14% in glass bottles, cartons, laminates put together through optimization and rationalization of specifications. The process will continue in the future. Plans are also underway to ensure that bulk of our packing material is of recyclable material. As part of our extended producer responsibility, we are on track with our target to effectively collect and co-process 100% of our post-consumer plastic waste with 48% achievement of target in H1. At this stage, while on one hand we will keep reacting to the market conditions tactically, on the other hand, we'll keep investing in building capability and strength to achieve our mid- to long-term aspiration of delivering sustainable growth through broad basing our portfolio both in the hair care and personal care space with focus, obviously, on hair oils, making forays into the under-index markets of West and South, scaling up our international e-commerce business as well as improving our execution excellence, process systems and focus on ESG initiatives. So with that, I end my opening remarks and open the session for questions.

[Operator Instructions] We have our first question from the line of Manoj Menon from ICICI Securities.

First of all, a good performance on the diversification efforts, and some of the new products definitely looks great. But having said that, in my mind, the biggest elephant in the room is actually the ADHO performance. Obviously, you did allude to, and your presentation has been fairly disclosure friendly. But my question is, is it really a market growth issue or a seasonal issue? Or is it really a sales issue? What I just wanted to request Jaideep to explain in which however quantitative or qualitative data which you might have, on the core category growth itself, while you are doing a lot of efforts on diversification, but the criticality of ADHO growth is very critical from having resources, let's say, to fund a lot of these multiple ventures, et cetera. And also, given the fact that ADHO itself is expected to have a longer runway for growth, but the performance over the last maybe few years, I'm not sure whether it's really supporting that thesis. If you could just talk about the core characteristics of the -- of the particular segment of the category with any of these studies or any information which you may have other than Nielsen?

So I think that's absolutely a fair question. In fact, I mean, overall, if you look at the entire premium oils, et cetera, I mean, I think it's pretty clear in the last few quarters there has been a bit of down trading. But having said that, ADHO being one of the largest brands in the hair oils category, I think it is -- I mean, on to us as well to see how we can scale up ADHO's business itself. If you look at -- except for the last 2 months of August and September, if you look at across the last 3, 4 quarters, ADHO's growth has been generally pretty -- going pretty good. In fact, what we wanted to expand both in terms of urban retail, where we wanted to see the ADHO, where our presence was low, as well as in terms of deep rural, I think the work has started up pretty well. So obviously, the setback of August and September, there has been -- if you ask me, yes, we can improve our execution excellence as well, and this is exactly what we are looking at in certain markets. The market have collapsed. I mean there is no question that the wholesale market really had a big setback in most of the wholesale mandis in the North and the Central parts of the country. But given our brand strength, I think there are some -- more plays there. We have seen that -- some of the corrective actions and some of the sales plays that you are alluding to. We saw some positive impact of the month in October itself, and these are work for me to continue throughout the year. There is no question that ADHO will have to fund its -- fund the growth, and hence, ADHO needs to keep growing, notwithstanding whatever happens in all the other portfolio. I think that consciousness across the entire marketing sales team is pretty much there, and I think we should see ADHO coming back strongly in the coming quarters.

Yes. We have next question from the line of Abneesh Roy from Edelweiss.

My question is on the rural data which Nielsen has given out. Even Unilever had called out the slowdown based on the Nielsen. How seriously are you taking this data? Because rural from 8.3% to minus 2.7%. Also, if you could comment on the urban growth also because that's also no growth, right. On 12% base, which is not very high, even urban is not growing as per Nielsen. So could you comment on both rural slowdown, how serious is it? And in urban, things don't seem to be remarkably different.

See, if you look at rural, clearly we see the slowdown that are happening. In fact, while our rural -- because last year, we started an initiative, and direct rural for us has been still holding up. I think the flat that we see or the gap that we see in our wholesale clearly reflects that rural markets have clearly had a setback, and that is not really coming back in a deep way. In urban, we see pockets which have been doing well. West, South for us also, which are obviously much under-indexed have been doing well. We see signs of recovery in Delhi, some of the other markets. So urban is more of a mixed bag, but I think rural is mostly across the country. We see rural -- and it -- we have to -- given the fact that last year rural had a -- because of the impetus, rural actually grew much faster. So on a 2-year basis, rural and urban will be more or less similar. But rural this year -- on a year-on-year basis, rural has gone down. I mean that is not going to correct in the next 1 or 2 quarters. I don't see that correction happening as far as a year or 2 years.

Sure.

Yes, sorry.

My second question is on Amla. Your market share, you have done well, from 1.6% to 3%. Of course, at 3%, brands don't turn profitable in terms of market share. So if you could tell us what is driving this market share gain. And when do you see this brand being profitable on its own?

In fact, if you look at -- as we have said, we look at Amla as a strategic investment for us, and we see that the brand coming to over INR 60 crores, INR 70 crores, it will turn at EBITDA neutral. As of now, our investments in the brand itself has been restricted. We had been also playing with the assortment so that where -- the more profitable assortment is where we have played. The lower size packs, where the margins are far worse, we are very, very under-indexed, and that's why we have only played in the markets where the larger packs are operating. So at this moment, we are really not too much EBITDA negative as far as Amla is concerned. And that is what we keep on calibrating. We'll keep our EBITDA at those levels. So as we scale up the brand, we'll keep investing back into the brand itself. So not too much of grain on the EBITDA. We would like to keep it neutral so that at least we are able to balance the portfolio. That's what our approach towards Amla is. So INR 60 crores, INR 70 crores is when we should be looking at a breakeven kind of an Amla. Our target is to reach about INR 100 crores in the next 2 years or so.

Sure. Last question on your coconut oil foray. So now almost 3 months have happened since the launch. So are you seeing some level of repeat purchase? And second, because copra raw material prices are coming down, have you also cut prices so that you continue to remain competitive versus the market leader?

So we have not cut prices in this thing. As you remember, when we had launched in July, we had kept our prices about 10% lower than the largest player. And we continue to get -- our main objective as far as coconut was concerned was basically get some specific markets of South and Maharashtra as -- and getting our distribution presence. It is more of a -- a little bit of a mid to long term because of the kind of launches that we are planning as far as GT is concerned in the next 2, 3 quarters. We wanted to get some foothold in the Southern markets, where I would say that the response is still mixed. But in the Western markets, we clearly see good presence happening as far as coconut entry is concerned, getting some good foothold in these markets. And that is something that we hope to exploit in the next 2,3 quarters. So, so far, we have kept quite a tight leash on the primary sales of coconut because we don't want too much of the thing, but we are getting good, encouraging response. So we'll see how that pans out. The initial response is very good both from the consumer as well as from the trade.

We have next question from the line of Percy Panthaki from IIFL.

Sir, first question on the Nielsen slowdown in rural. Just wanted to understand, how much of this is because of the base effect? Because, I mean, the slowdown might just be that last year, people were sort of recovering from COVID first wave, and that is causing some kind of anomaly. So can you give me some information on what is the 2-year growth rate as per Nielsen in rural and whether that has slowed down a lot?

So if you look at -- so 2 ways to look at. In terms of -- obviously, there is a bit of a base effect we are seeing compared to urban because last year, you see Urban had absolutely collapsed in the first quarter, and there has been not too much of a recovery as far as urban is concerned. In that sense, rural last year had a high growth. So this year, that growth has not got replicated. Some parts of it is bad. Even internally, if I look at our own data, I mean, for the first time, we are seeing rural overtaking the business and rural contributing to about 55% of the business while urban is just about 45% in terms of markets. So if you look at -- let me see.

[indiscernible] 2.

So I'll just give you the 2-year CAGR for -- So this is what we are looking at. So rural in terms of numbers for us is still higher. But in our case, as I said, because our wholesale has collapsed, the numbers are far stronger. We had a -- if you look at half year results, retail for us is about 23% growth, wholesale is at minus 15% and rural markets is about a 4% growth. And that is because of the direct to rural that we are doing, which is with the brand sales, et cetera. So that is what we are seeing as far as the market.

Right. But even if I look at your -- I mean, your own reported growth on a 2-year basis for the quarter, I'm not talking about rural, urban but just the total growth on a 2-year basis, it is not -- I mean, it's not a very great number. So I just wanted to understand, how much of this is a general FMCG sort of growth being lackluster issue and how much of it has got to do with light hair oils underperforming the overall FMCG sector?

See, if you look at the overall hair oils in -- coverage?

Two years.

Two-year CAGR, the usual, rural is still better than urban on an overall basis, if that was the question that you were asking. So...

That is as per Nielsen, sir, or per you?

As per Nielsen, as per Nielsen. For us, rural has been doing better. So rural is on a higher growth than urban. Now urban, this quarter, if you look at specifically, we had a double-digit decline as far as the wholesale is concerned. Wholesale really went down. It was over a 20% decline in this particular quarter. And as I said, for the half year, about 15%. So this is where our decline is coming, which is also -- part of it is combined rural market.

[indiscernible] 3%, 2.5% if I [indiscernible].

Overall, it is -- overall, it is flat, yes.

Sir, second question is on the input cost inflation. Your gross margin is down almost 700 basis points Y-o-Y. So just wanted to understand what is the inflation trends and if you have taken any price action to offset this. And just some understanding on the gross margins going ahead.

So gross margins will, I think, remain under pressure because as far as Q3 is concerned, we don't see any softening of prices either in LLP or RMO, so -- neither packing materials. So the prices -- that's why we have taken a 2% price increase as far as August, October is concerned. Now we also -- given the way the consumer trends are with so much of down trading happening, we also need to protect our brand. And hence, we'll also look at how competitive action is and hence calibrate our price increase. Ideally, we would have liked to pick up much higher price increase. But given the market scenario and the economy, I don't think we'll be taking more than 2% at this stage. But we'll keep monitoring the prices. And in case we need to take it -- take a further price increase maybe in the next quarter, we will look at another price increase if it is so required. But at this stage, we'll take the hit on gross margin.

And how much is the inflation -- cost inflation as it stands today versus what we've already seen in your Q2 results? Because even after whatever charge-out is there in your Q2 P&L, the average cost of that versus the average input cost basket today, that itself would have gone up further, right?

Was it -- first, I -- can you repeat that question? Q2 versus what? Q...

So as the input costs stand today versus what input costs were charged out in your Q2 P&L, there would be a further inflation, right? So if I look at what prices today versus what you had in your Q2 P&L charge-out, how much would that...

The question is consumption versus purchase, right? So what consumption we have booked in Q2 versus what are the purchase and current prices and hence...

What are current prices versus what have been charged out into Q2 P&L.

I got your points. So consumption charges actually as it will come in Q3 materials cost versus what it was in Q2 because it would have carried forward of Q1. So that, if you look at, will not be too significantly different because while we see RMO prices hardening, we also see LLP prices softening. So overall, the impact even between Q1 and Q2, you did not see too much. The thing is that what we were expecting is -- with the RMO, hoping to soften, it has not happened. And LLP has also not really softened to the extent that we expect. And hence, as a result, we do not see too much of difference between Q2 and Q3, Percy. It will be 1% or 2%, plus/minus, yes. So not really impact.

Crude's going up, sir. In the last 2, 3 months, crude going up. And LLP being a derivative of crude, don't you see an upside risk to the LLP prices?

I mean while, obviously, it's a derivative of crude and hence LLP prices, it will also be a supply and demand situation. Yes, LLP prices have hardened a bit, as I said. But at this moment, we don't see it materially making any impact on our overall LLP prices itself. It's not a direct correlation that you see between crude and LLP if you were to plot that out. So going forward, as I said, we will monitor. In case we feel that the prices of -- prices have really gone up so much, then maybe we'll take another price increase, which I alluded to in quarter 2 we'll take it. As of now, we are well covered for Q3. So really speaking for Q3 consumption, there will be not too much of difference whichever -- LLP, yes.

[Operator Instructions] We have next question from the line of Deepan Sankara Narayanan from Trustline PMS.

Firstly, I want to understand how has been the retail offtake growth. And when do we expect overall this wholesale starts growing with the festive season coming up and also economy opening up?

Well, okay, if you look at in terms of October business itself, clearly we see some bit of recovery than that we had seen in October, August and September. But given that it is the festive season, et cetera, we don't see kind of the real uptick that we expected to happen. I don't think that has been seen across the markets in most categories that at least we have been operating in or where we have been monitoring. So having said that, there were certain markets where we see the recovery to be still a little slower, especially markets of Bihar, Madhya Pradesh, Uttar Pradesh. But other markets of the North, East, West, South, et cetera, we see markets becoming a little better than -- or these other markets are.

Okay. Okay. So in that case, so this current ad and sales promotion run rate of 15%, 16%, will it continue for the next 2 to 3 quarters or it will go back to 18% levels of last year?

We'll keep it at between 15% to 18%, and we'll operate tactically between that. So 15% to 18% is where we'll operate. And as we launch our e-commerce brands, we might also look at a little bit of upside on that actually. So we would like to invest for the future. So some bit of investment we'll also have in that.

We have next question from the line of Tejash Shah from Spark Capital.

Sir, my question pertains to gross margins. So we are almost tracking at the lower band of our like historical margin band. So you said that you made some interventions. So do you want to operate at this lower end of the margin and try to push growth? Or you will try to go back to our earlier margin band with the intervention that we are planning to make in next 3 to 6 months?

See, with this unprecedented price changes that have happened in our key raw materials, I don't think we're in a position -- I don't think the market economics also would support a full-fledged passing of the price increases. So -- and we also see that most of these price trends will always be cyclical. Historically, you will see it as cyclical. And if you were to take most of the price increases, one is we are not sure whether how priced it will be from the marketplace because the marketplace is also a competitive place. On the other side, if you were to take a price increase and then the prices will drop, you would not be able to roll back the price off. So we'll -- that's exactly why we are taking them in a calibrated manner. We have just taken the third price increases -- or the third price increase for the year and keeping it open for -- as a price increase if and when necessary. So at this moment, we will have to bear with this, but we expect that in the next 2 quarters or so, the prices will start softening. I'll just take an opportunity -- I'll just take this opportunity to give the numbers for the 2 years CAGR, which is basically that we saw for the urban 2 years CAGR is minus 2.9%, while for the rural markets the CAGR is 2.9% positive with overall CAGR of minus 0.3%. These are the, I mean, the numbers that come, [indiscernible] 3% for urban and rural.

Yes. Yes. And second question pertains to our direct-to-consumer brand strategy. So 2 years back, it used to be novelty. Now it is like everybody is doing the same thing. So how do you stand out in that crowded market? And what is our value proposition which will click versus all the brands which have been launched? And then now, right, from start-up to established companies, everybody is going that path.

Yes, absolutely. Absolutely. And I think there are really not too many choices left for most organizations if they have not already jumped into the bandwagon. And hence -- I mean, we are already late in this e-commerce space. As you'll remember, last year -- about 5 quarters back, we -- our contribution to e-commerce was about 0.5%, far more under-indexed than most of our competitors. Now we have bridged the gap a bit at 4%. And we think that we have enough within ourselves to push for this strategy. I mean today, we are launching Natyv Soul. I'll not be able to talk of some of the other launches that we are planning, which you'll see some time about in Q3. And we'll be talking of another brand. But I think for us, as far as our company is concerned both with the traditional portfolio that we have as well as the new B2C brands that we are launching, we have enough and more fight in this space. One of the things that we keep saying is that this is a far more democratic space. And given the equity of Bajaj we can use in our traditional portfolio and any other hair oils that we launch as well as some of the niche categories that we can get into where I think it is a function of how we could wear in terms of our digital and influencer marketing skills, I think there is enough and more for us to be playing in this portfolio. I think in terms of skill set, infrastructure, we have built it up. And I think like most of the other large players who are getting into, I think there is enough and more for us also to be growing in this space. And given that it's an absolute number that we are chasing as a percentage to our turnover, I think we have better success rate possibility than most of the larger players. We'll be looking at similar numbers and a similar price.

But sir, in both our B2C brands' Natyv Soul launches, we are not leveraging Bajaj's name. At least that's what appears from -- when I checked on Amazon. So how will it work then?

So this is in an absolutely nascent stage. I mean this is just a prelaunch, if I were to use such a word. It's a soft launch. Maybe that's the word. I mean we've been saying by about quarter 4, and maybe it's sort of having a full range of its own. We are looking at about 20 to 30 products under the Natyv Soul brand itself, which is basically in the hair care, personal care space, as well as we'll get into both digital and influencer marketing that we are talking about. Parallelly, we are also looking at another range which we think might be relevant for our Bajaj name itself, which we'll parallelly be putting it across along with the traditional portfolio that we have. So with that, we feel that as a comprehensive e-commerce strategy can be built up, which, in fact, in the other range that we are talking about, the Zero Grey we're actually amalgamating to that space system, and, as an overall strategy, I think this is what we would have enough and more to play.

[Operator Instructions] We have next question from the line of Shirish Pardeshi from Centrum Capital.

On a slightly different note, and if I put a report card, not exactly the report card versus the time you have taken over, and when I look at the journey, you started saying the wholesale dependence is very high, and then we were trying to improve our system. So we did try to do brand sales operation to improve our coverage. And then you focused about 2 quarters before on -- from one brand, Almond Drops, to coconut. And then in between, we also have Amla. And now we are also talking about B2C. Now you always -- if I refer last 2, 4 con calls where you have used the strategy, processes vis-à-vis senior management, I think my candid view is that you have all the ingredients to show a better performance. However, the market conditions are not supporting. Now if I go back 4 years before, wholesale was a key component, and then we consciously cut the wholesale. And as we're coming back, wholesale is a key important channel. So one, the question is around how we should look at this company being a single category? From the hair oils, we had single brand. Now we have 3 brands. How do you see this company growing next 2 to 3 years? I mean that's the first question.

Okay. So Shirish, firstly, I don't think this attempt to come back to wholesale will be any of the -- something that we will be pursuing very, very aggressively. The overall strategy that we have stated upfront about 6, 7 quarters back, and that -- it will absolutely continue. I don't think there is any shift in our strategy in spite of this stupendous increase in raw material prices as well as the demand slowdown that we have. If we have to restructure some of these attempts to make a wholesale-heavy, single-brand company into something which is a little more multifaceted and with strength, it will take some time, and that journey is what we are monitoring ourselves also. So the entire objective of retail initiative, penetrating into wholesale as well as directly to rural, broadening our portfolio, getting into e-commerce, where we see the spaces are looking more democratized, getting into the international business, which will take up next year, these are all exactly the way we wanted to plan out. Yes, obviously, the financial numbers have not backed us given what we have seen, as I said, in both raw material prices and demand conditions. So this is something that we -- I think we'll continue with. I don't think we will change our journey or do any major reaction based on how the market conditions are. But having said that, I mean, wholesale has been one of our key pillars, et cetera. We are not going to just give up on wholesale. I mean that is something that is all that I was alluding to. Wholesale, we will ensure that whatever decent work that has happened in wholesale over a long period of year, that is retained, why we build strength. We will not give up on wholesale as one of the pillars and then start building other pillars. We are not demolishing the house to build another new house. It is something that we will continue to maintain while we scale up retail, rural and all the other things. This is how we would like to look at ourselves.

Wonderful. So you're sticking to the old stand. But one follow-up here. And then while discussing with the channel partners in wholesale, what we also have, the hypothesis, which is not -- over last 2 to 3 quarters, is that wholesale is becoming a very, very opportunistic. And traditionally, they were selling top 2 or 3 SKUs. However, the cash and carry is also affecting. So somewhere, the sense which I have gathered around last 2, 3 quarters is that consciously, the wholesale is cutting the inventory, which, at some point of time, by giving maybe a percentage or 2, we could lower the wholesale. But then consciously, the wholesale has come down, and -- because the retail channel is now getting more digitized or maybe cash and carry is effective. So is it a part and parcel that the trade is also having a structural inventory correction and which we don't know whether it will stop it at this stage or maybe going forward? It started from us because we tried to split the channel. Like the pandemic, the retail customers have moved from modern trade to e-commerce. Maybe physical stopping will come back. But consciously, the trade has cut the inventory. To what level do you agree or you would have seen or witnessed this phenomena in the trade?

So partly agree. I think you are quite right. I mean, in terms of trade reducing inventory, especially in the wholesale channel, clearly it's been seen. But having said that, some of the markets where wholesale is a pretty dominant and a very, very obvious way to do their business, let's say the more hinterlands, obviously markets such as Bihar, et cetera, I mean, you really cannot do wholesale, which is where we would really try to retain our strength while -- which is direct to rural as well as in terms of urban. Like most of the other competitors, we have been far more over-indexed in wholesale. That is something that we would like to reduce while maintaining the wholesale saliency in UP, Bihar. And it's more of a given and nothing else. But yes, inventories have gone down in the wholesale channel, and I think that is how the future will also pan out. I don't think that we cannot change -- those will change.

Okay. Just one last follow-up on this question. To what level we are drawing the wholesale contribution today? And at what level you are comfortable?

I'm sorry? Can you come again, please?

What's the current contribution from wholesale for us today? At what level are you comfortable?

So as of now, if you look at quarter 2 itself, the wholesale selling fee has come down from the mid-30s to about 23%. If I have to give you exact numbers, it is about 22.5% each for retail and wholesale and about 55% as far as the some stock is -- are concerned, which is the reason. So this is how the numbers are panned out, which are typically about -- if you'll remember, last time we had discussed, we were talking of 30% which was wholesale, 20% was retail and 50% rural. So that's how the numbers have changed. I mean rural was a little more, but -- yes, it's a little more.

Okay. My second question is on the price increase, what you mentioned.

Sorry, idea -- just to complete Shirish, ideally...

Yes.

We would prefer a retail and a wholesale in urban split to be more or less similar, which is what it is today but not this way where wholesaler has collapsed and retail has grown double digits. We can make it happen. We would like our retail growth to be much, much higher and the wholesale to remain about a single digit or mid-single digit or low single-digit growth so that at least we are able to get this balanced out, not the way it has happened to them. That's the way we would like to look at it in the future.

Sure. My second and last question. On the price increase, you mentioned that you have taken about 5% so far, and another 2% is going in the month of November. So cumulative, it would be 7%?

That's correct. That is absolutely correct, in the year.

[Operator Instructions] We have next question from the line of Rahul Ranade from Goldman Sachs Asset Management.

Just one quick question in terms of our value growth and volume growth. So if I look at it, the value growth, it is even lower than the volume growth for Q2, whereas we said that we've taken a 5% kind of a price increase in the ADHO part of the business. So just trying to understand then why is the value growth lower than the volume growth for the quarter.

Yes, 2 simple reasons. One is, obviously, as you have seen, that there is an inferior mix that had happened, which is where Amla and coconut have been scaled up. And that is what will continue to happen where we will be putting our volume growth a little higher. So as of now, for example, ADHO has a saliency of about 90%. Again, not the ideal way we would like to do it, ADHO going down as a business generator, but that's how it has turned out to be. ADHO is at 90% against the salience, which typically was about 92%. So this was one of [indiscernible] indexing, well, the overall index from the larger brands. So that has also had a positive impact on the value and a negative impact on the brand.

Yes. Sure. And just in terms of gross margin, so what will be kind of a sustainable level of gross margin? Obviously, if you look at it in the past, we have done significantly higher gross margin levels of 65%, 67% also. But now with, let's say, Amla and coconut being a meaningful part of the portfolio going forward, what would the gross margin look like on a sustainable basis let's say once the LLP and RMO prices cool off to more the variable kind of levels? But on a sustainable basis, how should we think of the gross margin?

So that's what we have been looking at. So originally stated the way we had planned out is basically looking at our gross margin coming to about 22%, 23%, which is actually what it is today because of the LLP and, let's say, LLP and RMO. But we were looking at the gross margin coming to about 22%, 23% and then slowly scaling up because the other thing that will also get scaled up is the expenses. The other expenses, et cetera, will get -- start flattening out as our top line keeps growing. So we were looking at our gross margin coming to about 22%, 23% and then slowly picking back to 24%, 25%. The 24%, 25% is the kind of gross margins we would like to -- playing with -- EBITDA margins that we would like to be playing with on an overall basis -- sorry, EBITDA margins. Because I would rather look at EBITDA rather than just pure gross margin play as such. Because if you look at even e-commerce brands that you have, you have very high gross margins, but then EBITDA will be lower because of the cost that we'll be putting in promotion and so on and so forth. So really speaking, it's better to look at the EBITDA margins rather than just sheer gross margin. Because if it is a single brand, single category, gross margins on a linear basis is easier to look at. But the moment you're looking at a play and a portfolio, it's the EBITDA margin that we would rather be comfortable.

Sure. Sure. And just for ADHO, what would have been the volume growth for the quarter? I think last -- we had a base of around 2% if I'm not wrong. And current numbers would be on that level?

I'm sorry, can you come again? What was that?

So in terms of volume growth for ADHO, what would that number be? Because I think September '20 quarter was a 2% kind of a growth if I'm not wrong. And so the current number is...

Yes. So there is -- actually, if you look at the overall number itself, it's a minus 4%. ADHO is also nearly exactly the same because there is not too much of a difference that happens. So ADHO is just a little higher than that number. So not really material difference as far as ADHO growth versus overall company.

Got it.

Significantly, if I had to just give a -- add a little bit of flavor to that, I think what we are seeing is all the larger packs, 100 ml and above, as a group has been doing pretty well. Those are all positive while the smaller packs is where the stress is, and that is also borne out by the fact that UP, Bihar, smaller-pack markets, the LUP markets, as well as the wholesale having brought us down. So the smaller packs is where we have lost out of it, while the larger packs still stood up well on a 2-year CAGR as well as on a 1-year growth basis both on a quarter basis as well as a YTD basis.

Sure, Sure. And the price increase, like when we talk about a 5% price increase through the year, it should be understood as a weighted price increase, right? It will be across the SKUs?

It is a weighted price increase, unfortunately, where the price -- where price bands are fixed like a INR 1 sachet, et cetera. So you can't really go down further on the packing of sachet. I mean with the 2.5 ml, you can't really bring it down further. So there, we have not taken a price increase. So in the larger packs, the price increases are more, which weighs it back to the percentage that we talked about.

[Operator Instructions] We have next question from the line of Shirish Pardeshi from Centrum Capital.

I have 2 questions in this turn. On a base of 5%, we have shown a decline of 6% last year, while I see that next 2 quarters, our base is also going to be very strong. I'm not saying the guidance, sir, but would you help me to understand how one should look at the performance? Because the 3 things which you have spoken is distribution expansion led by rural and sales operation, direct reach, wholesale might come back after the festive season if there is a demand condition which is going to improve, which is external, while we also see that you have gone from 1 brand to 3 brand. And you know your expansion strategy in the West and in the South. So maybe if you can then help us whether now already you consider 7% price increase which is there. But if you indicate what will be the volume growth and what is your aspiration level and where we can see this year-end. Or...

Yes, I don't think I can give you guidance on that. But I can say that some of the strategies [indiscernible] -- am I audible?

Yes, you are, sir.

Now there is a...

Sir, let me... Yes, sir, you may go ahead.

Yes, thank you. So Shirish, just so -- as I said, I would not be able to give you guidance, but I think some of the strategies that we put up in the month of October itself seems to be bearing fruit, and we see a really decent jump from what we saw in August and September as far as our performance is concerned. I think more or less, we also are clear how to be reacting to the marketplace in the months of November and December as the season comes up. So I think I'm pretty quietly confident that wherever the gap has happened in terms of the deep decline as far as wholesale is concerned, that will get neutralized to quite an extent, while all other initiatives continue in their -- so I am expecting a far better Q3 than that.

Okay. My second question is that you alluded, saying that [indiscernible] make up -- we have seen some pressure while Nepal and Bangladesh have done better. So could you spend a minute how one should look at the second half for the international market? And then I'm expecting that these lockdown issues and other things should be different from India.

See, our base is so insignificant. Most of the businesses happened more by default rather than by design. There is no intervention as such that is there in the international market as of now. Just now in the last 1.5 months, we have started working in these markets, and that's why in my opening statement, I said that you will see something of -- for us, we are talking about, as far as international markets, in the next year or so. At this moment, it is more downwards that is happening. And the reason for that is simple. Because with our company, which has been till now solely focused on one brand, as we are looking at expanding, we also need to be able to chew that we put on our plate. So how much we take on our plate is something that we need to be completely conscious of and ensure that those initiatives that we have taken up are actually starting to fructify. We have taken up an Amla, we have taken up coconut, we have taken up e-commerce, we have taken urban and real initiatives, as I said. I think -- and with coconut, we are looking at even the West and South. So this itself is something that we would like to stay on with for the next 2, 3 quarters, have some positive signs that we are already seeing in some of these markets come back to us while that e-commerce also keeps showing traction, and then we will start looking at further more. We don't want to take too much on our plate not only from the balance sheet and cash flow point of view but also from our own bandwidth point of view. I think we need to be a little careful on that. We don't want to make too many changes too suddenly.

Okay. My last question is on, again, Nielsen. And visiting on -- in the month of November, I'm sure you will have September numbers with you. What is the Amla growth rate in terms of volume, value for the quarter? If you can help me to understand. And what is our growth rate for Amla?

I mean, see, I've given you the -- our growth rate as well as market shares. And that would -- we have given some of your numbers. We have grown by volume almost 70%, and our market share has gone up from 1.7% to 1. -- 3%. 3% market share. So you can do the math backwards. so Amla has been growing. Amla has grown on a year-on-year basis. Marginally grown but better than some of the other brands, which have declined.

We have next question from the line of Rohan Samant from Multi-Act.

So on the margins, like in the past, the commentary that you have given was basically focusing on improving the absolute EBITDA rather than focusing on the percentage margin. So do you still hold on to that guidance over the next 2 to 3 years, that your focus would be more on absolute EBITDA rather than the percentage?

Absolutely. I think given the directional changes that we are trying to do and the initiatives that we are talking of, I think the overall play has to be where all the other cost elements of the company get neutralized. Like if you look at our company, one of the key discussion points that we always keep having is why is our employee costs so high? And that is mainly because while as a company you need to be able to fight and have strategic thinking capabilities the way some of the larger players have, but in terms of our size, when you put that as a percentage to our sales, obviously it will always look higher. Now that, if you have to neutralize and -- along with the manufacturing and the admin and everything else, if you have to neutralize, we'll have to look at the company being -- broad-basing the organization. Now broad-basing the organization, if you have to develop brands which bring in gross margins of the kind that ADHO brings, that would mean about a decade of investment in this kind of a brand, because that is the kind of equity you have to build up so that you can pull investors. So ADHO focus needs to remain. ADHO needs to be built. In fact, one of the first questions that was asked is when an ADHO focus cannot go on. Now that is something -- while there has been a bit of dropping of the ball in this quarter, ADHO focus will have to continue across all programs. I mean, for example, in this particular case, as I said, the low unit packs, the smaller packs have actually lost a bit, and that is something that we'll have to bring back very, very quickly, and that is what the focus has been. Other than that, another ADHO focus will have to remain where we get our EBITDA margins from. But overall, if you look at as a percentage, we would not want to keep at a margin which is at 28%, 30% or 33% EBITDA because then you will not be able to invest in anything else that you are looking to invest. So over the next 3 to 5 years, that EBITDA margin of 23% to 25% is what we will target. It might be at 23%. But that is on a neutralized and a normalized LLP, RMO as well as in decent market conditions. I'm not talking of very, very [ fallen ] market conditions but decent market conditions where the market in hair oils is growing at mid-single digits or mid-single digit percent.

Sure. And so basically, if you are looking at a 23% EBITDA margin, and in the past the base that we started with was much higher, so essentially your top line growth has to be at a very healthy clip as compared to what we have seen in the last 2 to 3 years. So that is something that you're looking at, right, in terms of...

Again, if you -- you will have to compare the basis a little more normalized manner. With the kind of unprecedented price increase that you have seen in LLP and RMO, the 23% is something that you are seeing today. If the basis were to be normalized, if the LLP and RMO were to be normalized, that this number of 23% itself would have looked 28%, 29%. That is because we have not really big time investment -- invested in some of large events. So that -- our own investment will also remain calibrated -- because of a pressure that we see in LLP and RMO, we will also calibrate our investment so that we don't have a big hit on our EBITDA margins as such. So there will be some dilution. But yes, in a normalized situation, these are the kind of numbers you would have looked at, at the 23% to 24%.

We have the last question from the line of [ Arvind Dutta ], an investor.

My question related to your long-term strategic plan from a 3- to 5-year perspective. Are there any plans to enter in other particular segments or you want to remain a single-product company? And the second part is that today, we are a INR 1,000 crore company, and if you have to scale up to INR 2,000 crores or INR 3,000 crores over the next 5 to 10 years, you will need to have a portfolio of other personal care products. You have the distribution network, so why not leverage by launching other personal care products, especially on an Ayurvedic theme? This is my question.

So no, absolutely right question, and this is something that we have been anyway exploring, and some work has already happened in this area. I mean if you have been tuned into our commentary, we have been looking at some of the extensions of our -- using our Almond Drops portfolio itself. I'm not sure still whether Ayurveda is somewhere. We will have the requisite strength to get in and whether our -- we would bring in that kind of an equity as some of the other larger, well-known brands, well, do bring in. So that is something that anyway we'll keep exploring. But yes, getting into some of the personal care -- adjacent personal care spaces is something that we are looking at, along with some of the completion of our hair oils as well as close -- adjacent hair care portfolio. So in the next 2, 3 quarters, you will see some of the more graded launches. Now why we have not gone too aggressive in launches, et cetera? Because we believe that we will have to invest in the brands rather than, let's just say, distribution network, take care of the brand itself. We have seen some of the large competitors launch a plethora of brands, and I'm presuming that their expectation is that distribution itself will pick it up. I don't think we have the wherewithal or the skills to do that. We would rather do it in a more calibrated manner as we see some of the other projects. We'll do it in a calibrated manner, and we would like to stay invested in some of the brands. So we have launched Amla, we have launched our coconut, we have launched our e-commerce range. And there'll be another few launches that you will see. And we'd like to remain there and keep grading ourselves based on what kind of money we make out of ADHO.

Ladies and gentlemen, that was the last question. I'd now like to hand the conference over to the management for closing comments. Over to you, sir.

Yes. So thank you so much for patiently bearing with us. I think as I said, this has been a challenging quarter both from the demand conditions perspective as well as in terms of where the demand has been distributed in. We have seen some bit of recovery happening in October, and we are also now also reacting to the marketplace to see where the declines are and what can be done as far as we are concerned. So in terms of execution excellence, our focus has been there, while on the long term, we are not going to really change any of our strategies going forward. So building of the team is already more or less in place as well as in terms of the areas that we have talked about. I would not like to repeat them, but those 3, 4 initiatives that we have put in practice, those we'll keep monitoring because we think as a company, we have to -- if we have to derisk ourselves with a single product on a predominant wholesale channel, we will have to build these strengths over the next 2, 3 years. And that is the direction we will continue to follow, and I think we'll see results come in slowly as the quarters go by. So thank you so much for patiently bearing with us and thank you for showing confidence. Thank you. Happy Diwali to all of you and your families and a very, very great, festive season to everyone. Thank you.

Thank you very much, sir. Ladies and gentlemen...

Thank you.

Thank you, sir. Ladies and gentlemen...

Thank you, sir. Thank you very much. Thank you, everybody.

Thank you very much, sir. Thank you to the members of management. Ladies and gentlemen, on behalf of ICICI Securities Limited, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.