Marico Limited (531642) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Marico Limited Q1 FY '22 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. [Operator Instructions] I would now like to hand the conference over to Mr. Saugata Gupta for his opening remarks. Thank you, and over to you, sir.

Good evening to all those of you who have joined the call. I hope all of you, your friends and family are safe and healthy. While COVID positivity rates in India have moderated to pre-second wave levels, the country, unfortunately, is still contending with nearly 40,000 new cases a day. I, on behalf of the entire team at Marico, would like to extend our heartfelt condolences to those who have lost their loved ones. Marico has remained committed to the well-being, health and safety of all its stakeholders. We are extremely grateful to all the frontline workers, including our sales and manufacturing personnel who are braving through this crisis. We believe vaccination is the only way to defeat the virus and revive economic activity. We have successfully covered almost all our members and their families through the -- at least the first round of vaccination drive and have extended the same to our business associates and third-party service providers as well. I will now take you through the quarter gone by and our outlook going forward before I leave the house open to questions. The quarter started on a good note, building on from the momentum in the last quarter. Consumer sentiment was reviving and there was a significant pickup in the daily routine activities. However, this recovery was stalled by the alarming surge of COVID-19 cases in India towards the latter part of April, which, unlike the first wave, reached even the rural hinterlands of India. While mobility was severely impacted in the month of May as various states deployed localized lockdowns and some of them continued even in June, the back-end supply chain was much more resilient and business continuity was maintained as retail shops were operational for restricted hours in the days. As lockdown measures and ongoing vaccination drives helped arrest the increasing caseload, we once again witnessed improving demand trends in India from June, and it continues in July. In our international business, we saw a strong broad-based recovery in Q1 relative to the COVID impact in these markets in the base quarter but there has been some impact of the resurgence of COVID in Bangladesh and Vietnam towards the end of the quarter. Coming to the quarter's performance, consolidated revenue from operations grew by 31%, with an underlying volume growth of 21% in domestic business and a constant currency growth of 21% in international business. We continue to see unprecedented inflation in key commodities such as edible oils, which rose sharply on a sequential basis while crude oil prices also surged over the last few months. This is probably one of the rare quarters in the history of Marico in the last 10, 12 years where we had exceptionally high consumption cost of all the 3 key inputs, copra, edible and vegetable oil and crude. Thus, gross margin remained under pressure in the quarter, but we are certain that it has bottomed out and will gradually improve on a sequential basis from Q2 and settle down in H2. The contraction in EBITDA margins in Q1 was partially reduced by operating leverage benefits. Having said that, ASP was up 27%, and we continued to invest behind our core brands and new launches in foods. EBITDA grew by 3% on a like-to-like and PAT by 8%. Reported PAT was down due to an exceptional gain in the base. The India business delivered 35% revenue growth with an underlying volume growth of 21%. As we had alluded to in the last quarter, we have corrected the historical skew between Q4 and Q1, which impacted the Q1 volume growth by at least 2% to 3%. Growth in core portfolio has also witnessed some impact due to the relatively higher caseload and extended lockdown restrictions in the South and West, especially Maharashtra, which are our core markets. More than 90% of the portfolio get market share on a MAT basis. Although the pandemic reached rural hinterland, rural continued to remain resilient and ahead on urban on a 2-year CAGR basis and exceeded pre-COVID monthly run rates despite a slowdown in May. With a normal monsoon focus and continued government stimulus, we expect this trend to sustain. The innate resilience in our operations reflected in the healthy growth of traditional trade in another exemplary quarter for e-commerce. Modern Trade posted a modest growth despite a low base because of, obviously, issues on attracting footfalls because of all the restrictions and some closures. CSD recovered sequentially and on a year-on-year basis. Parachute coconut oil, a healthy quarter with 12% volume growth and market share gain of 80 bps on a MAT basis. This was despite extended lockdowns in the core markets of South and West. Copra price was down 13% sequentially in Q1. And with supply outlook improving, prices are expected to remain range bound in the near term. For the full year, we expect it to be flat to very slightly marginally higher versus last year. The brand continues to see its equity strengthening the core and noncore markets, while actively driving the loose to branded conversion, we expect to grow volumes in the range of 5% to 7% this year in line with our medium-term aspirations. In the Saffola franchise, comprising edible oil and foods, we delivered 24% volume growth and 60% value growth year-on-year. We continue to expand the addressable market of Saffola. And with strong consumer trust and its association with health, the brand has effectively expanded its total addressable market with the back of a visible rise in consciousness towards eating right and the importance of building one's immunity. Saffola edible oil grew in low double digits, even on a strong base of 16%. Edible oil prices rose sequentially before showing signs of cooling off towards the end of the quarter, but it is going in a zig-zag way. For example, it has again increased a little bit in the last couple of weeks. We expect prices to be volatile in the short term with a medium-term downward bias. However, it will be imperative that we judiciously balance competitiveness and profitability of the franchise once prices begin to correct. Saffola Foods more than doubled with the oats franchise growing by 59% and the recent launches getting positive traction. Saffola Honey has reached a double-digit market share in key modern trade chains and consolidated its share in e-commerce above 25%. We're also now seeing a sequential scale-up in GT and have launched a 100-gram trial pack to expand distribution and aid trials. We are positive that the brand will clock around INR 100 crores this year in revenues. Saffola Mealmaker Soya Chunks has a good start in GT in West Bengal. It was extended to the rest of East and parts of North last month. It already has an all-India presence in MT and e-com has picked up a share of 14%. Just once -- my apologies, there was an Internet connectivity issue. I'll just start again. It has -- I was talking about Mealmaker Soya Chunks. It has an all-India presence in MT and e-com and has picked up a market share of 14% in Modern Trade. Saffola Oodles has also taken off well across channels. The brand is scaling up well in GT and MT, although the entire launch got delayed a little bit because of the COVID, and it's right now among the top 5 best sellers in pasta and noodles category on Amazon. We will continue to invest behind brand building distribution in GT and build on the healthy start in MT and e-com. Saffola Chyawan Amrut has not performed well as expected. We'll be revamping the mix and rejuvenating the brand over the course of this year, and we are determined to stay put and get sizable market share in this segment over the next 2, 3 years. Value-added hair oils grew 34% in volume terms on a weak base. Our portfolio has led volume growth in the category over the last year, has gained the highest share compared to peers on a MAT basis. All major brands in the franchise grew 20% plus. We aim to sustain this double-digit growth momentum over the medium term by maintaining a strong hold at the bottom of the pyramid, the mid-segment through right pricing distribution and brand building while investing to make inroads into the premium segments innovation. The premium personal care portfolio has recovered on a Y-o-Y basis, but has attained -- not attained pre-COVID levels. Livon Serums has led from the front and now has an exciting new look, while male grooming has still some way to go. We are optimistic that discretionary consumption will recover over the next 1 year and should be tracking growth over the pre-COVID levels soon. Moving to international. Bangladesh ended just shy of double-digit constant currency growth on a Y-o-Y basis on a strong base of 10%. The non-coconut oil portfolio continues to drive the diversification journey, with baby care and shampoo ranges along with the core hair oil portfolios tracking well. We will closely monitor the COVID graph and its impact on overall macros and we believe, like in India, our formidable franchise, which is 90% essential, strong systems and distribution reach in Bangladesh would get us through the challenges posed by the pandemic as we have done in India. The Southeast Asia business grew 16% in constant currency terms on a low base. The HPC category in Vietnam has recovered on a year-on-year basis, but still has been slow, while the food business has been trending healthy. There has been a sudden surge in COVID cases in Vietnam as well over the last 4 to 5 weeks. Given our portfolio is more discretionary, we expect business to be muted in the near term, but the medium-term drivers remain intact. MENA has rebounded well on a weak base, but we remain cautiously optimistic about the growth outlook. We'll continue to invest behind our brands and go-to-market initiatives as well as drive aggressive cost management to drive moving on efficiently. South Africa has come back well on a low base, driven by the health care portfolio. Unfortunately, there has been some political unrest in the country in July. We are cautious about the near-term outlook of the business, but we made positive on the core franchise of ethnic hair care and health care over the medium term. New country develop and export business continues to do well for us. In India, while there are apprehensions of the third wave, the company is equipped to tackle any disruptions in the business environment that may arise from the same. In the international markets, there has been a resurgence of COVID-19 in emerging nations of Asia, Africa and Southeast Asia. However, except in Vietnam, our exposure to the affected markets is not material. Our strategic priorities going forward will remain consistent. Our foremost priority is to maintain the strong momentum in our core portfolio while driving premiumization over the medium term. Secondly, we have a very exciting opportunity in foods in India, immunity and nutrition, where Saffola has a very great drive to win. We have internalized a choice-making and operating model in food that works. And we'll be aggressive in our bid to reach the INR 500 crore mark this year, which we are pretty confident about and build an INR 850 crore to INR 1,000 crore portfolio by FY '24. Number three, we are making steady progress in our go-to-market efforts in urban and rural. In urban, we are expanding our reach in the chemists and cosmetic channel, which is gaining salience during the pandemic, especially the chemist channel, while cosmetic will now recover. In rural, we continue to enhance our rural direct reach by expanding our stockist network by another 20% to 25% over the next couple of years. In addition, there is a renewed thrust on automation and analytics in the entire sales and supply chain network. Number 4, we continue to make investments towards enhancing our digital capabilities to stay ahead of the curve. We also have to accelerate our digital transformation journey by building a portfolio of 3 to 5 digital brands either organically or inorganically, with a combined turnover of at least INR 450 crores to INR 500 crores by FY '24. Beardo is tracking in line with internal aspiration and should exit the year at a run rate in net realization terms of INR 100 crores. The recent strategic investment in digital-first ayurvedic beauty brand, Just Herbs, presents a great opportunity to have a trusted natural all-around play with our growing presence on digital platforms. And we will continue to add to this portfolio both organically and inorganically. Next, while discretionary personal care currently contributes less than 5% of our domestic business, we are looking forward to rejuvenating our play in this space and building these categories into growth engines of the future. We believe Livon and Set Wet franchises have legs to grow substantially as consumer sentiment normalizes. Lastly, our rigorous efforts towards managing costs and building a simpler and more efficient structure have been playing dividends. We'll continue to drive this approach sustainably as the ongoing crisis has only reinforced the value of agility and nimbleness. As long as we keep getting these fundamentals right, we should be able to tide over transient headwinds and deliver 8% to 10% volume growth in India in the balance 3 quarters, sustain market share gains and double-digit constant currency growth in international business also over the medium term, while inching our operating margin above the threshold of 19%. I would like to close my comments by sending a vote of thanks to all our Marico members and associates for exhibiting tremendous resilience and grit through these challenging times. We hope that the world is moving closer to overcoming the pandemic and remain optimistic about the future as always. Thank you for your patient listening and we'll now take your questions and apologies for the break because of an Internet surge.

[Operator Instructions] The first question is from the line of Arnab Mitra from Credit Suisse.

My first question was on this ambition of INR 450 crores to INR 500 crores in digital-first brands by '24. If you could just talk about what is your current portfolio other than Beardo in this area. What is the run rate that you currently have here? And incrementally, the gap between your current run rate and this, would it largely be personal care? Or do you have other categories in mind also in this space?

So if you ask me, currently, we have Beardo, which is 100%. We've just acquired Just Herbs. And obviously, if we look at the brands which are a momentum of growth, they actually grow 50% to 100% every year. We also have 2 brands in the internal, which we have started now, which we will start investing behind sometime in the second half of the year, which is Pure Sense and Coco Soul. And we are open to looking at food because we have prototype ImmuniVeda, which is some of the immunity brands. So I think the way to look at it is that, obviously, everything will not succeed. But through a mixture of organic and inorganic, we had first -- the first thing which we had said that we must have 3 brands which will hit INR 100 crores by '24, '25. And we believe that given the track record of Beardo and some of the brands which had crossed INR 200 -- I mean, INR 100 crores and some will be sub this one. So I think it will be a portfolio of 5, 6 brands maybe, at least 4, 5 brands, which should add up to INR 450 crores, INR 500 crores. And I think the Beardo example has given us confidence of having an operating model of running digital brands independently of the mother ship. Also, with 3, 4 brands, there'll be significant synergies, whether it's with the tech stack, whether it's with the CRM, whether it's logistics and a common playbook across brands and an operating model. And I think the other interesting thing is that Marico is a strategic, is attractive given the experience in Beardo and I'm sure in Just Herbs, for any startup player also to discover and grow with us given the success of Beardo. So we believe that this is one space that will balance the -- while food will give you scale, this, after some time, will give you a certain reduced scale, not like the scale of foods, but also will give you far higher margin and, certainly, EBITDA. Because we believe Beardo also is in a position to actually start delivering profit sometime by Q3, Q4 this year itself.

That's helpful. My second question was on VAHO and Parachute. Between both of these, even if I adjust for that 2%, 3% adjustment that you have done now that the 1Q is not very big compared to what it used to be in the past, these seem to have flat volumes versus 1Q FY '20. In fact, VAHO is probably slightly lower than 1Q '20. So is this something that concerns you? Or do you just see this as a May impact and the run rates in June, July are giving you confidence that you will be able to, let's say, do a double-digit growth in volumes in VAHO in the next 3 quarters, given that this quarter was more like a flat on a 2-year CAGR?

I think the way to look at it -- I think -- see, as I said, that if you look at, overall, the previous year, that if we look at FY '19, '20, up till there, the Q1 had a huge skew, okay? Number 2, obviously, there has been a, impact even in May. But the way to look at it is this, if you take Q2, Q3 and Q4 of last year, which is FY '21, and look at that run rate and look at the Q1 run rate, you will actually see a double-digit growth in both VAHO and PCNO. And that's a better way to look at it because that gives us the trend. And if you extrapolate the trend, that Parachute is very much in the run rate terms, if we continue with this run rate, to deliver 5% to 7%; and VAHO delivering double-digit growth for the balance 3 quarters. And I think the data is available with you, you said Q2 to Q4, and that's the better way to look at it.

The next question is from the line of Abneesh Roy from Edelweiss.

My first question is on Saffola edible oil. So one is, if you could give us the value growth? Second is, if I see 1 year back, the non-premium edible oil competitors would be INR 80 per liter, now it is INR 160, INR 170, while if I see, optically, now Saffola is also pretty close to that number. So you must have added a lot of new customers. I understand 450 gains is gain in market share in the super premium, but any sense on how much new customers you would have added in the last 2, 3 quarters? And when deflation happens, because we always see inflation and then deflation in this category, how would you retain those new customers? Any sense you can give on that?

No -- so I think we have given you a combined growth of the Saffola franchise because we are looking at the Saffola franchise on its totality. If you look at the growth of Saffola, around 50% to 60% has increased through penetration and around 40% has increased because of existing consumers consuming more a share of requirement at the home. The RPI, which is the relative price index, of Saffola is to this one, the absolute price was -- has stayed constantly around INR 50. You have to look at INR 50 [ to the ] outlay. Because the current price of Saffola is INR 215. So therefore, in outlay terms, per liter, it hasn't changed significantly. In percentage terms, it might have changed. But when people -- consumers buy, suppose they buy, on average, 3 to 4 liters and a heavy consumer buys 5 liters, they will look at an outlay. So in outlay terms, whether in the pre-inflation and the post-inflation, the number -- I mean, incremental outlay to buy Saffola hasn't increased -- I mean, hasn't decreased substantially. So I think we have to -- as I said that as the deflation starts, we have to also manage both the volumes and the entire profitability because we'll also need to regain some of the profitability. But we believe that at the end of the day, as long as the RPI or the relative price rupees, this one stays constant, there is no -- there's not going to be significant erosion of consumers.

My second question is, again, on digital startups. So one is, is there any ability to do some of those stuff in your existing business in a big way? You discussed some of that. But are there big learnings? Second, any sense you could give us on current gross margin, EBITDA margin for Beardo? And from a 3-year, 4-year perspective, if you could discuss the marketing plan and any clinical distribution plan for Beardo especially?

See, I think one of the biggest learnings is that digital brands need to be -- they need to work independently in a far more start-up kind of environment, which we have tried to recreate and that's why even today, Beardo operates out of Ahmedabad. And even some of our digital brands, what we call Engine 2, they stay separate from our core business in terms of people, processes and other things. Because -- having said that, there is a lot of learnings that have happened in terms of digital capability in our core brands and especially brands which have a significant share of digital. And in fact, we do internally measure and there's a significant process in which we measure our digital capability and our digital state of our brands. And therefore, I think we -- this cross-learning helps. At the same time, there is also, as I mentioned, there could be synergies which are available in terms of growing these brands. Now we would like to obviously grow Beardo first, completely, full potential in both D2C and e-commerce. Before COVID hit, there was this one on the salon channel in Beardo. And I think we will try to ensure that -- and maybe there is an opportunity in Modern Trade, but we would not like these brands to get into a mass GT. Having said that, I mean, there could be a potential in premium cosmetic outlets for a -- very, very premium cosmetic outlets for brands like Just Herbs. So that's the broad thinking.

And any sense of gross and EBITDA margins?

No, we would not like to get into those details, please?

The next question is from the line of Percy Panthaki from IIFL Securities.

My first question is also about the digital brands that you have been talking about. If you could just give me some idea as to what is the route to market for this within digital? I mean, is it going to be -- I mean, of course, it will be a combination of everything. But if you can give some idea as to how much of it will be direct to customer; how much of it will be through marketplace aggregators, et cetera; and whether the mix that you have today is what you are targeting in the future also, the same mix or will it change towards one or the other channel.

So I think -- see, let the market evolve. It's very -- and one of the beauty of the start-up things is unlike my core, I don't have a definitive 3-year plan. In fact, to give you an example, I just review these businesses just once in a quarter because we want them to work like entrepreneurs and work independently. Having said that, I think right now, Beardo, broadly, if I look at the total e-com business, it will be around 50-50 D2C and marketplace. But that again, it depends on the brand, depends on this one. So there could be brands which are more marketplace, more D2C. There's no fixed formula of it. See, there's a unit economics. There is -- and therefore, wherever there could be certain brands which are almost like exclusive and does far well with one partner than the others. So I think there is no fixed formula. I think as long as there's a unit economics in each channel which works, I think it's -- that's the way to go about it.

Sure. And would you be able to give an idea as to what is the total size of these 4 brands as of FY '21 or rather exit FY '21?

No. I think, as I said that -- all I can say is that Beardo is going to hit an exit run rate of 100.

Combined together also?

And we have 2 aspirations. One, can we have at least 3 brands hitting INR 100 crores, and using the portfolio can we go into INR 450 crores to INR 500 crores. But I think, definitely, let -- by the end of this year, we'll give -- we'll be able to give you a fair idea of broadly where we have reached.

Sure. But, like, currently, apart from Beardo, the other 3 brands are sort of very small. Would that be a fair assessment?

I think Just Herbs is moderate, the others are small, yes.

And any information that you can share on Just Herbs acquisition?

No, I think -- whatever, I think, we have had a press release and all I can say is that this is a brand which is well spaced in reasonably mass premium ayurvedic, this one, brands, which is in the area of clean beauty. And we believe that there is enough synergies between Marico and this one. In terms of digital capability, it's -- it has a good high -- and in terms of digital capability, it has had good product scores in some of the marketplaces. And I believe that just like Beardo, it will be a mutually beneficial relationship. And the promoter will continue to be involved in the business over a definitive period.

Second question is on Saffola edible oil. You've done a decent volume growth there despite a fairly high price increase. So just wanted to understand what has changed there versus earlier, where earlier, the growth was a little volatile and a little below what it was today. Is it just the pandemic that people are sort of shifting consumption from out-of-home to in-home, which has led to this growth? And once the out-of-home consumption picks up, on a higher base, the growth will revert to a normal mid- to high single-digit volume growth? Is that how we should look at it?

If you look at -- firstly, I think if you really look at it, I would assume that Q2, Q3 and -- definitely Q3 and Q4 last year was also normal, with a lot of people going out and everybody eating out and Saffola continued to deliver double digits. So if I look at the breakup, and that's why I gave you the breakup, that 60%-40% could have been 63%-37%, 60% as of the incremental, this one has happened because of increase in penetration and 35% to 40% of the incremental volumes has happened because of people, existing consumers consuming more or existing consumers increasing their share of requirement of the household. So I think Saffola is -- if you look at even history, and the reason I'm talking about -- if we look at the '17 to '20 where it is seen as inconsistent; if you take out the GST quarter and the demon quarter, actually, with the CAGR of Saffola, and Pawan can add, if I'm right, is around 7.5%. So it was not that bad. It was just that -- I think it was a little volatile, I would say. So I think that has increased to double digits. Having said that, I think we will be happy if Saffola -- since we want to also manage, and once the deflation cycle starts, we want to retain a little bit of our margins, we believe that we will be happy to get, as a base case, a high single-digit growth.

[Operator Instructions] The next question is from the line of Avi Mehta from Macquarie.

My question was on the RPI for Saffola that you were kind of -- is it fair to kind of -- what I took away is that you would look at it from a constant currency basis as in absolute rupees value rather than a percentage basis as the deflation cycle or whenever the deflation cycle kicks in?

No, it's a factor. But having said that, what happens during inflation, that factor goes down. During deflation, the factor goes up. Having said that, we try to -- just like Parachute, we try to create the absolute outlay within a band. For example, per liter, it could vary between INR 50 to INR 60 per liter. But you're right that during the inflation, it goes down tad a little that factor, while -- during deflation, that factor goes up a little in terms of this one. But the band is kept within say INR 10, INR 15. It could be anything. I mean it could be INR 50 to INR 60, INR 45 to INR 60, but there's not a very wide band. We keep that in play because that's the outlay. So you are right in terms of absolute percentages. When there is significant inflation, the absolute percentage margin goes down. When there is deflation, because of the numerator -- sorry, because of the denominator effect, the absolute percentage margin goes up.

Okay. So the difference percentage divergence also between -- would also kind of change effectively dependent on where the -- there is a deflationary/inflationary cycle, that is how...

Yes. Because -- if it pure deflation, I won't keep -- the gap might not be INR 60, the gap might be INR 40, INR 45.

Okay, sir. Got it. Clear. Sir, no, I was trying to link it up with the 3-brand strategy that you have kind of evolved, which is the Active -- and is that -- are those gaps also something that you are kind of -- when you talk about RPI or was it just the entry level that you were talking about?

No. So I think there is a pricing strategy. Having said that, all our focus is actually towards growing Gold and Total. Active and Tasty are there as an entry point. But in terms of focus on investments behind driving growth, and that's why the growth is happening, the significant portion of the growth actually is happening in Total and Gold. That is our focus area, because that's one, right, gives you higher realization and higher margins.

Got it, sir...

And the role of, even, Tasty is just to give an offering so that people who want to get into the brand has an entry point in this one. But these are the brands we don't invest behind because [indiscernible] than this one.

Okay, sir. And sir, on the digital brands, I just had a small question. You did kind of allude towards Coco Soul being one of the brands that would be digital. Could you kind of share in that experience, is the playbook very different? Because my understanding was that Coco Soul is largely an MT-driven brand, or e-com MT-driven brand and not necessarily D2C.

No, no. So okay, let me just give you a perspective. Coco Soul was originally prototyped as a virgin coconut oil brand in MT. But now what we have done is we believe that coconut oil, if you look at virgin coconut oil, it's a very exotic thing in the West. It's just like Yoga and turmeric latte and anything that comes back from the West. What we are doing is, now we have converted this and we have actually test prototyped in Nykaa, we are prototyping, on a personal care brand, based on virgin coconut oil. And this is a virgin coconut oil based, the entire personal care range. So we have just tweaked that entire mix to something different, started off as something different, and this has moved to something different.

Okay. Sir, let me rephrase it. Would you argue that the playbook would be very similar? I understand with personal care, but do you think that the playbook for digital brands differs a lot between foods and nonfoods?

Absolutely.

I mean, I was recently looking at honey. I know it's not exactly the same, but that -- if you could kind of give from that perspective, how do you -- and that then kind of boils down to what are the kind of brands that you're looking when you look for acquisition or what kind of brands would you kind of consider? Is this only like honey that you [indiscernible] or something very different? If you could help us understand this better.

I didn't get your last thing like, what you said?

Like honey. So is it like honey or is it like...

So honey, has nothing to do with Modern Trade -- see, just to give you a perspective, honey as a category, Modern Trade and e-com anyway contributes to 40% like Saffola and -- maybe for us a little bit. But just to give you -- we sell substantial amount in GT. So food -- so I think the 2 different ways of looking at it is that there is -- if you want to create a digital brand, personal care, unit economics works far better simply because you need an average order value or RSP, the selling price of at least minimum $8 to $9, which is $500 -- $500 to $600. Usually, personal care is high GM and high ACOS. Food brands, operationally, digitally can be successful only there is a very, very high margin. So food brands usually are far better served if they go brick and mortar and definitely goes into specialty food and Modern Trade outlets. Versus personal care, you can actually survive on a D2C plus marketplace model.

Okay. So would it be fair to read them, given we have been kind of looking at this profitability lens as well that your focus would be largely on the personal care segment when you say digital...

On digital, yes. Absolutely. Absolutely. You're absolutely right.

The next question is from the line of [ Nitin Jain ] from [ Fairview ].

I have just one question. So traditionally, we have seen that in the D2C market, while the margins are strong, scalability is always an issue. So how is the company looking at addressing scalability in all the D2C brands that it is acquiring?

So if we look at some of the successful big brands, I think they have been able to scale up. Having said that, obviously, one of the reasons we are -- as a strategic, there is to offer the next level of distribution, which is -- which I talked about, which is Modern Trade, which is specialty, in the case of food, specialty food outlets; in the case of this one, chemist and cosmetics, where personal care brands are sold, and some brands can also move to the salon. So obviously, that's the route to scalability. But as I said, I think our aspiration right now is to cross INR 100 crores, which can -- I mean, for example, Beardo is, today, 90% on digital, and it is slated to cross the INR 100 crore run rate. And I think INR 100 crore -- yes, the INR 100 crores to INR 500 crores journey may require moving into a brick-and-mortar.

The next question is from the line of Harit from Investec.

I just had 2 questions. You mentioned -- you typically mentioned the margin band in the previous quarter saying that it would be in the 19%, 20% band, probably at the lower end, given that you had such an inflationary quarter and yet managed a 19% operating margin for the business, I mean, is there a possibility of upside, given business recovers back potentially, especially on the inflation side?

So I think I'll tell you the reason. Because ultimately, it's not just the actual price but also in consumption terms. So if you look at the edible oil, it's still volatile. While it went down, it has again gone up. So I think things will settle down much better in the H2. So I would say, rather than trying to say something or commit to something in Q2, I think things will gradually settle down into -- in H2, where we should be in a better position to manage the margins. Also, what will happen is that you must realize that one of the things that happened, because of high inflation this quarter, we had operating leverage. The corresponding inflation also in Q2 is slightly lower.

Right. Right. Fair points. The second part is the international margin performance, and I'm looking at more like a gross margin performance. And the impact there has not been so severe. So is that the difference -- because we also have copra prices having a large impact because Bangladesh is a large copra RM business for us. I just wanted to get a sense from you, is it that the only the major difference between international and India is the edible oil side, and that's really the big difference on the gross margin?

So I think 2 things. One is the edible oil. Second thing, as you know, that India doesn't allow import of copra. But in the international business, the copra is sourced and the difference -- sometimes, there is a difference between the copra prices in India and copra prices internationally.

And also if I may add, Harit, while internationally, 50% comes from Bangladesh, and in balance, 50% of the geographies, we haven't seen this kind of inflation.

[Foreign Language] Vietnam and other thing is more personal care, 100% personal care. So there's no inflation hit.

And also the prices -- the difference in the prices for Bangladesh and India is slightly different. So it wasn't that high as we [ experienced ] in India.

Got it. I was just asking from the lens that while Bangladesh is 50% of revenue, it's a much higher proportion of the EBITDA internationally.

The next question is from the line of Rakesh Roy from Indsec Securities & Finance.

Sir, my first question is regarding, do you see any, sir, near-term headwind in supply chain or demand side, especially in South India after rise in the [indiscernible] cases?

No, actually not. I think as I said, that while last year we were caught unawares, I think, because of that lockdown, I think our supply chain, the entire capability in terms of, also, all kinds of black swan scenarios, I think we have become far, far agile in terms of supply chain management. The second thing, as you know, that in terms of our own and our extended third party, including all the -- we have been able to -- we should be able to complete vaccination by September 15. And therefore, including our associates and everybody, we should be in a position to be fully vaccinated amongst those who are eligible. And I believe that we will be able to cope up. So as I said, I think there are 2 things that we have seen from market to market. First principle is the strong gets stronger, weak gets weaker during any such disruption. The second thing is, I think, which is very important is what portfolio do you have. If you have a portfolio which is much more essential, then the consumption doesn't get impacted. And if you are strong, if you have systems and processes and strength, I think the coping ability always is far higher. So I think given this 2 contexts. And that's why we are far more confident now that there is a COVID surge in a country like Bangladesh, where both those things play out, I think we have a very, very strong playbook right up from supply chain, distribution, go-to-market, managing costs, all are in place.

Yes, sir. Sir, my next question is, how is the demand scenario in rural India in Q1? And how do you see in the future also?

So I think we haven't seen any dip, although I must say that this time, what happened was the -- there was an impact of COVID in the rural hinterland. The only other difference that has happened, and I told you is that if you noticed last year, the South, especially the rural markets, are completely unaffected. This time, the South markets were affected. In fact, last year, the South -- actually, South rural, in spite of a huge impact in other markets was almost clocking at the standard run rates of the previous quarter. So I would say that given that the monsoon is good, the entire government direct benefit transfer continues to do well and if vaccination rates and there is no major third surge, we believe that the rural consumption will continue to be reasonably buoyant.

The next question is from the line of Latika Chopra from JPMorgan.

Two questions [ intimately ] from my side. The first is, you've mentioned about aggressive cost management targets in FY '22, any qualification you would like to do in which areas these cost saving targets are?

So we started the process last year, where we actually did anything between 150 to 200. We continue to do that. Having said that, I think the 2, 3 broad areas of where we have managed, one is, of course, we continue to hugely use analytics and manage -- in resource allocation, in both sales and marketing spends, we have done a revenue management exercise. We have done a cost to serve exercise, and therefore, that is one big area. The other area is in the entire area of inventory, working capital, and we will continue to focus on driving -- even we have made good strides. But having said that, there's still a journey to go in terms of the entire inventory, write-offs, working capital. We continue to operate with a far lower number of SKUs. During the last year, we reduced 26% SKUs and we are ensuring that for every time we have a far more strict protocol of adding SKUs. And for every SKUs getting added, we are also ensuring -- because there is a beauty of simplification. The third area is, I think, the entire -- some of the structural changes -- even after we get fully vaccinated, we'll move into a hybrid way of working and a different operating model, and that will also ensure a structural saving of costs. So all these 3, I think this one, in addition to that, we have done a cost transformation exercise in some of our international markets, including Vietnam, Egypt last year, where we continue to get accruals. And we are now doing one cost transformation exercise in Bangladesh.

Sure. I also wanted to check, are these cost savings in absolute terms or as a percentage of revenue going to be more than what you achieved in FY '21 or FY '20? Any [indiscernible] quantification, if possible?

So FY '21 was a onetime far higher one, because there was structural -- significant structural and there was also some onetime savings. For example, if we look at a lot of fixed overheads had got saved in quarter 1. So I would say the absolute quantum will be a tad lower because we also started a significant exercise in Vietnam and Egypt last year. So in terms of accruals, it could be slightly lower.

Sure. The second bit was on the foods portfolio. You have put out a target of INR 800 crores, INR 850 crores. So apart from the existing new brands that you've talked about, are there any plans for adding more to this portfolio over the course of next 3 years?

So if you look at -- okay, let me just first talk about what is existing. I think oats -- the penetration of oats is still in single digits. And therefore, there is a huge opportunity to continue to drive penetration of oats. And the good thing is that while we have added 3 more to the foods repertoire -- 3 more categories to the food repertoire, oats continue to grow. The second thing is, obviously, honey will continue to grow market share. There is -- that's a category which is also expected to grow in double digits. And once we cross the INR 100 crores, there is an ambition which we will continue to drive this one. Third, nuggets, this is interesting because we believe that protein as a market is going to -- I think there is significant opportunity. It's a INR 900 crore branded market. There is an unbranded market, too. And also the fact that there is opportunity to value add to that market. Lastly, Oodles. And again, while we are not competing at the mass end, we believe that we are offering a differentiated offering. And given the size of the market, even if I get 2% to 3%, that will be a significant size. So I think all these, which is honey, Oodles and soya chunks are potential INR 100 crore opportunities. We have to do something about Chyawanprash. We will see that in the next couple of months. And we believe that is going to work. And maybe we would look at exploring 1 or 2 categories. Out of which one category will, if not everything, have success rate. But yes, you might see a category added.

The next question is from the line of Krishnan Sambamoorthy from Motilal Oswal.

Yes, Saugata, I got dropped off from the call. So apologies if this has been answered already. This is on the current incumbent premium personal care brand. Just like you stated, outlook on FY '24 for foods and digital-first, could you also share some outlook here? And in view of the opportunity that online is providing, could you also have a sharper growth on for the likes of Livon and Set Wet?

So ideally, we would like Livon and Set Wet to go into 20% plus. I think that's the broad aspiration. I think -- so out of which, I think, Livon is just about reaching pre-COVID levels and we are getting that growth. And I think Set Wet is something which we still have to do. The difference is, male styling, a lot of usage happens when guys go out. Styling the hair happens when you are actually going clubbing, you are going out, you're going to college. And thus -- while in the case of serums, it's giving a salon-finish hair. The impact has been less. So I think while Livon Serums have recovered, the styling part of it is yet to recover. And I think the first port of call is, can we start getting 20%-plus growth? Because as you know, the business model of this one that -- we need -- like we need to grow VAHO by 10% plus. We need to grow foods by at least 40%, 50% every quarter and then maybe move to 30% over the next 3, 4 years. I think this is -- these 2 brands need to definitely grow by 20% plus. And therefore, that's our aspiration. And yes, we haven't -- there is a significant opportunity, you are right, that in terms of e-commerce and digital, given our new capability, there is an opportunity for a brand to grow. But to me, the bigger growth is on penetration, because whether it's Livon sachet or the Set Wet INR 10 pack, there is enough opportunity to drive penetration and not just grow at the top end.

The next question is from the line of Abneesh Roy from Edelweiss.

Two follow-up questions. One, of course, is on the refill. So you have a good presence of Modern Trade in normal times for some of your brands. We have seen one of the Indian FMCG company come out with a refill for 3 of their brands, which is a global company with an Indian subsidiary. So do you think, one, this will work medium, long term. And second, does it make sense for Saffola, especially, to do this at some stage?

So I think the way I look at it is that as far as -- we have a significant program on driving sustainability and our thing on packaging and reducing plastic and obviously, responsible end use. Different organizations do it in different ways. And as you know that we enjoy a significant rating on ESG. Recently, in the CRISIL rating, we were the #1 in ESG amongst all FMCG companies. And therefore, we will continue to have a strong program in terms of plastic usage and our packaging and responsible usage also.

And on the new product funnel, will there be acceleration going ahead? You already have a lot of innovations in the market currently and good growth potential there. But if you could discuss across the Indian portfolio or the international, in terms of pipeline, is there going to be a lot of new product going ahead in the next 1 year time frame?

So I think we want to do a few things, but a few things. Well, we don't believe in launching 30 things and trying to add to the revenue because someday it catches up with you. I believe the 2 fundamental things we are currently doing is as follows: In India, we have done a significant work on expanding the total addressable market in Saffola. And we have shown that it is a much better route to grow than trying to do small, small, 30 small things and trying to grow. And we don't -- we believe that that might show aggression and agility, but this is a far more long-term sustainable way of growth. As far as Bangladesh is concerned, we have now experimented and we have proven that Parachute Advansed has a route in terms of total addressable market, we have launched shampoos. We are doing well in shampoos. We are doing well in baby, which is Parachute Advansed and those just for baby. And therefore, I think these are our entire -- and similarly, we have another focus area of creating a portfolio of digital brands. To me, these are the 3 first areas which will continue. The other one where you can see some action is, as you know, in value-added hair oils, we are far higher share in the base and not much in the top end with things like hair fall and other things. That is one more area that could be seeing innovation.

And sir, last question on oats. So we have seen extremely good performance of value-added masala, over 94%, 95% market share. So my question is within oats, how is the flow between the plain oats to Masala Oats? So is Masala Oats now gaining share every year, and would you see that continuing? Because plain oats also, clearly, penetration is quite low. Any comment on that?

So I think, initially, we focused all our energies behind driving Masala Oats because it was value added. Our job is actually to drive penetration and not market share. Market share is incidental. Having said that, today, I think an equal growth that comes from plain oats, we believe that as food habits are changing, and this is an opportunity for plain oats to grow. But having said that, if you were to ask me plain oats, the opportunity will be a mixture of market share and penetration. Indians like far more savory food. And number 2 is Masala Oats is -- we have been able to move Masala Oats from breakfast to in-between meals where the total market size is far higher than breakfast. So I would think that it's a two-pronged strategy having said that, but I think Marico has a singular hand at task of driving penetration of Masala oats. And how does it get a higher share of plate or share of wallet amongst all categories that exist in the in-between meals, healthy in-between meals offerings.

The next question is from the line of Kunal Vora from BNP Paribas.

Sir, on international, you mentioned that there are certain headwinds in markets like Bangladesh, Vietnam, South Africa. And your base going forward also is high compared to what you had in 1Q. So would double-digit growth, which is a medium-term target, be difficult to achieve for the rest of the year?

Actually, Q2 was a single-digit base, Q2, Q3, last year anyway. So let me just address it differently, okay? First of all, our biggest contributor is Bangladesh, and I told you about Bangladesh has an Indian model, where 90% of the categories we sell are essential and day-to-day items. Number two, we have actually even more strong brands and strong distribution in this one in Bangladesh. So unless -- and while the COVID surge is there, we believe that we have the wherewithal, and given all the learnings of India, to replicate that model in place and to deliver that double-digit growth, which we are talking about. The second thing is in Southeast Asia. Fortunately, our entire exposure is only Vietnam. We don't have businesses that much in Malaysia and Indonesia. In fact, Indonesia is far more affected than Vietnam. As far as Vietnam is concerned, we believe that things should get under control. It's a country where there is significant amount of government -- in terms of government driving controls and doing lockdowns. The citizens are in terms of -- there is a huge amount of discipline and consciousness. And usually, we -- and of course, vaccinations have started. So we believe that this kind of surge is, it's a 4-to-6-week phenomenon. Having said that, obviously, there could be an impact this quarter because a lot of our portfolio is discretionary, especially males. Male shampooing is something, or male styling, it's a little more discretionary than some of the portfolio in Bangladesh. As regards South Africa is concerned, yes, there was some unrest. Things are normalizing, and we think we should get back on track given the fact that the business has been on a momentum. And Middle East, we are chugging along with a double-digit growth. So if you add everything all together for the balance year, double-digit growth, I think, possibility is fairly, fairly confident at this stage.

Sure. Okay. Second and last question about your pricing strategy going forward. Assuming RM price cools off, like you've seen for copra to an extent, which are the segments in which you will be open to reverse the price hike? Like it looks like in case of edible oil price hikes, like price cut is a possibility, while Parachute, it might not be? So just your thoughts on what can we expect in pricing going forward.

So Parachute, as I said, that copra is going to be inbound. So I don't see any pricing action happening as far as food is concerned. I think Saffola as well when -- see, right now, the prices are going in as exact manner. It went down for a couple of weeks and has gone up. So once we see -- and as you know, that we don't price it like a commodity where we have -- I mean, we can't do price changes every week or something. So what -- as soon as we see our trajectory going, which is in terms of directionally, certain that this will go down, we might take price drops. We will have to take price drops.

[Operator Instructions] Ladies and gentlemen, we take the last question from the line of Tejash Shah from Spark Capital.

So my question pertains to D2C brands that was discussed at length today. So -- and then the question is based on assumption that perhaps D2C brands have a higher share of millennials or we are largely driven by millennial consumers. So Saugata, just wanted to understand what is the problem that D2C brands are able to solve for millennials in terms of -- is it that the channel is of preference there? Or is it the brand resonates more with the millennial consumers? Or they are genuinely solving problems, which perhaps incumbents or established brands are not able to solve?

So I think it's a combination of 2 things. There are certain brands which obviously cater to the untapped or unmet need. The second thing is, I think -- if we look at some of the brands, there are 2, 3 routes. One is an unmet need. Second is they have been able to make a hero ingredient, which using content marketing, using very strong digital marketing capability to stand out. I mean, if you look at globally, I mean, there is a brand call in history which started off with a Jeju volcanic cash, it's a product. If you look at virgin coconut oil in U.S., I give you an example of a simple haldi doodh, which has come back as a turmeric latte. I think in India, you have seen examples of 2 categories -- 2 ingredients, which have suddenly become heroes thanks to great digital marketing, social media marketing and everything else, which is onion oil or apple cider vinegar as examples. Or even today, aloe vera or sometimes things like -- if you look at some of the categories or some of the products which are successful in the West or in the case of styling in North Asia, like Korea and Japan, and they become very, very successful. So I think charcoal, activated charcoal, who would have known about activated charcoal will become suddenly, [ orange ]. So I think they are able to singularly -- and also some of the brands stand for something. For example, it could be Clean Beauty. It could be stands for free-from. It could be on sustainability and a lot of millennials believe in that. And I think that's how these brands develop also studied. And I think it's an inspiration for a lot of personal care D2C brands. There are 2 brands which I personally admire like Glossier and Drunk Elephant. These are U.S. brands, and they are real fantastic cases of digital marketing. So I think the capabilities -- they think differently. The kind of people who work on those deals are completely different. They are not these -- the traditional what I call professionals who run large companies, who run large these ones. So I think it's a different model. It's a different kind of people, different processes. So -- and as I said, that's why we are deliberately keeping them completely different. We don't want to Marico-nize that business.

But do you also see this as some fatigue of old brands? Because, let's say if we would have done any of this innovation with our existing set of brands, if the acceptability from millennials or young consumers goes down versus some of the new age, catchy and rising who would do almost the same thing, which perhaps we could have done in our labs, but the acceptability part, because the way they present themselves, digital marketing, they relate to young consumers better. Is that the limiting factor? Because what you just spoke about, I think, Marico, as a company, can also do it on its own lab and R&D platforms.

So I'll tell you what. I think there are 2 different business models. Our company's FMCG are geared to a certain business which is skin, which, as I said, that we are -- in Marico, we are looking at, today, simplicity, reducing SKUs. They work on a different velocity of innovation where they actually think like, for example, the velocity of innovation, if it's a cycle time of 8 to 9 months in a traditional FMCG company. They have a 30- to 60-day cycle. They have a risk appetite because the value-add risk is far lower, okay? And secondly, I think the velocity of innovation, the velocity of experimentation is different. It's too difficult for both the business models to coexist with an existing company. Because ultimately, you have to be best in the class in one business model. And that is why, I think, INR 50 crore opportunity for a INR 10,000 crore company might not be attractive when it is done by the core. Because that, in terms of share of mind and share of time of the management will get the 30th position versus for people with no escape buttons for them, that is all. The focus and their approach is different. And let me tell you, there's enough studies to show that this concept that has 2 operating model can't co-exist in an existing organization.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.

Thanks a lot for listening in on the call. To conclude, we carried the momentum from last year and delivered a good Q1 performance with a broad-based growth, both in India and international markets. With improving demand trends across our categories, we are quite optimistic about both near-term and medium-term performance. However, the ongoing COVID situation keeps us watchful. We expect the cost pressures to ease out as we inch closer to the second half of the year, thereby releasing pressure on margins, and we would strive to deliver double-digit earnings growth. If you have any further queries, please feel free to reach out to the IR team, and we will be happy to address the same. That is it from our side. Please stay safe and take care.

Thank you very much, sir. Ladies and gentlemen, on behalf of Marico Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.