Marico Limited (531642) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of Marico Limited. We have with us today 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. Before we get started, I would like to remind you that the question-and-answer session is only for institutional investors and analysts. And therefore, if there is anybody else who is not an institutional investor or analyst but would like to ask questions, please directly reach out to Marico's Investor Relations team. I'll now hand the conference over to Mr. Saugata Gupta for his opening remarks. Thank you, and over to you, sir.

Thanks. So good evening to all those who of you have joined the call. I hope all of you, your friends and family are keeping safe and healthy. And I think after 6 quarters, we are having this call where me and my colleagues are together in a physical setting so, it's a very reassuring and a welcome thing. So I would like to start with a perspective on how the operating environment has shaped up over the last few months. It is certainly relieving to see COVID case flows recede across the country as India successfully administered at least one dose of vaccine to 75% of the eligible adult population. We are grateful to the government authorities and all the frontline warriors who have worked tirelessly to achieve this feat. Mobility levels now above pre-pandemic levels is gradually rising across all sectors of the economy. Positive signs are showing up on some of the macro indicators, while a meaningful and sustained recovery will depend on maintaining the velocity of vaccination drive, employment growth and keeping inflation under check. As far as the quarter is concerned, consumption sentiment in our categories largely held up, but there was a moderation in run rates on a sequential basis, especially in rural and this happened towards the end of the quarter. While it is too early to call out any underlying trend, I would like to share our hypothesis for the same. Given that spending on out-of-home categories and services had plummeted sharply, the unleashing of the pent-up demand in this segment has possibly taken up disproportionate share of wallet as consumers increasingly step out of their homes. This coupled with significant inflation could have further impacted the share of spend on FMCG, but I believe it's temporary. Also, the relative advantage of direct distribution enjoyed by larger players would have reduced as some of the smaller players are back on their feet. Even Nielsen data indicates a certain slowdown in recent times. However, we are not yet jumping to any definitive conclusion as retail audit pickups are yet to stabilize. Therefore, we would wait and watch for a few months before calling out any slowdown trend, if at all. We have had normal monsoons and government stimulus continues to benefit a large section of the population in rural, which should help over the near to medium-term. In addition, we expect continued overall economic recovery, which should help stabilize consumption. However, the continued high inflation and the global supply chain disruptions are 2 definitive risk factors to watch out for. In most of our international geo -- business, all geographies other than Vietnam, the consumption and the market situation continues to be largely stable, although there is cost inflation in each and every market. Vietnam had a tough quarter with severe COVID surge but we expect it to do better as curbs are being gradually lifted with cases coming down and vaccination picking up in the impacted areas. I will now talk about the business performance in the quarter and our outlook going forward. In Q2, consolidated revenue from operations grew by 22% with an underlying volume growth of 8%. In the domestic business and in -- and a constant currency growth of 13% in international business. Gross margin improved sequentially, but was under pressure year-on-year with vegetable and crude oil prices staying at elevated levels. ASP at 8% of the sales was up marginally as we maintained optimal investment across key categories and new foods. EBITDA grew by 9% and like-to-like PAT was up by 8%. Reported PAT was up 17% due to an exceptional item in the business. The India business delivered 24% revenue growth with an underlying volume growth of 8%. 2-year CAGR was 9% and revenue CAGR 2-year was 15%. We continue to gain market share in more than 90% of the portfolio on a MAT basis. And we also showed sequential market share gain in this same segment of the portfolio. GT was stable with rural staying ahead of urban. The alternate channels grew in double digits, although the exponential growth place of e-commerce has slowed down to some extent with part of the demand shifting to modern trade, which is showing signs of recovery and slowly going back to pre-COVID levels. CSD recovered sequentially on a year-on-year basis. Parachute Coconut Oil registered 7% volume growth and market share gain of 180 bps in the rigid tax on a MAT basis has also gained sequentially. Copra prices have corrected sequentially with the supply outlook, improving prices are expected to be in a narrow range. Going to this scenario, the brand is proactively passing on value to consumers through tactical consumer offers. We expect copra prices to be largely range bound in the balance half of the year, and therefore, I think on the margin situation on Parachute, we are very comfortable. As we drive penetration in both core and non-core markets, we expect to grow volumes in the range of 5% to 7% over the medium-term. In the Saffola franchise comprising edible oils and foods, we delivered a 46% value growth year-on-year. Saffola Edible Oil has a muted quarter on a strong base of '20, mainly due to trade destocking in response to volatility in edible oil prices, there was significant expectation in the first 2 months of the quarter of prices coming down, which never happened, and that led to a trade destocking. In addition to that, I think the lower in home consumption economy opened up. Vegetable oil prices remain at high levels. The import duty correction has not yet reflected in the prices but we expect some correction in the coming quarters, but it is also linked to the crude. And as you know, that crude continues to reach higher levels every day. Saffola Foods grew about 70% with base Oats growing at 36% and the recent launch is scaling in line with expectations. Saffola Honey is tracking in line with expectations and should exit the year at INR 100 crore run rate. Saffola Mealmaker Soya Chunks has exceeded aspiration so far, and it's gaining penetration in key markets of North and East. It's now got a 20% market share in modern trade and also doing well in GT. However, Nielsen doesn't capture the market share in GT. It is well poised to scale up for the next year. Saffola Oodles is also scaling up well in GT & MT and is regularly featuring among the top 5 Bestsellers in the pasta and noodles category on Amazon. We have taken learnings from the erstwhile Chyawanamrut and relaunched the new Chyawanprash with a new mix in time for the forthcoming season. Broadly, we are well set to deliver the INR 500 crore aspiration in Foods this year. Value Added grew a 16% in value terms, largely on volume. The portfolio is consolidated with 27% value share and 37% volume share, with a market share gain of 40 bps on a MAT basis and some sequential gain versus previous quarter. Mid and premium segment showed stronger traction while maintaining our presence in the bottom and the mid-segment of hair oils. We aim to sustain the double-digit value growth momentum over the medium-term by focusing on expanding value share ahead of volume share by driving a ritual mix and participating meaningfully in the premium segment through innovation. The Premium Personal Care portfolio had its best quarter since onset of the pandemic. Livon Serums is now well ahead of pre-COVID run rates. Male Grooming is steadily recovering. Beardo and Just Herbs too tracked well in line with internal targets and acquisition assumptions. We remain positive on the growth prospect and discretionary consumption around [indiscernible] all activities are picking up. Moving to International, Bangladesh had a stellar quarter with 16% constant currency growth, the performance of baby care and Naturale shampoo ranges along with core Hair Oils portfolio continued to strengthen the diversification journey. The Southeast Asia business declined by 2% in constant currency terms. The lockdowns in Vietnam hit the Home & Personal Care Category, while Foods benefited from the in-home consumption tailwind. MENA business grew 20% on a low base. We have [ poured it ] into Hair Oils in Egypt and Foods in Middle East, thereby expanding the total addressable market in the region and boosting medium-term growth prospects in MENA. South Africa had a stable quarter, driven by the Health Care portfolio and the new country and export business recovered well on a low base. While the demand trend in the near-term could be slower, we are certainly moving in the right direction in terms of our strategic priorities that will be key in establishing a sustained broad-based and profitable growth trajectory over the medium-term. We are not seeing any road blocks even in the near-term on our portfolio diversification journey in India and the Foods and the Digital-first Premium Personal Care portfolio are making healthy strides along with rapid recovery of our discretionary portfolio. Likewise, the diversification journey in Bangladesh will continue to trend very well in the coming quarters along with some new green shoots of growth in other international markets. Our number one priority is to strengthen the core power brands and drive premiumization journey across portfolios through innovation and infuse new journey in our brands through renovations from time to time. Right pricing will continue to be a key factor in our core portfolio to ensure value growth -- to ensure volume growth. We will also continue to explore TAM expansion with our power brands. We are doing a great journey in Saffola in India and Parachute Advanced in Bangladesh, and we will continue to explore these in other markets. Secondly, we are enthused by the tremendous opportunity in Value Added Foods, immunity and nutrition. We have tasted success in initial to increase Saffola's addressable market, and we are on course to reach the INR 500 crore mark this year. We will continue to be aggressive in driving market share gains and market development of these categories we have poured it into, as well explore a couple of new launches in early FY '23 in order to build a INR 850 crore to INR 1,000 crore portfolio by FY '24, the confidence level in doing this is very high. Number three, we believe our efforts towards go-to-market transformation in urban and rural will enable us to maintain our competitive value for the longer term. In rural, we continue to enhance the rural directly by expanding our stock ex network. In urban, we are sharpening our focus on the chemist and food outlets. We have launched a separate go-to-market model of our Foods business in 3 metro cities, where we have segregated food outlets, deployed dedicated feet-on-street and made specific investment towards merchandising in-store visibility and promotion. We will extend this across, once the prototype is successful and also experiment the same in chemist and cosmetic outlet later. We're also increasing leveraging automation and analytics to enhance the productivity of our entire sales and supply chain network. Number four, digital is a key pivot for our consumer facing business. Today, we are consistently learning and building future-ready capabilities, thanks to brands like Beardo and Just Herbs in our fold by they operate independently of the mother ship. Both brands are tracking in line with internal aspirations and will enable us to effectively tap into what is likely to be the fastest growing channel. These capabilities will help us to scale and draw in our D2C play through both organic and inorganic groups. We continue to aspire to build a INR 450 crore to INR 500 crore digital brand business by 2024. Number five, we aim to maintain predictable double-digit constant currency growth in International business, given the minimal exposure to any volatile economies and any forex. We have renewed our focus towards expanding the total addressable market, especially in MENA and Vietnam, which will enable us to deliver a broad-based performance over the media-term in addition to Bangladesh. Next, we continue to chase aggressive targets, institutionalized cost-saving programs and refine our cost structures that allow us to remain competitive and deliver profitable growth. The sharp inflation in input costs have made cost management an imperative, while crude and vegetable oil prices stay put currently, gross margins will move up sequentially in Q3 and Q4. However, the improvement in operating margin is likely to play out largely only in Q4. This is because of 2 counts. First, while we have been able to maintain the optimized share of voice and visibility without significant increase in ad spend in the last few quarters, we must note that A&P spend is likely to rise in the forthcoming quarters, given the more media clutter and everything opening up. Secondly, the second round of cost improvement measures, which were initiated in Q2 will only start giving accruals in Q4. Last but not the least, Marico is committed to safeguarding the interests of its stakeholders, our ESG agenda continues to be an irreplaceable part of our ethos. Recently, we adopted a hybrid working model to build locational and other flexibility requirements of the millennial workforce of today. We're also immensely proud to announce Marico's Inclusion & Diversity Council and Charter that reinforces an equal, diverse and inclusive workforce, in terms of skilled ethnicities, nationalities and gender. We aim to maintain best-in-class governance standards, which will -- which we believe provide a structural framework to shape a sustainable future. We believe that as long as we stick to these fundamentals, adapt to the vagaries of the operating environment with agility and innovation, we can stay resilient and deliver 13% to 15% revenue growth over the medium-term on the back of 8% to 10% volume growth in the India business and double-digit constant currency growth in the International business, while keeping our operating margin above the threshold of 19%. However, in H2 of this year, in view of the current conditions and the very high base of 15% and 25% in India, we are looking at a double-digit revenue growth with mid-single-digit volume growth in India at this point in time. This will also translate into a healthy double-digit 2-year CAGR in volume terms and we might also see a movement to a high single-digit volume growth in Q4 if consumption situation does not worsen. I would like to close my comments by conveying my gratitude to all Marico members and associates for their tremendous spirit and resilience through these challenging times. We hope to keep moving ahead together to build an even stronger and lasting ecosystem by staying true to our purpose of making a positive difference in the lives of all those we touched along with the way. Thank you for your patient listening, and we will now take your questions.

[Operator Instructions] The first question is from the line of Percy Panthaki from IIFL.

Congrats on a good set of numbers. Just one data point. First, can you give some idea on what is the volume growth for Saffola Oils business?

It's very muted.

But not in the negative territory, right?

No.

Okay. Secondly, just wanted to understand in the digital brands, we have only one brand of material scale, which is Beardo, the others are really very small. So what really gives us confidence that we can go to that INR 400 crore to INR 500 crore mark? I understand it's good to have a vision or ambition, but at this point of time, what is the level of confidence of achieving that vision or ambition? Just like you said in Foods, INR 850 crore to INR 1,000 crore, seems like there is a high level of confidence. How would you rate your level of confidence in the digital brands reaching that target?

So just to give a perspective, yes, you are right. Beardo is going to exit at INR 100 crores. Now, if you look at even Just Herbs, it will get into a reasonable high scale. And therefore, I think what we were able to share is an exit run rate in Q4. So once we -- and we have a certain internal aspiration to a certain milestone to bridge. And I believe if we reach that, and we have a reasonable amount of confidence there, I think that should be able to give the confidence of the external world in terms of that ability to reach that INR 450 crore to INR 500 crore. But as the things stand now in terms of sequential growth, Just Herbs will get scale by the end of the year.

Okay. And lastly, can you give some idea on the moving parts on your EBITDA margin going ahead, in terms of either any pricing actions that you would need to take the cost environment? Ad spend already you mentioned will go up. So what would be the moving parts, if you can discuss these 2 or 3 moving parts as well as some idea on the overall EBITDA margins at the consol. level?

So let me just give you a broad perspective. Now, the first thing is when it comes to cost, as I said that copra is under control, and we believe it is going to be really firm. Now, as far as edible vegetable oil is concerned and crude, it's a very difficult one to guess. And we believe that the earliest softening that can happen could be -- it will take a quarter or so, at least, and it will only -- we can see some visibility in Q4. As regards some of the -- as I said, that we were expecting some softening in Q2, but when it didn't happen, we initiated one more round of cost measures, which, obviously, as you know last year, we did structural changes into INR 150 crore to INR 200 crore of cost, which we have taken out. Now, we have done -- the second round, we have started. But while we have visibility of those measures, I think we are going to accrue those only in sometime in Q4. So therefore, while you will have a sequential, you -- as you know that there was a, I think, 140 basis points improvement in gross margin. You will see sequential improvement every quarter from now on, especially that fact that copra is reasonably under control. The EBITDA margin improvement we'll start seeing in Q4 because we believe that there could be at least a 100 basis points plus increase in A&P. As you know that as the market has opened up, plus you have IPL, you have T-20 World Cup, you have the season -- to maintain the certain SOV, the ad spend up to go up. And plus, we have also started spending on the discretionary part of the portfolio and also, because things have opened up. So given the fact that we'll be spending higher on A&P, the EBITDA margin improvement you will see, while the gross margin every quarter, you will see a sequential improvement. The EBITDA -- the large part of the EBITDA improvement will happen in Q4 onwards. And the visibility of the cost improvement project, which we started in Q2, we already have a visibility of that, but the accrual will start sometime in Q4 only.

Okay, sir. Got you. And overall EBITDA margin guidance remains unchanged first?

Yes, yes. Percy, obviously, as I said that there will be no improvement right now, but once in Q4, it will start improving and the medium-term EBITDA margin guidance of a threshold of 19% remains unchanged.

The next question is from the line of Vivek Maheshwari from Jefferies.

A couple of questions. So first is on the disclosures, I mean, if there is one thing consistent in FMCG or staples is your disclosure. Now, when I look at -- and that has been the case for, let's say, 15 or probably 20 years. Now, last quarter, you discontinued, let's say, Saffola volume growth. This quarter, you have discontinued VAHO volume growth. What is the sudden thought process change over here? And what is it that we should expect as we go forward?

Thanks, Vivek, for bringing it up. It's not that we are cutting down on disclosures or transparency. And there are specific reasons as to why we are not doing certain things in the public eyes. Let me first talk about VAHO. If you look at the VAHO portfolio, we have a significant [ data ] currently in terms of our volume and value share. And to bridge this gap, we are internally moving from volume targets to value target as key performance metrics. So this is a step towards driving [indiscernible] the portfolio. And thus, what we are doing is we are aligning our external communication in line with our internal management KPI. And moreover, this will involve not much of a difference in volume and value involved. That isn't even gone down, it's better to stick to a value recovery. Saffola, in fact, we have discussed in the last quarter. Obviously, the extension of the brand Saffola to multiple foods category beyond oils and edibles, we have actually expanded the overall Saffola Foods total addressable market to nearly INR 5,000 crores. And we also expect that this proportionate growth of the franchise will be actually led by value-added products in the Foods and Immunity categories. And therefore, we see very well reporting growth for Saffola as a franchise. Moreover, we also believe disclosing volume growth of Saffola Oil specifically works to a competitive disadvantage and therefore, we would rather not disclose the same and we'll keep giving broader indications. So that is the thought process. I think apart from that if you look at our disclosures, it will still remain top quartile in the sector, and we stick to that.

And I think just to add, I think we did a net revenue management exercise in the organization last year, where we have now changed the KPIs. And one of the things which we realized is obviously, premiumization in VAHO has to play a role and all the -- so what we have done is the internal KPI in which the management is measured is now going to be valuable. We have just aligned it. And I don't think you will see any more changes from there because we have just done the alignment. We will continue to indicate the volume growth and volume share. So I can assure you that, that is something which we'll continue to indicate. And in VAHO, actually, there is hardly much difference between volume and value growth really. So I think that is the only thing we've done. So it's all internal and external KPIs are now aligned because otherwise, it's very difficult to have 2 different KPIS, one external and one internal. And I don't think any more you can expect anything. It's more or less done. These are the 2 which we have done. As a part of our total, as I said, the NRM exercise, which we did with one of the big consulting firms last year.

Got it. And that doesn't change the medium-term 8% to 10% volume growth?

Nothing. So I mean, are we not -- have we stopped chasing 10% volume growth in VAHO? The answer is no. We will continue to chase 10% volume growth in VAHO.

It's just an alignment with respect to what we're tracking internally and what we are reporting externally.

And we will -- as I said, also, this time also we disclosed Saffola volume, didn't we? We will not stop from telling you an idea of how are they doing. You don't worry on that front at all.

That's reassuring. And I think just with due respect to Pawan's point, I would just like to correct you, you are not in top quarter, you are #1 in disclosure, as I always state. So we are looking forward to the same thing in future as well. My second question is on the EBITDA margin, Saugata, when you say that fourth quarter will show up some of those benefits, the measures that you have taken. But is that also because of waste issue? Because last year, when I look at your fourth quarter margins, those were at about 16% at EBITDA level.

I'm talking absolute margin. See, it's absolute margin, I'm talking. It's not that I'm talking about Y-o-Y growth, I'm talking about the absolute margin. The other reason you must realize what is happening is, it's also a denominator effect which will also start neutralizing. When you have high inflation, the denominator goes up and therefore, if it's inflation led top line growth, the margin automatically reduces in percentage terms. So I think that also will get neutralized. And as I said that -- and we are also expecting that I think the somewhere someday the crude and vegetable will also start stabilizing. Right now, we are facing 3 challenges, let me tell you, out of which one is crude, which is having a thing on LP and packaging, and vegetable oils. Thankfully, we have a minor issue. And I'm sure other brands in Personal Care globally will face a bigger challenge. So we have a similar situation like semiconductors on silicones because of the energy crisis in China. There is neither silicones and silicones have gone at 100%. Now, fortunately, we only use it in serums, we don't have much shampoos and other categories in Personal Care. So it's getting one after other hit. So we believe that -- if I look at even vegetable oils, the crop across the world has been good. So unless -- and right now, the inflation is led more by crude, but as you know that, if crude prices go beyond $65 to $70, then there is a diversion into vegetable oils and in crude, in terms of petrol they add 10% to 20%. So I think that is supporting. But in terms of the output of the crop, which has happened, whether it's in LatAm or Europe, the crop is decent. So we expect that veg oil someday to correct sometime in Q4. We were expecting the correction in Q3. Unfortunately, in spite of the government duty cut, with this crude suddenly going up, this thing never happened. So I think it's a combination of all this. And we believe that you will start seeing the medium-term targets happening by Q4 sometime, Q4 or Q1, definitely. And the good thing is that, hopefully, the monsoon -- Southwest monsoon has been good. The Northeast initial indications should be okay and therefore, copra next year also will be comfortable.

Okay. Got it. Got it. And just 2 very small questions. One is when you talk about, let's say, Beardo turnover INR 100 crore exit or INR 450 crore to INR 500 crore by 2024 of e -- of D2C. These numbers, when you talk about these are accounting revenues or, let's say, so-called GMVs?

No, no, no. Unfortunately, I wish I would have done this. So then I would have been having a valuation 5x GMV, a INR 1,000 crore valuation of Beardo. Because unfortunately, we are poor people, we have to go by net realization.

Okay. So Beardo INR 100 crore net?

Yes, net. It is the unfortunate part of it. We don't have the luxury of GMV. I wish my Board would have allowed that.

Got it. And last very small question on Chyawanprash. Saugata, you have mentioned and the release also talks about Chyawanprash, the mix reformulation or whatever. Was it a mix related issue? Because I'm guessing at that point of time when you launched, there was a fair amount of science which got into it. I would have imagined it would have been more about customer optics because there are some entrenched players in that space. So mix itself can...

Let me address this issue. So we wanted to give a differentiated product. Now, as per laws, we can't call it Chyawanprash, so we have there something called Chyawanamrut. Now, what happened is consumers don't understand it. Number two, I think in terms of the packaging and other things and even the market, we tried to go head on. And now I think we have a different strategy. We believe that -- if we look at -- I'll give you analogy, I think in terms of -- it's a little modern Ayurveda. Saffola is a modern brand. And what has happened post-COVID is that earlier the significant dominant consumption was in the Hindi Heartland of this category, but post-COVID, and which has stayed on, although the growth rates of these categories have gone down. There is now adoption of this category in where South and amongst higher LSM consumers. And this is where Saffola comes in. And if you see this packaging is differentiated, it's far more modern, it's not -- and we believe that given our experience in honey, for example, in honey, we still have 20% plus share in e-com. We have 10% share in modern trade nearly. And therefore, we know how to play these categories in these 2 channels. So I think we started off trying to do GT in one or 2 markets. I think we have completely revamped this strategy. And we believe by doing this, we are actually -- our resource allocation and our channel strategy is far more focused, which is our strength as opposed to places where we don't have a right to win. And I believe -- I think -- and this channels now have a critical mass, which didn't happen when COVID had just up. So let's wait and watch. And as I said, that I think we have done 4, 5 things in food. As you know, new products, you have a certain success rate and therefore, we have to have the appetite of some failures. But I think we are determined to make it a success. So I think the resilience in the team and I think our ability to do foods, I think, improved by at least 10x times. So even if we fail, we stumble, we will get up and start running again until we get the success.

Right. Right. On that note, thank you and wishing you all the best to you as well as your team.

The next question is from the line of Prakash Kapadia from Anived Portfolio Managers.

A couple of questions from my end. On VAHO, despite the low base growth seems to be slightly on the lower side. Is it fair to assume with opening up of work, offices and the entire unlock, this should grow at a much faster pace in the coming quarters?

See, the base is 4%. And I think you have to look at from a run rate basis. And I think on a run rate basis, it's think fairly [Audio Gap]. So I don't see any -- so there has been a double-digit volume growth. And as I said, that out of the 16%, largely, it has been volume growth led, which is a double-digit volume growth. So I think it's clear we are -- I think we are tracking sequentially fair. And I think what is most encouraging is the broad-based growth where some of the mid to premium brands have also started showing growth. And as you know, historically, between 2018, '19 to '20, we had growth largely led by BOP and Shanti Amla, where we had an issue with some of the other brands. Now, all the brands, it's a pretty broad-based growth. I think so -- I believe that we still have a task to do at the top end, which is hair fall and other premium end. But that is something we should be -- we are determined to do because that will start bringing that volume and a value share gap. So I don't think in terms of our run rate, there is any concern as far as the value-added hair oil is concerned. And as I also alluded to it, if you look at all HPC categories, especially rural, it has shown some slowdown, especially in August, September. And this is the data in Nielsen also, which is showing a rural slowdown in all HPC categories, slightly less in food.

Right. Right. And you mentioned about some of the cost initiatives which will show up in Q4. Can you quantify a number for FY '22 and which are the areas...

No, it's not possible. I think we are looking at -- as I said that we keep on looking at costs. It's a -- as I said that it is a very, very institutionalized approach in our organization. And I think, as I had told you in between the last 18 months, we had taken anything between INR 150 crores to INR 200 crores because if you look at the inflation, the inflation is anything between INR 600 crores to INR 800 crores, if you add everything, that's the kind of inflationary hit we have had. In spite of that, I think we are holding on reasonably well, and that is because we have had these things. We -- to be frank, we never thought that there'll be one more surge of inflation, which is crude and vegetable oil led in Q2. When it started happening in August, we have started a series of measures. We have the visibility of those initiatives but since some of them takes time, it will start accruing in Q4. But as I said that, that will take care of -- while in Q3, the sequential margin growth will get neutralized by -- the sequential gross margin neutralized by A&P. In Q4, these measures, along with the sequential gross margin growth -- gross margin movement will actually lead to a leg up in EBITDA margins in Q4.

Understood. And lastly, we've always maintained taking calibrated price increases, and the focus is on maintaining volume growth and market share. On the domestic business, given whatever has happened on the input side, what kind of a price hike would have we taken at a domestic portfolio level, if you can share a number?

So if you see, the volume value difference is 8% and 24%. So the price factor is 16%. Obviously, it varies from -- like in Saffola it has been as high as 50% almost.

And just one data keeping question. What would be the CapEx for next year?

You can take it in the range of about INR 150-odd crores.

The next question is from the line of Arnab Mitra from Credit Suisse.

My first question was actually on Saffola Edible Oil volume. So this quarter's limited volume growth, as you mentioned, in your assessment, how much of it could be due to the trade destocking issue? Why I'm asking it is, ever since the pandemic started, you've had 6, 7 quarters of very high growth. Do you see this as a situation which could last for many quarters as you -- as people go back to their normal life? Or is it a lot more to do with the trade element of component of these destocking?

I will -- let me just give you a flavor of it. The STRs in trade has definitely come down around 3 to 4 days, okay? And as you know, edible oil, the STRs anyway are thin. So percentage STR are insignificant because people don't keep more than 7 to 10 days stock in the house. Because the reason is we're anticipating every week that there will be a fall, there'll be a fall, okay? The second thing that has happened, obviously, is in terms of the channel mix in -- where e-com and modern trade, while modern trade growth in Saffola has not got compensated because e-com has come down. And I think a significant portion of the -- with the economy opening up, we believe that a total consumption at high LSM households, which -- Saffola consumers have gone down. Lastly, and now we will have to get data, it's just that, we believe that this continuous high inflation and these prices will -- or could potentially slow down adoption into the brand, but that is where we are waiting and watching on this because, as you know, yes, the second half also has a 17% volume base. Having said that, I think we -- once things start softening, which should ideally happen sometime in quarter 4 and definitely next year, quarter 1, I think things will come back to -- gradually to normal.

Okay. And just carrying on from one of the previous questions. If your Saffola volumes are going to remain muted in the near-term and the base for VAHO is definitely higher. You had a very strong pickup last year second half. Do you feel confident about that mid-single-digit number, especially in the context of -- as you mentioned, some form of a rural slowdown also coming through? Or is there a risk to that number also, if the current situation continues?

I'll tell you. Let me just break it up in this one. We don't see any issues in Parachute. As far as VAHO is concerned, I think while the base growth is high, I think, in terms of run rates and given the fact that we are now having broad-based growth, especially in the mid to premium brand, I think we will be able to deliver this double-digit value growth, which we have taken into account. Foods, again, doing well, and we are seeing a recovery of the discretionary. So even if Saffola continues to remain muted, I think -- and that is the reason I think we are indicating a mid-single-digit as opposed to a high single-digit, which we were earlier gunning for. So I don't think there is any stress in what we are looking at currently. Now, this so-called slowdown, I think we have to wait and watch because if I look at other economic indicators, I think they are fairly in control. The monsoon has been good. So as I said, that it could be 2 things, and I'm talking of the sector and not just our this one. It could be that there was in June and July, a lot of pipeline filling and then -- which then translates to that kind of uptake. And as I said, when it opens up and this high inflation, there is a challenge in the share of wallet between out-of-home and the fact that there is inflation in food, inflation in petrol, transport and all that. I think if things stabilize, we have -- I think, fundamentally, the reason which we are happy about is all our brands in terms of brand equity, health, penetration and distribution, everything is in order. So I think that gives us the assurance that while we have been giving you a cautious outlook, this much, I think there is no stress in that.

And my last question was on the new Saffola Foods category. So obviously, the first big, I think, success outside of Oats was in Honey. So in Honey, I just wanted to understand the journey of distribution expansion, have you entered into GT? What kind of distribution do you have there? And are you seeing offtakes in GT, if you have entered in these areas? Or is the brand still very much e-com oriented and it will remain so for at least the foreseeable year or so?

I think we have started our GT expansion. And as I also alluded to that, given now that we have critical mass in Foods, which should be hitting INR 500 crores, we are also starting a differentiated GTM for Foods in 3 metros to start with, which will extend it. And I believe in the high weighted D outlets today, Honey is present. And we, hopefully -- we should be able to now -- the next growth will be through GT because I think we have had significant gains in both modern trade and e-com. Soya Chunks is actually a significant GT product. And therefore, while we have 20% share in MT because others are not present, like in West Bengal, which is our test market, a prototype market, we have a very high presence in GT and significant distribution. So I think now, the journey is going to be significant investment behind food GTM in GT. And we expect the next growth to come from there because even if you have to succeed in Oodles, you have to move and get a critical one. So therefore, in the high weighted D outlets, in Foods, we will definitely have a significant presence and a significant amount of investment.

The next question is from the line of Shirish Pardeshi from Centrum Capital.

I have 2 questions. The first question is that you said the rural, you are seeing the strain. Is there any specific buckets you are referring to, say, middle India? Or it's in general, you're saying this comment?

So I think there are certain buckets but it is very difficult, as I said that, see, this is something which started happening towards the end of August. We're seeing it in September, and it continues. We -- all I can say is it is better in the south. This much I can tell you that south is not that impacted.

South is not impacted?

No. Relatively for us. And that's why I said that we don't see any certain Parachute at all.

Okay. The other question I have, you tried to target about INR 500 crore from the digital brands in next 2, 3 years. If I do quick math, it's roughly about 5% of the business, which you're targeting from this channel or maybe products. So your commentary what you're saying single-digit looks a little lower? Or are you been trying to more conservative?

No, that 5%, that is in '24. And by that time, I think the turnover of the company will be higher than INR 10,000 crores.

My guess is it will be INR 10,500 crore, INR 11,000 crore in between.

Fine. But that is -- I mean...

Shirish, we're not very clear on the question. What Saugata has mentioned is that we are expecting mid-single-digit growth in F2. And the contribution from this portfolio will be, of course, as the revenue guides. And we're talking about INR 850 crore to INR 1,000 crores by 2024.

That could be. So that will be around...

Okay. Sure.

Does that help, Shirish?

Yes. Yes. That I understand. Just one follow-up on that, and that's my last question. This INR 500 crores what you're targeting. Will it also have the impact on the margin movement on the positive side? Or it will -- you will keep on investing?

I think the gross margin, obviously, of this portfolio will be high. I think we have a strategic funding policy, which is where we invest a certain percentage of PBT into strategic funding. Now, that policy remains the same. It's just that we are investing behind digital brands versus this. So I don't see any significant impact on that. But certainly, this will positively impact the gross margin definitely.

Sure. Thank you and all the best to you and the team.

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

I just had 2 questions. First was on the new go-to-market investment which you made in the food business. I just wanted to understand, is this a precursor to probably over the next, say, 12 to 18 months and even more as new brand launch or looking at new products to get you INR 850 crore to INR 1,000 crore target, and hence, you're building this up, over and above the fact that you want to build GT into the existing brands as well?

So I think one thing we realized that our current strength was modern trade e-com and grocery. Now, modern trade and e-com and therefore, when Food got launched, our right to win in modern and e-com was very high, and we established significant share. Now, if you look at penetration of Oats and Savory Oats, it's still a consolidated penetration. Now when we are getting into things like Oodles and now that we have a range of foods, we decided that it makes sense because selling some of the other mass items and food whether it's replenishment, selling in pieces, managing stock freshness. They are different skill sets. And the current set of this last mile distributor sales force or the current set of merchandisers may not be equipped to handle specialized food outlets, which are largely today, open format, which needs a certain level of servicing, it could be twice a week. And therefore, I think we set -- we have set this up. And the second thing is, obviously, yes, we are looking at entry into one or 2 categories. And I believe our food GTM will become an attractive proposition for potential start-up acquisitions because they will now have a ready-made GTM for us to scale up. And tomorrow, if I want to look at even acquisitions in the food business.

Got it. Very clear. The second point was on the VAHO business. Now that you've got the mid-premium and premium business also firing and its broad-based growth, assuming that you continue to do well and probably add new product here, is there a view that maybe within the next 2, 3 years, structurally the margin profile of this business, and especially the gross margin level, can be higher, aiding your overall India business?

Yes. So let me tell you, you are -- I think, you are largely right. The fact that a significant part of the growth of VAHO was led by Shanti Amla and Shanti Amla since we have a discounted price strategy and also the fact that the significant action in the market in the previous 2, 3 years happened in the bottom of pyramid, which is mustard and other things. Now, if you ask me, this will definitely happen only when we aggressively participate. I think some improvement will happen, but a substantial improvement will happen when we have a much more significant presence in -- like things like hair fall or a premium almond kind of an oil. Or we get into, what I call, premium participation, today which WOW, Mamaearth and those kind of brands have. So I think it's a journey. I will think it will happen in 2 stages. First, the fact that we have stabilized the mid, which is premium for us, but what is not still premium for the market. The next stage has to be participation in premium, far better presence in Hairfall and some other segments there. So it definitely will happen in stages but you are absolutely right, our endeavor is to -- and one of the reasons we have changed the KPI to value and focus on that is to endeavor to improve the margins in that part of the business.

[Operator Instructions] The next question is from the line of Aditya Soman from Goldman Sachs.

A couple of questions. One is, can you give us a sense of how inflation is playing out in your international markets? And whether you have enough fighting power to sort of offset that? And secondly, in terms of Parachute, will there be -- I mean, in terms of price increase, how much further price increase you feel the need to take, assuming that the input cost inflation does not change from here? Just to offset it -- I mean, just to assume that if you were to take it to offset the margin impact, how much price increase?

First, let me address the international market. I think the international market, given the portfolio is completely different and also, as you know that, we use in Bangladesh and other markets, the copra, which is sourced from other markets. So while there is inflation impact, the inflation impact is little less, and therefore, we have managed wherever possible. And we don't see any significant margin strain there. Obviously, in some of the places where we export some of the Indian products, obviously, there would be some impact. But largely, I think it has been contained. And as you know, last year also, we did significant exercise in cost management, especially in Vietnam and some of the other markets. So we believe -- and as you know that -- also, the other thing is that there is a significant diversification of our portfolio in Bangladesh, which includes shampoo, baby and other things, which are not so input cost heavy in terms of -- RM heavy, in terms of commodities. So I think we are in a fairly okay space in that. Coming to Parachute, actually, copra has sequentially reduced. And therefore, we have taken a little bit of a price correction. There's been 11% sequential reduction in copra prices. And as you know that we are very clear, now we have been extremely proactive in managing prices because we have learned our lessons of the past. We have actually taken -- actually a price marginal, tactical through price promotion, some price correction actually. We have taken in the last -- starting September and even now as we speak.

I understand. That's very good to know. And here, there would still be some inflation because of the packaging material and stuff like that, but do you feel that the reduction in the copra price is sufficient for you to offset that?

Yes. I think it's fine. I mean, that is -- I mean, I'm talking of the total cost, even if you look at the total cost, COGS, I think it has sequentially reduced.

The next question is from the line of Tejash Shah from Spark Capital.

Hello, am I audible?

Yes, you are.

So my question pertains to margins and not in the near-term, but the medium to long-term. And then, this is led by the mix change, which may happen based on our trust on -- increasing trust at least that I'm picking up for the last couple of calls on the food part of the portfolio. Do you see that as the Personal Care buyers comes down in the portfolio, there will be, a, volatility also increasing, and 2, the margin profile at the company level also might change as we go along on this path?

I think the way to look at it is, I think, 2 elements of it. In the long -- in the medium to long-term, the food portfolio will certainly have an accretive gross margin compared to Saffola Edible Oil. And therefore, as and when the dependence on food keeps on increasing, the overall Saffola growth, the overall Saffola blended margin will increase. The second thing is there are 2 other drivers of growth. One is we have talked about the premiumization of hair nourishment and increasingly in VAHO, we want to look at value growth. Secondly, if I look at the digital business we spoke about, it will have a higher gross margin. And thirdly, I think we believe now that the COVID thing has stabilized to a large extent. Some of the drivers of growth, which was stagnating, which is male grooming, serums and other part of the business will also start growing. So if I look at the delta of top line, coming from these versus food, they are more or less aligned. And therefore, the blended margin, we don't see, in fact, we believe actually the blended gross margin will improve because we are reducing our dependence on commodity-driven ones, which is where -- or pricing-driven ones, which is basically Parachute Coconut Oil, Saffola, and Shanti Amla, which is a price point driven brand. So these 3, the component proportion of these 3 to the total sales will actually come down. And our problem, as I said that, therefore, that will also ensure that the volatility is slightly lower.

Very clear, Saugata. Second question on digital-first brand portfolio. So today, when we look at the portfolio it is, again, Personal Care heavy. So is that platform not suited for food launches or D2C experiments there? Or as of now, we are consciously focusing on one part of the portfolio only?

If you look at the unit economics, it is far more, I think, conducive to Personal Care because you need a AOV of $8 to $9, you need a GM one of 65%, 70%. And therefore -- and because you need a high A cost, A cost is usually 100% in year 1 for any successful D2C brand collapsing to AP and 50%. So with this kind of unit economics is very difficult. So it's perfect for a brand, which is a INR 350 to INR 500 with a 65% to 70% GM. This is very difficult other than the kind of products, which is high-end nutrition or very specialized foods. But if you look at food brands, for food brands, it's easier. Crossover can happen with availability in modern trade and specialty food outlets versus D2C brand, I think the crossover to brick-and-mortar can happen only after INR 60 crores, INR 70 crores of NR, I mean, or INR 100 crore plus of GMV. So I think that's the difference. Therefore, having a 60% gross margin food, I'm sure people do it. There are brands today in the space that do it. But then, what happens is that total addressable market becomes limited. And food, our focus is far more on scale.

Sure. Very clear. Thanks, and happy Diwali to the whole team and all the best.

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

Thanks a lot for listening on the call. To conclude, we had a satisfactory quarter 2 performance, that's largely broad-based growth, both in India and International market. However, the demand trend in India in the last month or so keeps us watchful in the near-term. While there is a comfort around copra prices, high inflation in other raw materials will put pressure on the margin, and that can lead to modest profit growth in second half. If you have any further queries, please feel free to reach out to our IR team, and we'll be happy to answer to the same. That is it from our side. Wish you all a great festive season ahead. Please stay safe and take care.

Thank you. On behalf of Marico Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.