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Edited Transcript of MARICO.NSE earnings conference call or presentation 1-Aug-19 12:30pm GMT

Q1 2020 Marico Ltd Earnings Call

Mumbai Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Marico Ltd earnings conference call or presentation Thursday, August 1, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Saugata Gupta

Marico Limited - MD, CEO & Executive Director

* Vivek Anant Karve

Marico Limited - CFO

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Conference Call Participants

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* Abneesh Roy

Edelweiss Securities Ltd., Research Division - SVP

* Arnab Mitra

Crédit Suisse AG, Research Division - Research Analyst

* Gaurav Jogani

Axis Capital Limited - Assistant VP

* Harit Kapoor

Investec Bank plc, Research Division - Analyst

* Naveen Trivedi

HDFC Securities Limited, Research Division - Research Analyst

* Sameer Gupta

IIFL Research - Research Analyst

* Shirish Pardeshi

Centrum Broking Limited, Research Division - Senior Analyst

* Sunita Sachdev

UBS Investment Bank, Research Division - Executive Director and Equity Analyst

* Vivek Maheshwari

CLSA Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day and welcome to the Marico Limited Q1 FY '20 Investor Conference Call hosted by Axis Capital Limited. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Gaurav Jogani from Axis Capital Limited. Thank you, and over to you, sir.

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Gaurav Jogani, Axis Capital Limited - Assistant VP [2]

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Thank you. Good evening, everyone. On behalf of Axis Capital, I would like to welcome you all. From the management, we have with us today Mr. Saugata Gupta, Managing Director and CEO; and Mr. Vivek Karve, CFO.

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's not an institutional investor or analyst but would like to ask questions please directly reach out to Marico's Investor Relations team.

With that, I would like to hand over the call to the management for their opening comments. Thank you, and over to you, sir.

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [3]

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Yes. A very good evening to all those who have joined the call. We'd like to start with a quick brief of the quarter and a broad outlook for the balance year before we start taking your questions.

Our performance in Q1 was decent in terms of volume growth, but there was a very robust performance on the margin and market share front. The consumption situation and the liquidity in the channel continues to be challenged, and we hope that this will improve towards the second half of the year.

Having said that, in the India business, we are happy with the performance of Parachute; Value Added Hair Oil, except the premium component; Foods and Premium Hair Nourishment. We need to still sort out Saffola, which I will discuss in detail a little later; and Male Grooming will get back into growth.

We have significantly stepped up investments in innovation, and some of them are doing well, while a few are WIP. We will continue to keep our A&P well funded at current levels.

In the International business, it has been a steady quarter with Bangladesh on a solid momentum and Vietnam and new country development delivering decent growth. The Nihar business declined on a reported basis, but, however, adjusting for a onetime distribution and stock correction in the Gulf business in preparation for the localization of production, this year is growing low single digits. If you adjust this onetime correction, the real constant currency growth of the International business would have been 9% this quarter. We expect the International business to continue to deliver steady, profitable growth for the balance year.

Let me now give you some flavor of the Indian business. There are significant long-term shifts happening in the GTM structure, and we strongly feel that organized plans with high-equity legal brands, cutting-edge agility in supply chain and technology, and deep [rural] direct distribution will have a distinct source of long-term competitive advantage in terms of market shares, consolidation and long-term growth.

As a consequence, Parachute continues to do well, and we are very much in line with our medium-term growth aspiration of 5% to 7% and onward steady share gain. However, like every time when there's a deflation, the nonfocused part of the CNO business gets impacted, and it has experienced double-digit decline this quarter. This has dampened the overall volume growth of the Indian business to the extent of at least 1.5%.

In the case of Value Added Hair Oil, we continue to do well at the mid- to bottom of Premium Hair segment, while we have a job to do at the premium (inaudible) looking slow. Having said that, we are confident of moving the growth to double digits through the balance year.

Aloe continues to do well, while dry fruit oil is showing a positive traction in some of the markets where it has been launched. We have a good market share gain in both Value Add and volume growth. And here also, we are seeing a shared movement to organize plans with robust rural distribution.

So our line up here is your line. While the communication has driven equity and penetration, all our gains have been only in Modern Trade and E-commerce. We have been struggling in urban GT because of price premium and channel interplay. Therefore, to drive affordability and reduce any interplay through pack assortment, we have prototyped a differentiated pack solution strategy across the channels.

A 5-liter price-up pack at INR 6.99, which is INR 1.26 (inaudible) MRP in select GT vis-à-vis a (inaudible) plus 1 liter free. And the current MRP of INR 8.25 in Modern Trade and E-com is being prototyped from (inaudible). However, the lower price point has not driven either distribution gains or transaction uplifted in existing outlets in these 2.5 months in this quarter. Against that, we have lost out on incremental promoted volume, which was during the last year's base. We're going to wait and watch to see how this plays out over the next few months and then take up sequentials.

And without the new vectors of growth, we continue to be positive on Foods and Premium Hair Nourishment, delivering 20%-plus growth, and Kaya retaining critical mass towards the exit of the year. The flattish performance of Male Grooming has been because of deals. Excluding deals, the rest of the portfolio has grown in double digits. We have plans in place to get the franchise back into double-digit growth for the balance year.

In terms of channels, Modern Trade and E-commerce continues to drive growth. We are taking significant steps to improve our quality of rural distribution, which will help us to maintain growth in spite of the weak consumption scenario. We have a short-term plan to revitalize urban GT, but we have concluded that we have to take a fresh approach to manage long-term disruptive changes in the channel. In the short term, our new initiative will challenge cosmetic, food and stand-alone Modern Trade channel, along with the most [book] value at looking to drive partner ROIs should get it back into growth.

With respect to the International business, we continue to be optimistic about the growth and diversification journey in Bangladesh. While the core continues to grow, some of the new initiatives of the value-added space will commence. We will continue (inaudible) innovation and capability to turbocharge growth in Bangladesh and some of the other Southeastern markets.

The other markets are expected to hold steady. And therefore, we are confident of a double-digit constant currency growth in the balance year while continuing to retain good margins in International business.

While the immediate-term consumer sentiment appears to be [with a lot of the] liquidity crunch, we continue to sense an opportunity to drive competitive advantage in rural markets and invest in innovation in our rural markets and new channels in India. We do not have a complete infrastructure to support that yet. But in overall terms, as for current trends, we are looking at a high single-digit volume growth in India this year. We expect some of the new products to get critical mass by mid-2020, which will help shore up the new portfolio contribution.

We also expect some significant shifts in our quality of rural and premium over distribution (inaudible) this year, which will set up the business for incremental growth towards the end of the year.

To sum up, we are looking at a scenario of 6% to 8% volume growth in India with mild inflation. In the absence of any macro or geopolitical-level surprise, International business can deliver double-digit constant currency growth in the balance year. There could be some reversal of over price in the last season starting Q3. Having said that, we believe that the margin for the full year will definitely be in the zone of 19% plus. We will continue to aggressively invest in brand innovation and that A&P -- A&P sales will be at least around 10% of sales.

Additionally, we are planning to fast-forward some of the long-term investment towards leadership capability, digital, automation and GTM transformation this year. So there -- so that there are no investment challenges next year should there be any change in cost structure.

Thank you for your patient listening, and happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Abneesh Roy from Edelweiss.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [2]

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So firstly, congrats on the good set of performance. My first question is on the launch which happened this quarter so -- in breakfast. So a follow-up on (inaudible), if I see, there is already expense players like MPR, et cetera, in most of the breakfast options and our full variety foods are there in those always very differentiated positioning. But India's largest company tried the similar kind of thing in South India, and they failed. So what is different here? Is it just a brand which will work for you? If you could discuss why this space in which already there are players.

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [3]

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Okay. So I think this is just a small prototype we are doing. I think the issue is that when you participate in that first we need to have a range. In this case, if you look at each of the various differentiator in terms of the (inaudible), they are not playing this one. Yet, some people will fail. Some people will (inaudible). In foods, you need scale and range. And therefore, we are looking at, obviously, people looking at healthier options.

Number two, as trends change where people want to -- now breakfast in terms of they don't want to cook their own stuff. There is a what I call ready-to-cook kind of trends are increasing the results and also snack pack. Now as I said, it is a prototype. In fact, it's a very, very low investment prototype that -- we are driving in our engine -- new engine, which is Indian 2 or Indian 3 in food of [that we] sort of experimentation to try. And I think given the fact that they are very, very low, they are not ATL invested, I think we have an appetite for experimentation, and now -- and some will fail, some will succeed. And we believe that the currently is not a big bet. We want to start things small. And if they win, we want to scale up quick and then take it to big.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [4]

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My second question is on Saffola and in the food portfolio, very strong growth on a strong [base] of (inaudible) 38% growth. So what's going by? Because FY '18 was a tough year for you, and now 4, 5 quarters, very good growth. So one is that. And second is in terms of the vending machine, now 300 vending machine in 200 offices. So any learnings from there? Is it now commercially viable? Is it now finding takers? When do you see a pan-India launch in terms of the vending machine?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [5]

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I don't see a vending machine as a stand-alone business. We are using it for driving more sampling and selling. We don't want to -- right now, given our product portfolio, we don't see as a vending machine business as a commercial business. I think it is an alternate form of sampling. It's an alternate form of creating a habit [analyzing it] in form of, I would say, A&P in terms of creating resiliency and visibility for the brand. Because as you know, unlike other food products like snacks, here you have to do [big] sampling. So this is I think a very interesting route to drive sampling of the product.

As regard to food section, I think we believe -- I think food we need to get into scale. I think we are creating differentiated brands. We also see also perhaps got the right distribution and whether it's GT MP or -- as I have said that we are -- we have to succeed in foods, we think we are now -- we have big [possibility] of (inaudible) in food it's very important that we rapidly scale up food so that we can grow at 20% to 25% [a year] so that we have at least a INR 400 crore business over the next 3, 4 years.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [6]

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One follow-up here. So the 38% growth is the vending machine. Also a reasonable portion of the growth coming from your vending machines?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [7]

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No. The vending machine is nothing. It's almost (inaudible). I don't think we -- it just -- we supply the premix and it's hardly anything. It will not be (inaudible) 1% of the growth there.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [8]

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My second and last question is in terms of urban GT slowdown is at 5%. Even if I see a 3-year growth in (inaudible) 11%. So is it only because of Saffola? And in Saffola, you're right below (inaudible), right? What has been the response to that?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [9]

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(inaudible) decline.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [10]

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Yes. So on a 3-year basis (inaudible)...

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [11]

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Yes.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [12]

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I

On a 3-year basis, (inaudible)...

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [13]

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(inaudible). I think there is a combination of the fact that there's a significant perhaps business moving to more (inaudible) come and most of the impact in, number two (inaudible) and things tracking with same channel. So that has been a combination of both GST scenario of the channel, and that constitutes a significant portion of urban GT.

And lastly, if you look at it, I think what has also happened is that it has all sort of -- in the case of Modern Trade income and wholesale being the same, the distribution ROI and (inaudible) got impacted. If you add GT plus [NT] plus E-commerce (inaudible) at [35%].

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [14]

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And on the smaller pack of Saffola, any success you have seen?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [15]

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It's, again, a very small product. I would not like to -- you see any innovation is like (inaudible). I can't declare whether the (inaudible) would have had within 3 months, so we have to wait and watch.

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Operator [16]

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The next question is from the line of Sameer Gupta from India Infoline.

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Sameer Gupta, IIFL Research - Research Analyst [17]

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My question is also about 2 launches but more general in nature. You've done a lot of new launches in the last few months. You've done True Roots. You've done Coco Soul. You've done breakfast range, et cetera, some new variants of oats, et cetera. So just wanted your initial feel. Some of them might be too early to comment on. But to whatever extent, if you can comment on these 4 or 5 new initiatives and new sort of subcategories that you've launched where you see sort of initial signs of success, where you feel that launch is not ramping up as expected. Any feel you can give on this, sir.

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [18]

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Okay. So again, as I said, that it is very difficult to start and adhere to quality and decided not to now give up any quarterly feel of this thing. As I said, it takes time to build. And we have to be patient. To give a -- okay, but to give you an overall status.

From the [packs], obviously, as I said, I don't have (inaudible) it has been extremely successful. The food business is on [traction]. We believe amongst the existing, similarly, in the bottom of pyramid both Value Added mustard oil and (inaudible) to see the kind of market share. They are both subscale.

In terms of the very new things, I think the support of (inaudible), which is a new food business, Dry Fruit Oil and Kaya could gets scale by the end of the year.

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Sameer Gupta, IIFL Research - Research Analyst [19]

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Okay. Secondly, on Kaya, if I just dwell a little deeper on this. What is the plan here? Do you plan to make it like sort of mass premium skincare brand available in Modern Trade as well as general trade? I mean do you plan to go sort of -- not mass market but I mean in the mass market distribution and current changes become like a normal premium mass market brand? Or do you expect it to remain more niche and restricted to Modern Trade, et cetera?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [20]

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I think we are still prototyping. It's available in Modern Trade, E-com, and we are prototyping in 2 markets in general trade, top-end general trade. And again, we have launched it in March. Please give us some time. And I believe that as the skincare category penetration increases, I think skincare is a potential source of growth.

As you know, at least in the top 7, 8 cities where Kaya has significant clinics and there is Kaya production from the clinics and E-com, Kaya branded (inaudible). So therefore, I think it makes sense to have what I call a [prod] version of Kaya, which is, again, targeted at a slightly younger population and maybe a slightly lower pricing to tap this opportunity. So we are still prototyping it, but we -- given the opportunity, yes, it can get into premium general trade, which is [chemics], cosmetic and stand-alone Modern Trade and general trade. As you know, some of the other mass [steed] brands and antiaging or (inaudible) are previous mass skincare are reasonably available because they have a price point, for example, on some of the subcategories which are very attractive.

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Sameer Gupta, IIFL Research - Research Analyst [21]

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Right. Sir, my next question is on VAHO. So if I take a longer-term perspective, now we believe that initial rapid growth of the low-cost Amla period that is now like normalized, and it's no longer going to grow at 30%, 40%. So in this kind of context, what is the growth driver? Of course, there will be normal organic growth in all your brands. But apart from that, do you think that there is something on the horizon to fill in the gap that, let's say, Shanti Amla had sort of delivered over the last 4, 5 years, if something -- because if that is coming in line with normal growth, is there something that will sort of, again, be a product of that going ahead?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [22]

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So it might be with the one brand. So I think there are 2 opportunities. One is there is a bottom of (inaudible) opportunity. Because as I said, I believe in a post-GST scenario with wholesaler perhaps becoming a little challenged, and some smaller brands will need to lock your brand. So there is a bottom of (inaudible) opportunity which organized here, including us and some other brands are capitalizing on.

The second part of this is sort of premium line, which I said is a combination of aloe, dry fruit oil and maybe more sustaining participation in hair [quality]. So it can't be made up with one brand, but a combination of these 2 aims which are to drive the VAHO growth in the future.

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Operator [23]

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The next question is from the line of (inaudible) from (inaudible) Management Service.

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Unidentified Analyst, [24]

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So if I look at the capital employed for the domestic business, that has seen a reduction of 1 20 crores. Is it the lower copra prices? Or is it something else which is leading to this?

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Vivek Anant Karve, Marico Limited - CFO [25]

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Yes. So if you look at the capital employed, what we have done is there are some pricing final initiatives that we have taken which has elongated the day that (inaudible). So that is the key in it.

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Unidentified Analyst, [26]

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Okay. Okay. Understood. Understood. Can you share the value growth of Value Added Hair Oil for the quarter?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [27]

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11%.

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Unidentified Analyst, [28]

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11%. Okay. And the last (inaudible), if I look at Saffola (inaudible) historically, I think Saffola Gold has been [around] 50%, 55% of our sales mix. So is that facing lower demand because of the slightly higher price point? Or are some of the other [mediums] and subbrands also facing some challenges? If you could share some perspective.

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [29]

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I think it's an issue -- a lot of the subbrands issue, I think the issue is of the channel where we have not been able to -- as I said, there is a justification of the price premium and the interchannel play (inaudible) general trade where -- when general trade where we have been facing significant headwinds.

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Unidentified Analyst, [30]

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And is this because some of the other brands have become aggressive or better price points? Or the value proposition of Saffola Gold has been not accepted or has been communicated? Is that the reason?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [31]

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I think it's somewhat right. I think we haven't -- we need to tackle the entire price promotion strategy. While I -- and I agree with you that I think the -- like as I said that the value proposition in terms of -- compared to some of the others have got challenged. And therefore, that price promotion strategy with respect to each of the channels, we have to get it right. And that is the experiment I was talking about. We still wait and watch and see what happens.

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Operator [32]

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

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [33]

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First question on copra prices, Saugata. Did you mention that from third quarter onwards you expect a bit of inflation in copra?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [34]

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Copra price (inaudible), as you know as you get into off-season, so as you -- in fact, if you look at the -- currently, we are buying at I think 25% below last year, and that's good mostly (inaudible) there.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [35]

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Okay. Okay. Directionally, I mean it's not -- you're not calling for a big inflation rate from where we are?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [36]

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It's (inaudible) that you know on this kind of things it's very difficult to put it. But normally -- I mean as far as -- this is on buying some. I think it could have a little inflationary because we are now in the season. And normally, there is a little bit of (inaudible) as you move from October, November, which is the off-season.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [37]

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Okay. On Saffola, sorry, I just couldn't understand your opening comments about what exactly have you done in urban GT. Could you just recap for me?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [38]

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Okay. And I think it's the price promotion strategy. I think last year most of the promotions was at, say, INR 7.99, 5 plus 1 liter free across all channels. Back (inaudible), so what we thought is that if there is a price affordability issue and also there are channel interplays that normally happen which will be between E-com, (inaudible) Modern Trade impacting GT, can we go for a differentiated back strategy. So this year what we did was while you have a 5 plus 1 liter running in Modern Trade and E-com at INR 8.25, which is the price of the 5 liter, we are giving 1 liter free in Modern Trade and E-com, and we are giving INR 126 price up in Q2.

Now what is happening is that, that has not led in the last 75 days that we have launched in either distribution increase or transaction increase. Further results with no significant transaction increase against the 5 plus 1 which is there, and the last year then we are losing running. That is what I meant.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [39]

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Okay. Got it. And this logic of having this differentiated pricing, was it because that is how the competition was behaving in the market? What drove that differential strategy?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [40]

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So I will not -- I think obviously a brand like Saffola given the kind of consumer proposition that happened in Modern Trade and E-com, how do you make -- how do you prevent inflation and plan -- give a value proposition in GT. That is I think the objective. And globally, this is how revenue management and assortment is normally done wherever there is strong play between 2 channels.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [41]

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Okay. And going further, I mean if I look at the last 10, 12 quarters, I mean there has been a constant struggle on your part on Saffola, and you have tried experimented at all points of time. You have said the same thing what you are repeating today. I mean what exactly -- when do you have -- will have all the answers? Or is it that Saffola is now too difficult to at least on the -- beyond foods, just on the pure oil side, it's now too difficult to get growth backward here? Because all the information that you've given about experiment, differentiated pricing is something that we have been hearing for 10, 12 quarters now.

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [42]

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Yes, you are right, but we have to keep on trying. As I said, the brand has had significant equity and (inaudible).

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [43]

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You think do you now?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [44]

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Yes.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [45]

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You think so? Because the fact that it is not showing and transferring into numbers and -- so does it have as much equity as you believe demand? If that is the case, why would it not perform despite? And you have seen that digital Parachute there have been certain blips along the way. You have been able to rectify those. But in Saffola, just totally opposite to -- and your confidence on VAHO I can understand. And you'll -- yes.

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [46]

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So let me just again rephrase that last year the Saffola product [wasn't] the same. And I think there are a lot of brands in the category -- and I can talk about big brands, which are (inaudible) brands which have grown 5% to 7% across. So I don't think -- and as I said that I think -- yes, I think -- in fact the previous year was, I think it was (inaudible) the demand in the GST quarter the average growth rate has been around 6%. I would -- while I agree there's not been a great performance, I can talk about many brands which are large brands in the case of INR 1,000 crores, which grow 5%, 6%. And then sure, I mean we haven't done a great job. We still don't have answers. But I don't think -- and as I said that every -- in everything, we have to keep on track. I mean -- I don't think if we have strong capability and stock management we make a declaration that we give up.

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Vivek Anant Karve, Marico Limited - CFO [47]

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And when moving (inaudible), if you take a clearly long-term spend. I'm starting a little in the past. But except for FY '18, our average growth rate has always been in the range of 8% to 9%. So at the time (inaudible) our aspiration for the brand is much bigger. And that's where probably the (inaudible).

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [48]

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So just to clarify, FY '16 was 8.8%; FY '17, 7.8%. FY '18 was negative because of this one. FY '19 was 8.1%. So I don't think that demand of -- and then as I said, I can talk about many brands with INR 1,000 crores which are operating at 5% growth. We haven't done a good job. I completely agree. But as I said...

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [49]

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I mean I understand that...

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [50]

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I don't think, as said, that if we believe that this management and leadership and our team has capability will formally declare that we can manage things. So I don't think that is what Marico is all about.

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Vivek Anant Karve, Marico Limited - CFO [51]

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We are falling short of (inaudible). I think that is how I -- we would read internally.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [52]

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Okay. Sure. Sure. And lastly, on the urban GT, 5% decline, whereas overall urban growing 5%. That's again something that we have -- again, I have not [picked up] in case of other companies. So is there a specific thing with your category where the salience of Modern Trade and E-commerce is disproportionately higher, which is what is impacting being on an urban city because this minus 5% number looks too much?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [53]

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Yes. I don't know whether -- I don't have a breakout of urban GT plus Modern Trade and E-com. I don't know, but I believe that reasonable yes. I think we also must realize that (inaudible) a big component of urban GT. And that is also impacting. Number two, some of our new launches which we look at it are also skewed towards Modern Trade and E-com, some of them which we have launched. But as I said, the overall urban channel of 5% are reasonable. I think they can be better, but I just think the urban GT is [checked] because of the fact that there is Saffola having a significant component there.

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Operator [54]

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

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Harit Kapoor, Investec Bank plc, Research Division - Analyst [55]

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Just 2 questions. Firstly, on the fact that copra has actually come off quite sharply over the last 2 quarters, just wanted to get your sense whether you think apart from the low-margin, nonfocused packs some pricing or consumer offers would be required even in the digit packs for Parachute on coconut oil going forward to pass this on?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [56]

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So I think, as I mentioned in the last call, on (inaudible) perhaps a drop of around 20 -- 15%, 20% overall is comfortable. Any deflation more than that is not comfortable. We have taken some tactical course and write-offs and promotions. Having said that, I think what is different from this time versus the previous time, as I said, is in a situation where liquidity -- there's a liquidity crunch in the overall system. The fact that the wholesale system is stressed, the fact that we have a much stronger direct distribution and we have market leadership, these are also competitive advantage. So therefore, our ability to stretch the [client] on the pricing model perhaps is slightly better than what it was in the previous years.

Number two, I think we have learned our lesson from some of the earlier deflation so that we have taken proactive steps in some of the facts in terms of pricing and promo. So to answer your question. We believe that there will be some uptick in the prices by -- as it goes in Q3. And as you know that we do far more given our big cash in the system, our ability to do strategic buying and position building, I think we are comfortable.

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Harit Kapoor, Investec Bank plc, Research Division - Analyst [57]

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Got it. Got it, sir. Second question was on the advertising side. So obviously, brand investments have been strong in India. But even if you look at last 2 quarters, international markets there's been a sharp increase in the brand investments. I just wanted to understand whether this is largely Bangladesh? Or is it investments across the board?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [58]

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It is specifically Bangladesh where we are. As you know, that we are on an aggressive diversification plan. Our Parachute contribution of [90%] a few years ago. We are now like 70%. We have now launched Male Grooming, Skin Care, [Bibbi]. And we will continue to be I think far more bolder in terms of our diversification given our strength in Bangladesh over the years.

Having said that, as I said, that as long as we are making significant margins, we are very happy. We are also investing in Vietnam a bit. But primarily, it is our turbocharging of our growth in Bangladesh.

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Operator [59]

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(Operator Instructions) Your next question is from the line of Arnab Mitra from Credit Suisse.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [60]

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Congratulations on a good set of numbers. On Parachute, actually just carrying forward the previous question. So normally when copra falls, you do have a slowdown in the volume growth. You said that this time it's probably the competitive environment is a bit different. But at the same time, the macro environment and consumption is also weakening. So have you actually seen -- when you say that the liquidity constraints and things like that, on the ground, do you actually see supply issues of some of your bottled coconut oil competitors in terms of either pricing or supply of stock or distribution rate which is helping you sustain this growth? And is there a risk that if you pushed it a bit too much that there could be a quarter where suddenly we see a volume drop -- volume growth drop here?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [61]

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So I think 2 things. There is one -- what -- I think what I meant is that sometimes in current circumstances maybe for small players their ability to load the channel or in the case of wholesale they might have reduced their repertoire of brands. So these are the changes that have happened. And therefore, I think somebody with a direct distribution has a competitive advantage. We are not getting complacent at all. I think we check this from month-to-month. We also now have a model of not only pricing and volume but linked to [mission] upticks. And as I said that we are tweaking in terms of consumer promotions and price of -- in our pricing mix to ensure that -- so therefore, just to give you an example. I think Parachute if you look at our volume and value, there has been a 1% deflation. So it's not that we haven't taken some correction, so -- but we have just taken it -- this time I think we also are taking it in certain paths, certain markets. So we are just following that pattern, but we are extremely being careful. It's not that we will be complacent and be greedy about margins at all.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [62]

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Sure. And the market share gain I think which you mentioned in the release of [250] bps that was on (inaudible) only?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [63]

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That's right.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [64]

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Okay. The second question was on the gross margin. So while copra has come off, there's also been a very sharp deflation in GT prices, which is one of your key imports. So is there -- the raw material environment more benign going ahead compared to what it was even this quarter given the fall in the crude derivative prices? And therefore, do you have more possibility on gross margins or this kind of -- you will get to invested in pricing or advertising?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [65]

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I think you can see on this kind of a thing for the balance of the year fairly. And then in GT, I don't think it will -- I don't think there's any (inaudible) see marginal could be, but I think the biggest one is copra (inaudible). You can say that it might not be 25, but copra deflation could be 20. That's the kind of a number it can be.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [66]

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Sure. And last question on the rural growth. While rural has grown well for you, I mean it is better than urban. Is it a stable situation? Or are you seeing the growth kind of gradually slipping off through the quarter as you went through the June quarter?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [67]

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No. So I can tell you why I think -- let me just give you a flavor of the rural. Yes, overall consumption and channel liquidity I mean those things are an issue, okay? Having said that, I think 2 things we are focusing on this year is that how do you improve the effectiveness and the quality of our rural distribution and reach. And secondly, what we believe is wherever we believe that is a source of competitive advantage. And now we also have a repertoire of a lot of (inaudible) like (inaudible), [Nihar, Shanti], Jasmine, Value Added mustard along with Shanti and, as I said, INR 20 -- rupee price point. So I think we are just now focusing on implementing rural distribution because we believe that going forward over the next 5 years given the dramatic transformation that urban GT will have in experience. If we keep on investing in rural and keep on investing in direct distribution, that will be long term. So (inaudible). And for large overlays plan, also the supply chain and, of course, we are (inaudible) network optimization (inaudible) have also given some cost savings which can be plowed back into rural distribution.

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Operator [68]

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The next question is from the line of Naveen Trivedi from HDFC Securities.

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Naveen Trivedi, HDFC Securities Limited, Research Division - Research Analyst [69]

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So my question is on international EBIT margin. So this margin is [20 bps] highest EBIT margin, and it is even higher than to your domestic margin also. So while this is -- so you achieved around 500 bps expansion. So can you just give us some color about how you're getting this kind of a profile? And is this sustainable?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [70]

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No. I mean -- as I said, we have given you an overall margin guidance of 19% plus. There could be quarterly fluctuations of the margin given the mix of the countries and sometimes the A&P over the quarter. But as long as we are able to deliver you 19%-plus margins, plus even this year, so this will be quarterly fluctuations. But I think one of the things we have done, as you know in [2014] the international margin was [9%]. We have moved it to I think in 2018 to (inaudible), and it's here to stay. We will never get out from that level.

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Naveen Trivedi, HDFC Securities Limited, Research Division - Research Analyst [71]

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Can we assume that the large part of the margin expansion of the 500 bps is driven by some your improve on the (inaudible)?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [72]

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I don't think A&P (inaudible).I had earlier said the A&P still has increased. It is a question of gross margin expansion. As you know, a significant portion of the Bangladesh business is also the (inaudible) business. I think it's a mixture of both. But as I said that I don't think we should look at this margin as a kind of a bellwether margin for the balance year. But having said that, as I said, there's a 20% -- 18% to 20% international margin is also here to stay over the medium term. Okay? A&P has just -- actually has gone up. So if you look at it, none of our margin expansion we have been able to do this with increasing A&P.

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Naveen Trivedi, HDFC Securities Limited, Research Division - Research Analyst [73]

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Fair point. And the second question is on the -- on Bangladesh. As you know that you lost some market share in the Bangladesh. Any specific reason and like any comments you want to mention here?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [74]

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As I said, I think any market, when you have 86%, 87% market share, there could be local competitive threat. So having said that, we have been able to grow the value through [trend case]. So we will definitely -- there has been some localized -- there have been some market share losses in some places, but we are taking action to protect this market share dilution.

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Naveen Trivedi, HDFC Securities Limited, Research Division - Research Analyst [75]

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And lastly, like what we observed in the last 6 months, despite what we had seen quite a slowdown scenario, most leading companies have gained market share in their portfolio. Is it that, that ways to benefits are gradually coming to leading players, and they are organized ahead of the market now started losing share and losing (inaudible) that we were enjoying, which by the slowdown has impacted more -- it's like the slowdown has impacted more towards the smaller players than the (inaudible) trend?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [76]

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I would think it is selective for, as I said, with large (inaudible) brands, which are a significant market share and companies perhaps with big distribution or high-quality distribution. But it's a very slow trend. I don't think we should think it's a very accelerated trend. But yes, there is a trend.

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Operator [77]

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The next question is from the line of (inaudible) from (inaudible).

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Unidentified Analyst, [78]

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This is [Sandan Metacharian] from [Anvil Wealth]. I need -- I have 2 questions. I wanted to understand, firstly, how big is the health food market? Are the 55 target market too big for us?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [79]

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So I think -- as I said, it's a very low-penetrated market. I would say that if the new food business can deliver, say, 200 -- INR 150 to 200 crores in the next few years, I'll be -- we will be happy.

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Unidentified Analyst, [80]

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Okay. And what percentage of the overall market would that be (inaudible)?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [81]

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I think we're participating in multiple (inaudible) and very difficult to get market share in each category. But as I said, that it's completely a repertoire in a range of products. And the way to look at it is that our people are increasingly seeking better-for-you solutions, in-between meals or a breakfast. We don't plan to be in the center of the (inaudible). And I think both the fact that Modern Trade, specialty food outlets and E-commerce driving that trend. I would think we are going to capitalize on trend. I don't think we have specific market share. And as I said that we are running this food business entrepreneurly and not [asking] we are just producing 5,000 to say something is working, something [may not] not working. And then -- and some will scale up. It's very difficult to actually in a (inaudible) get into market (inaudible) what is the market share actually (inaudible). We want to run this business extremely entrepreneurly and see how it moves along the way. But at least, as I said, that if we can hit, say, 35 crores, 40 crores this year and then move to 200 crores in 3 years, 150 crores to 200 crores, would have done a good job.

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Unidentified Analyst, [82]

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Okay. So my next question is related to the year-end. Basically, I wanted to understand in terms of these new launches, new product launches. What is our threshold levels in total figure out whether it's a success or not? I know because there have been many products that will be added to the portfolio. Some will grow up over a period of time, new ones will be added. So what is that makes the management decide to -- we want to consider this type [particular] products for the next 2 years, 3 years, 5 years, whatever the time period?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [83]

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I don't think -- any new things we have to give it time, okay, 2 to 3 years. And as I said that by trying to give you guidance and exact numbers, I don't want to create (inaudible) internal pressure to say that we have not done quarterly. With our new product, if I start giving quarterly guidance, it will be very difficult. Having said that, I think some of the good successful (inaudible) definitely in a personal care like a Value Added (inaudible) that should be the thing -- take an [aloe], for example, that (inaudible). The things like foods cost of (inaudible). But we have certain internal action standards. It has to be meaningful in terms of this one.

Number two, as we see unified (inaudible) actual standard, is there an improvement or growth year-on-year. I think we look at those things, and then we take a call in 3, 5 years. I think -- I know the condition (inaudible), is there something which (inaudible) you will not call a complete washout. We will take the call much more quicker. But as long as there's (inaudible), we are fine. I think it will be difficult to set out for the quarterly targets (inaudible). But yes, we look at sequential growth sometimes. To give you an example, sometimes the environment consumption is positive, sometimes will be negative. But I would say that some of them should hit in 3 years at least (inaudible) 300 crores, some of them, at least 3, 4 of them. They (inaudible) adding critical (inaudible).

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Operator [84]

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

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [85]

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I have 2 questions. The first question in continuation with the food business. What is the aspirational contribution you are expecting in next 3 years’ time for this business?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [86]

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If you look at our number, I think, as I said, the new foods, which will be 150 to 200. And by 3 years, you have an existing food business which is 150 crores plus that should grow 15%, 20%. And you must look at some new things. I mean it's by the next 3, 4 years, and should we (inaudible), it would be a good job if we have a 400 crores to 500 crores business by 2020 to 2023

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [87]

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.

Okay. Got it. Would you be able to share what is the full year target for new select contribution regarding the (inaudible)?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [88]

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No. No.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [89]

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Okay. The other thing I wanted to check, you have in the press -- I mean in the [information] update you have said that 2/3 -- 1/3 of the market is still loose. I just wanted to understand this thing deeper. Which segments or which locations? Or is it predominantly that it will be higher in North India?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [90]

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Yes. I think you are referring to copra (inaudible), 1/3 is unbranded.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [91]

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Yes. So which -- I mean is it the rural which is still a bigger opportunity in terms of conversion?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [92]

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Yes, rural is a bigger opportunity.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [93]

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And what could be this loose market in terms of price?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [94]

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In terms of?

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [95]

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Price, maybe volume or value, whatever you have.

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [96]

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In terms of -- I mean whatever is -- I mean broadly I don't want to give any details, but you can say 2,000 crores.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [97]

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Okay. And this is a long-term opportunity for us for conversion?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [98]

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That's right.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [99]

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One more question on the wholesale part, which you've touched upon briefly. I just wanted to understand this liquidity issue which has been highlighting last 2 quarters. Has that been completely sorted out? And I'm basically looking at what's the wholesale contribution which you guys are enjoying right now.

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [100]

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Not to get into (inaudible) contribution. But I think we still have a channel. It's just not liquidity issue. It also, as I said, there are interchannel dynamics between cash and carry, wholesale, E-com, B2B. And the fact that obviously the whole GST scenario there will be increasing level playing field in terms of compliance. So perhaps long term, it's -- there are 2 things will happen. That leadership brands will -- because of the effect of (inaudible) in fact we get squeezed. Therefore, number two is because of this constant rate fluctuations and channel interplay, the holding power of the wholesale channel are running trade offers to down stocks will not be -- that will be less and less of an offering. And thirdly, it might (inaudible) in terms of cost to sell and you get critical mass. The next rural it would be actually long term plus neutral compared to driving to wholesale.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [101]

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Okay. So basically, I just wanted to understand you are building distribution like 5,000 population. So is that you have given up hopes on wholesale coming back and that's why you're [weighting] the distribution? Or do you think wholesale will come back and that will complement your distribution?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [102]

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As I said, I don't think -- I think everything you can't give up (inaudible). But I think the issuance of the fact that -- we have to see what is the -- if direct distribution is also a competitive advantage or not. What happened is that in the past maybe the incremental cost of distribution versus incremental revenue versus doing -- generalizing a significant portion to wholesale, that would have been a much more beneficial thing. In a [poor] GST scenario and the fact that also the fact that there is channel interplays and options available of cash and carry and other as kinds of distribution and build on our distribution alternative, we believe for large-scale players direct distribution is a long-term sustainable thing rather than compared to just generalizing. So therefore, yes, companies who don't have direct distribution will be (inaudible) in the long term.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [103]

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Okay. All right. Just last one question. Will you be able to share the full year CSD contribution for FY '19 and this quarter?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [104]

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6% to 7% [roughly].

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [105]

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And it's remained at 7% in this quarter?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [106]

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I don't want to get into quarterly contribution of a channel. Broadly annualized, that's the number.

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Operator [107]

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(Operator Instructions) The next question is from the line of Sameer Gupta from India Infoline.

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Sameer Gupta, IIFL Research - Research Analyst [108]

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Sameer, here again. In your foods, growth is quite high at 30% plus. And of course, there are a lot of new launches in the food space. And even launches which have happened in the last 3, 4 quarters, they might be ramping up. So just wanted to understand what is the underlying growth of our core business, that is Saffola, masala, how is that growing?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [109]

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[20].

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Operator [110]

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(Operator Instructions) The next question is from the line of Sunita Sachdev from UBS.

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Sunita Sachdev, UBS Investment Bank, Research Division - Executive Director and Equity Analyst [111]

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Very happy to see that you're giving importance and wanting to build distribution as a sustainable advantage, completely in the right direction. I just wanted to get some color on what exactly and how exactly you're building this distribution? What exactly are we doing to build it?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [112]

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I think there are 2 parts. In [foods], I think instead of just (inaudible). I think we are first focusing on the quality of each, I think. I think more than numbers I believe quality is more important in certain markets where we're underindexed. This year we'll focus on that. We have looked at also the entire channel pay for performance. Because at end of the day, it is important that each channel is incentivized for growth rather than maintenance because sometimes what happens is your performance management system for your distribution partner might not be incentivizing growth, so we have done these 2 things and increasing the quality and also using automation to ensure that there is no risk again affecting the soft coverage.

As far as urban is concerned, I think we are underindexed in [chemics], cosmetic and specialty food outlets to drive our new portfolio. And there, we have segmented distribution where we have created a special channel, special channel programs and a higher quality of last mile in our third-party sales force, which basically would like then . The other thing which we are doing there, I think in shopping we consider it very, very important. Therefore, whether it's duty advisers or promoters and in-shop demand generation, that is one area we are now investing in.

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Sunita Sachdev, UBS Investment Bank, Research Division - Executive Director and Equity Analyst [113]

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So your full year volume, value growth, ballpark numbers that you give kind of include all the improvements or added impetus that you're putting on this urban distribution and rural distribution channels, right?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [114]

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That's right. As I said, it will take time. I mean we have just started the process, and we believe it's for the long term. And whatever number we have talked about, which is the fixed rate for India with a slight deflation, is something which includes the revenue. This is our outlook as of now. Yes.

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Sunita Sachdev, UBS Investment Bank, Research Division - Executive Director and Equity Analyst [115]

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And lastly, I think internationally growth is definitely happening. How sustainable are these levels of growth rate?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [116]

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I think we are actually very, very positive about, as I said, [2] (inaudible). Okay. Let me just give a disclaimer. I think this is subject to no macro surprises, whether a geopolitical or economic trends because international business are volatile. Having said that, we are extremely lucky because if you look at around 75% of our (inaudible) from international, which is, again, which is 22% overall, and 75% of 22% is around 15% or 16% of our business. That comes from high GDP growth segments. So if you look at Bangladesh, Bangladesh GDP growth is 6%. It was -- it's reasonably stable. The quality of human development index is good. We have now, again -- we believe is, again, growing at a [5%]. So we don't have -- our business has come from areas where there is GDP growth. We are lucky that -- I think 90%, 95% of our business has come from countries where there is at least 5% GDP growth, there is currency stability. So I think -- so that's the first thing. So therefore, that gives us the first what I call assurance.

Secondly, I think we have invested a lot to improve capability and execution, leadership capability and execution so that there is predictability and no surprises in the business. So at least, I think Bangladesh and Vietnam we are positioned. South Africa, I think there is a clear, what I call, consumption and macro situation in terms of demand and GDP growth rate. As far as [Nalway], it's not very exciting. At the same time, I think it is holding steady. I don't think there'll be any surprises. And have started in the Gulf. After a long time, we have started making profits. So I would say, overall, I think it's more steady. And I think the more reassuring part of this is that the profit levels or the margin levels of international business which have actually doubled in terms -- over the last 6 years. So I think that is -- this is here to stay. I don't see an erosion of that base.

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Operator [117]

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The next question is from the line of [Fameel] from Motilal Oswal Securities.

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Unidentified Analyst, [118]

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My question is regarding the product lines related to skincare and -- (inaudible) do you plan to enter into products which have a certain mass market to premium kind of pricing?

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Saugata Gupta, Marico Limited - MD, CEO & Executive Director [119]

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I think we are in Kaya Youth, and we see how with Kaya Youth, but I don't think that we'll (inaudible) new brands (inaudible).

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Operator [120]

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And there are no further questions. I will now hand the conference to the management for closing comments.

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Vivek Anant Karve, Marico Limited - CFO [121]

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Good evening. First of all, thanks for joining the call today. And so what I correctly pointed out, we are very (inaudible) performance in the first quarter. And as we look forward, we're confident of delivering 6% to 8% volume growth in the India business and a double-digit constant currency growth in the International business. So that's it from our side. Good evening.

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Operator [122]

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Thank you very much. On behalf of Axis Capital Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.