Financial Daily from THE HINDU group of publications
Wednesday, Oct 06, 2004
Financial Daily from THE HINDU group of publications Wednesday, Oct 06, 2004 |
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Corporate
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Interview `We're betting on high margin products' Latha Venkatraman
Mr Milind Sarwate, Chief Financial Officer, Marico Industries Ltd.
Mumbai , Oct. 5 MARICO Industries Ltd has worked backward from the consumer propelling it on a growth path, according to Mr Milind Sarwate, Chief Financial Officer of the company. This has helped the company to sustain growth over a long period and has enabled it to turn in an upward profit curve for the last 19 quarters. "Stock market also rewards companies whose maintainability of future profits is high. This maintainability can manifest only if a profit making apparatus is in place," he told Business Line in an interview. High margin products have contributed to Marico's turnover and profitability growth in the past few quarters. Do you see this trend sustaining? Has the portfolio of high margin products shifted significantly over the last few quarters with the change in input costs or any other factors that may have impacted margins? The entire journey towards high margin portfolio started about two years ago. This portfolio is growing by about 15 per cent in volume terms while the low margin portfolio is degrowing. That is a conscious degrowth plan. The proportion of high margin products would keep growing and getting rid of some low margin products can do this. We stopped making Sweekar Soya, a low margin product that generates volumes but contributes little to the bottomline. We continued with Sweekar sunflower whose margins are low but not as low as Sweekar Soya. Besides, incremental volume will come only at low margins. When we launch new products we not only look at the size of turnover they can generate, but how sustainable the margins are. All the new products that we have looked at recently have been big margin generators. They have pushed up our margins profile. We are a volume-led company, not a value-led company. We believe that real consumer franchise lies in physical consumption. In some ways, we also look at value. But in driving our sales up, our focus is on volumes; our sales and marketing targets are based on volumes. We have been pushing up high margin portfolio using this criterion. Even when we were not growing by numbers, we always disclosed our volume data. Our turnover growth was 16-17 per cent in value - volume and price increase contributing equally. Today, branded coconut oil is able to charge a 100 per cent premium over loose oil. Our focus is on ensuring that we move up the value chain as much as possible. Year-on-year, to what extent has your revenue mix changed between high margin products, international businesses and new businesses? There is a clear trend in Marico to focus on high margin business. Our international business is clearly high margin business. It has been growing at a CAGR of 35-40 per cent over the past few years. Kaya and Sundari are also high margin businesses. Although, there are no profits now for these businesses because of the initial investments the margin profile is very good. In Kaya, the key cost is that of equipment and infrastructure. Setting up Kaya business is like setting up a hotel business. Today, there is a minimum critical mass of high spenders - a creamy layer that is growing. The stigma on spending money on oneself is getting reduced. There are more structured occasions to spend on. This trend is growing. This unidirectional change is helping our Kaya business. We are trying to ride the change that is taking place. Marico's profile has changed with its foray into services. This came up earlier than expected. We took an entrepreneurial leap into skin care services. Our composition of products has changed over a period. There has been a change even in terms of how we look at our portfolio. Earlier, it was hair care and edible oils; now they are personal care and health care. We have moved to branded products from commodity products. We have moved away from selling to the masses in a general way to selling something. Marico's strength has been new innovations, new businesses and new ideas? Does the FMCG market have the wherewithal to accept any of these new ideas further? Or you think there still exists huge opportunities? In the products space, it is difficult to say if huge opportunities exist. Because most markets are coming to a situation of being over-flogged. We believe there are innovation opportunities in new geographies. An example is Parachute hair cream. It has done very well in the Gulf in the face of stiff competition from international products like Brylcreem and Sunsilk. Parachute hair cream is already at number two position. In India, this product did not do well, but in the Middle East it seems to have clicked. There is innovation in the services business. It provides us with consumer insight. There is also a huge scope in international business. At the moment, we are losing money in some of it like Sundari but in terms of direction we are on the right track. Sundari required a critical mass to come of age. But this business has given us an opportunity to learn about the US market. In this business we are focusing on Spas. We are looking at the Ayurvedic skin care market, as alternative products have big growth prospects in the US. Rising input costs have been impacting FMCG companies. Is Marico also subject to vagaries of input costs and to what extent have you been able to mitigate the impact? If there is an underlying commodity, the company has to manage the cyclical fluctuations in prices. Marico has ridden these cycles very well. For instance, Parachute, which used to cost Rs 29 in 1997, now costs Rs 34. Cost management has brought down our packing material costs during this period. So as a brand, Parachute has the pricing power to take prices up when input costs go up and also to take them strategically down. Over the last seven years, Parachute's price has moved in a wavy line but at the end we are making Rs 5 on each bottle. We are able to command a premium. A brand should be able to do that. We don't take positions in commodity markets. We are the largest maker of packaged coconut oil. So, if we enter a rising copra market to take positions, we will end up driving up prices further. We believe that real money lies in the higher strata of the value chain. That approach has helped us to charter an uninterrupted 19 quarters profit growth. If we were to ride a commodity cycle, then we would not have made profits. We work backward from the consumer. Stock markets also rewards companies whose maintainability of futures profits is high. This maintainability can manifest only if a profit making apparatus is in place.
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