'We are moving from products to solutions'

SMART TALK

With the FMCG sector once again seeing better days in terms of pricing and margins, companies have churned out better quarterly numbers and analysts hold a positive outlook for coming quarters for most segments of the sector.

While a behemoth like Hindustan Lever posted 14.4 per cent y-o-y growth in net sales and 56 per cent bottomline growth in December FY06 quarter, hair care and skin care major, Marico, posted 13 per cent net sales growth and 42.6 per cent net profit growth.

Recently, Marico acquired the Rs 120 crore coconut oil and perfumed hair oil brand, Nihar, from Hindustan Lever. Nihar's distribution reach in the eastern market will provide Marico a platform to showcase its other brands.

Transforming from a oil to beauty care and wellness company, Marico is bullish about growth, both in India and abroad. Excerpts from an interview with Marico chairman & managing director, Harsh Mariwala.

What kind of growth and returns do you expect from your newly acquired brand, Nihar? How much did you acquire it for?

Currently we are in the process of finalising the details of the acquisition of Nihar. We will declare the price at which we bought it, later. The new brand, which is strong in east India, will help us increase our presence there. We will also get backroom synergies in sourcing of copra and in supply chain.

Nihar is a big brand and it will boost our bottomline. It will give us tax benefits as well. This acquisition will help us in achieving our turnover target of Rs 2000 crore in another four years' time. The two soap brands we bought in Bangladesh will also serve the same purpose.

What was the strategy behind acquiring Manjal soap brand?

We are new to the soap business and are hence moving up the learning curve. The acquisition of the turmeric-based Manjal is a 'bolt-on' acquisition. We found it better to acquire an established soap (in Kerala market), rather than starting afresh.

We plan to take it to other markets and have already prototyped it in Tamil Nadu. We will watch its progress there.

How would you fund your investments in new products?

We would fund most new investments through internal accruals. But we would go for some debt for the Nihar brand. When new products are introduced, the initial costs result in a hit on the bottomline, but the same is recovered in 2-3 years.

Tell us about the contribution of various brands of Marico to the total revenue and profit. What changes are expected going forward?

Over the last few years Marico has brought down the share of its leading brands Parachute and Saffola in the turnover and profits, so as to create more engines of growth.

At the same time, Marico is consciously growing the share of its focus brands (which include Parachute and Saffola). Broadly, the share of Parachute is now about 40 per cent and that of Saffola about 15 per cent.

Other parts of Marico's basket, which have grown and now constitute over 10 per cent each of the portfolio are its international business and its hair oils (comprising Parachute Jasmine, Shanti Amla and Hair & Care).

Though Sweekar currently contributes about 10 per cent of the turnover, it does not receive focus owing to the low margins in the refined sunflower oil category. The balance is made up of a number of smaller brands and new business categories such as Kaya and Sundari.

Going forward, the share of the newer brands and businesses is expected to grow. We have been prototyping new products in its chosen areas of beauty and wellness. This year we rolled out Parachute After Shower cream nationally. As with any FMCG, we must experiment with a pipeline of new product ideas.

What kind of growth do you expect in your existing businesses?

Our hair care business is expected to grow in double digits. Within that, perfumed hair oils will grow faster on a smaller base, while plain coconut oil may grow at 5-7 per cent.

For FY07 we have targeted a growth of 15-20 per cent. Saffola will grow at about 10-15 per cent. Moreover, we are prototyping two new brands in Mumbai. They are Parachute Therapie and Saffola Atta Mix. Sparsh baby oil is another prototype.

Kaya has now expanded to 44 clinics (42 in India spread over 16 cities and two in Dubai) and has a customer based of over 1,00,000. We plan to consolidate the existing Kaya Skin Clinics over next 6-8 months. We will not open any more clinics in the next six months.

But, over the next two years, Kaya may put up another 15 to 20 clinics in India. We will open a few more clinics in the Middle East, the first of which will be at Abu Dhabi. The turnover from that business in FY06 is expected to be Rs 45 crore. It will break even in FY07 with a turnover of Rs 55-60 crore.

The progress in Sundari has been slower than anticipated. It is primarily in the US and Asia Pacific region. The company will persist with its strategy of targeting large destination spas.

The lead time from first contact to booking an order is long, maybe 6-8 months. However, we have been acquiring some prestigious accounts. Investments will have to continue into the next year, before we see some significant numbers getting added to the topline.

In FY07 we expect a 40 per cent growth on the small base. The losses are likely to reduce by Rs three crore. We plan to target Europe in FY07.

Which products and regions are expected to contribute the most to your target of Rs 2000 crore turnover in four years?

To achieve the Rs 2000 crore turnover target in four years, we need to growth at 18 per cent every year and reach Rs 1150 crore turnover in FY06.

In the international business, we plan to increase our market share in coconut oil and soaps in Bangladesh. We expect a Rs 40 crore turnover in our hair oils and creams business in Middle East in FY06 and Rs 60 crore in FY07. A 30-35 per cent growth is expected in our overall international business in FY07.

While Marico will focus on nurturing its new brands and businesses, some of the current brands may still comprise a significant portion of the Rs 2000 crore. Parachute, Saffola and Sweekar may still remain large brands in the portfolio.

The international business division, which is already over Rs 100 crore, is expected to contribute 20 per cent of total turnover in 4 years. A large new entrant in Marico's basket will be the recently acquired brand, Nihar. If Kaya establishes itself in smaller towns too, as it has done in the metros, it would grow into a reasonably large sized brand for Marico.

What are the possible effects of raw material prices hikes in coming quarters?

Coconut prices are expected to remain stable in the coming year. Prices of palm oil will not affect us much as our soap business is very small. We do not see any raw material price threat, including packaging material.

How do you plan to face the ever present stiff competition in the FMCG sector?

We will continue to be consumer centric, gaining insight and innovating. We have plans for new products and will have a couple of more prototypes in March, on the lines of baby oil in Andhra and Tamil Nadu and the jasmine soap in West Bengal. We also want to scale up our small business of Saffola Salt.

Our four-pronged strategy should help us in facing competition. First, we have been undergoing a journey from low-margin to high-margin products. Second, we are moving from oil to beauty care and wellness business. Third, we aim to increase the contribution of the overseas business turnover from 10 per cent to 20 per cent of the total over four years. Lastly, we are moving from products to solutions and the Kaya and Sundari brands are steps in that direction.

How much will be advertising as a part of the total promotional costs, in future?

Marico has consciously followed a strategy of brand building where it spends a larger portion of its ASP expenditure on advertising, rather than on promotion. This creates a longer term franchise for its brands with effective communication.

The company spends about 80 per cent of its ASP budgets on advertising versus 20 per cent on sales promotion.

What are your expectations from the Budget for your sector?

Hopefully all the states would agree to implement VAT, for which a proper roadmap is required.

What do you view as possible threats, going forward?

A general hostile environment in Bangladesh requires us to be cautious in future. Across other markets, our innovations in our hair care products like hair creams help us keep pace with the emerging trends.