Marico Limited (531642) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Marico Limited Q2 FY '26 Earnings Conference Call. We have with us the senior management of Marico represented by Mr. Saugata Gupta, MD and CEO; and Mr. Pawan Agrawal, Group CFO and CEO International business. [Operator Instructions] Before we get started, I would like to remind you that the Q&A session is 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 now hand the conference over to Mr. Saugata Gupta. Thank you, and over to you, sir.

Yes. Hi, and good evening to all those who have joined the call. I would like to start with a narrative on the operating environment during the quarter gone by, after which I'll touch upon our performance and strategic objectives going forward. We witnessed steady demand trends during the month of July and August before facing transitionary disruption in trade channels due to the implementation of the revised GST rates in the month of September. The recent GST rate rationalization is a positive step towards boosting demand and driving sustainable growth in the branded FMCG sector. About 30% of our India business have benefited from the GST revision. Consistent with the government's objective, we have passed on the benefits of the reduced GST rates to the consumers across relevant categories, either through price cuts or grammage increase in price point packs, thereby enhancing product affordability and accessibility. Further, the ongoing progress of Project SETU continue to strengthen our distribution fundamentals with execution across markets. Coverage expansion remains on track, underpinned by focused initiatives to deepen presence in upgraded towns and expand outlet reach. Organized trade, specialty quick commerce continued to lead growth for the business. Qcom has nearly doubled on a year-on-year basis. Overall, we're optimistic that easing inflation, supportive policy, transformative GST reforms along with favorable monsoon and a healthy crop outlook will boost disposable incomes and aid consumption across urban and rural markets. Moving on to the quarterly performance. We have delivered a 7% volume growth in spite of the disruptions in September. In India, after absorbing, as I talked about, the transition in trade disruptions, our franchises continue to witness healthy offtake growth with more than 95% of the business gaining or sustaining market share and more than 75% of the business gaining or sustaining penetration. Revenue growth in India business hit multi-quarter highs, supplemented by prior pricing actions in core portfolios in response to sharp inflation in key commodities. Revenue growth will remain strong in the second half, even when partial anniversarization of pricing action in the Parachute and Saffola portfolios. Delving further into the India business, I will now share the performance of our key categories. Parachute was muted in volume terms in the context of unprecedented hyperinflation in copra prices and 60% pricing growth year-on-year basis, I've never heard of any brand, master brand, power brand in the world taking a 60% pricing growth. I think it's something unheard of in large FMCG economies. Obviously, in small countries with hyperinflation, this is a possibility. The brand was flattish in volume terms after normalizing for MLH changes. In addition, we also rationed supplies to certain institutional customers to safeguard brand profitability. The brand consolidated its market share, therefore, continuing to exhibit remarkable pricing elasticity. We expect Parachute to remain steady and revert to growth as pricing and input cost headwinds received over the next few quarters. On copra prices, it has come down actually from 15% from the highs seen in July '25. Current forecasts and our crop estimate outlook suggests that copra is likely to settle down over the course of the next few quarters and start coming down March onwards. Saffola oil was flattish in volume terms amid the prevailing elevated pricing environment. We anticipate growth will gradually pick up over the course of the next few quarters as pricing volatility has subsided. The recently launched Saffola cold-pressed oil range witnessed a positive response on e-com and qcom platforms. Value-added hair oils accelerate its growth trajectory. The franchise gained 150 bps in value market share on a MAT basis. The mid- and premium segment of the portfolio continued to record double-digit volume growth in this quarter. As you will recall, we have started investing behind that and growing that part of the portfolio. We are confident of maintaining this double-digit growth momentum in the franchise in the quarters ahead on the back of strategic pivots over the last 9 to 12 months. The foods portfolio has crossed INR 1,100 crore ARR. Saffola Oats continued to gain market share, while the honey and soya chunks continue to scale up well. The new muesli range is exhibiting green shoots. True Elements and the plant-based nutraceutical portfolio Plix maintained their strong growth momentum. During the quarter, True Elements expanded its ready-to-eat portfolio with the prototyping of Protein Bars and Overnight Oats. We remain on track to meet our aspirations over the medium term. The immense growth opportunity in foods and the potential to expand TAM is undeniable and we'll continue to double down on the same. Having said that, I would have seen that we have grown 12% this quarter. Let me address upfront the reason for this. I think it's a combination of three, four reasons, and therefore, we expect food to go back into higher growth trajectory by Q4. There were four things. One, as you know now, we are lapping up the last year of earnout of True Elements. And obviously, once we have integrated, we have adjusted in terms of certain strategy and consolidated the process and focus on profitability instead of just growth. There is some Flipkart adjustment in terms of -- especially on Plix and which is Flipkart has adjusted accounting where the net realization has gone down based on the discounting. There is also a base of mayo, peanut butter and some Munchiez in the base. And also, for the next 2, 3 quarters, we are now very, very focused on improving Plix profitability and mix. So having -- we will do these things over the next 2 quarters, and we are extremely confident that by quarter 4, we will get back into higher growth rate on foods. Premium personal care maintained a strong growth trajectory during the quarter in the serums, male grooming and skin care portfolio. We aim to invest in sustainable growth vectors across the course of the coming quarters. The digital first portfolio exited the quarter with an ARR of over INR 1,000 crores. We are on track to reach 2.5x of FY '24 ARR in FY '27, in line with our aspiration. We remain sharply focused on profitability and aspire to achieve double-digit EBITDA margins in this portfolio by FY '27. Moving on, the international business maintained its robust performance. Bangladesh showcased its foundational strength and delivered a set of expectations. Vietnam showed signs of recovery backed by targeted initiatives in the quarter and will continue to grow in the coming quarters at a higher rate. MENA remains on an accelerated growth path on the back of strong growth across core and new franchises, while South Africa had a sluggish H1, we are certain of a visible recovery in the second half. To sum up, we delivered an encouraging performance in the first half with both the India and International business progressing in tandem. We remain focused on executing our strategic priorities for the year and expect to sustain the positive growth momentum across India and overseas business in the quarters ahead. We will aim to improve India volume growth and maintain robust double-digit constant currency momentum in the overseas business in the second half of the year. Supported by pricing growth, we continue to target around 25% consolidated revenue growth this year. Over the last few years, we have delivered -- last few quarters, we have delivered reasonable EBITDA growth despite unprecedented input cost inflation and continued A&P investments. As margin pressures ease gradually, we aim to deliver double-digit EBITDA growth in the second half. We remain confident in our trajectory and expect to make meaningful progress towards our ambition of reaching INR 20,000 crores in revenue by 2030. While headwinds and disruptions in operating environment are inevitable, we have consistently focused on embedding resilience across our systems, culture and operating model to deliver consistent and predictable outcomes. Beyond the strong equity of our brands, it is this institutionalized resilience in cost management and back-end capabilities that has enabled us to sustain EBITDA growth through varying input cost cycles without compromising in brand building investments in each and every quarter since the pandemic. And there is something perhaps we are one of the very few companies to achieve this. We have never given any surprise any quarter on EBITDA growth. Our culture of empowerment encourages teams to experiment, adapt and innovate fostering agility and ensuring the continuity of our growth flywheel. This is backed up with a strong next-gen leadership and capability development plan which has led to a strong largely internal succession planning pipeline. I'd also mentioned that addition to this resilient leadership pipeline, our ability to anticipate and call out risks and opportunities in our business ahead of time has ensured consistent top quartile performance in recent times. This is enabled by a leadership mindset, which is self-aware, authentic, which encourages us to embrace reality and focus on internal solutions for issues rather than always externalize a problem. With that, I conclude my remarks. Thank you, and we can now take questions.

[Operator Instructions] Our first question comes from the line of Avi from Macquarie.

I just had one single question. On the GST transition, could you give us a sense on what would be your expectation of the impact? And how long do you think it will take for this disruption to reverse?

So I think we saw some of this impact flowing into first half of October, but I think it's now more or less stabilized.

And the quantum of the impact in your opinion, how much would it be on sales or volume whichever way?

You can take around 2% kind of a thing in the quarter 2.

See quarter 2 was an impact of about 2%. Now it was led by destocking. But typically, what we have seen is that once the trade destocks, it's very difficult to sort of bring it back to the old stock level. So if the question is whether we'll see a positive impact of 1% or 2% in quarter 3, the answer is not really. But having said that, we've given a guidance on the overall volume trajectory, which we definitely expect that could be slightly better than what we delivered in quarter 2.

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

Two questions. First is on the honey and soya chunks, if you could tell us how much is the salience of kirana in this part of the portfolio? And if you could talk about profitability, how is the positioning? Are you more of a price warrior or now you are charging almost parity to the market leader in these two segments?

So we will be a warrior, but not on pricing. I think we are a challenger. So if you really look at it, two things we have to do, which is as far as honey is concerned, I think we were over-indexed in organized trade. And as far as GT is concerned, our weighted distribution was not that great, but there is a significant portion of honey businesses on GT. We are beginning our initiatives on that, and we believe that while in OT, it is a lot of pricing game and a lot of more clutter, as far as GT is concerned, it's a far more -- and is the same case, Muesli also, that the number of players in GT are far lower. And usually, the leader enjoys a far higher market share. Therefore, the market share pool available for grabbing is far higher. And I think we have -- we should have done it a little earlier, but we are now very, very determined to get our act right on GT and Foods. And now coming to profitability, and profitability of honey is, I think, decent. There is no reason for concern. As I said that on pricing, we are no longer -- we don't operate on price. As far as soya is concerned, soya is primarily a GT initiative. And we are obviously taking steps to ensure the reason we are not growing significantly aggressively soya to ensure we grow profitably. As you are aware, in the last 2 years, we have increased our gross margin in food by 1,000 basis points and we are determined every year to improve that gross margin.

One follow-up there, Saugata, so in terms of soya, why is it primarily GT, because modern trade e-commerce, quick commerce generally is much easier low-hanging fruit, so I couldn't understand why more of GT in this?

So soya actually, the consumer use is basically, especially during the monsoon, it's used when vegetable prices go up. It is used as a protein substitute and it is for the mass end. Now we don't participate in the so-called mock meat and frozen, which is growing, but it is not yet that critical mass. So -- and also, if you look at the unit price, it is not a very high this one, and therefore, technically, even if I push OT, it will not be a very profitable this one to push in OT because the pricing is pretty muted in terms of the unit price of soya.

Understood. Second and last question. So generally, Plix the growth is quite strong. So now you are also mentioning the profitability also comes into the picture. So the reason for that, it is just a phase evolution, if you could talk about competition, how is the competition shaping up? I think HUL's Oziva also in many of the segments, now they also compete. So if you could talk about how the competitive intensity is? Is that one of the reasons why profitability is coming as a focused area. And you spoke on accounting on Flipkart. Normally, this kind of thing we have not come across other FMCG companies. So how does your number change because of the accounting, the logic behind that, if you could explain? And similarly, what is the size of the True Elements two new products. So one is, of course, Overnight Oats market size, is it very nascent? And second, Protein Bars is very competitive. So what will be your positioning here given a lot of D2C companies also there here?

Okay. I think Pawan will address the Flipkart thing, which is specific to only Plix and this one, only digital brand. It is not this one or other anyway, we'll explain that. I think as far as Plix is concerned, there are two things. One is nothing to do with -- we want to significantly improve profitability because it is a critical mass, it continues to grow. And the reason is we have, as I talked about an aspiration of double-digit EBITDA for the entire digital business in 2027. So what we are doing in the next 2 quarters. The food part of the Plix, which is while -- we will continue to aggressively grow the Personal Care, which is that mix is changing. The food part of the Plix, we are ensuring that we invest -- and in the right channels and the right this one to drive and improve profitability. And it takes only two quarters to handle that, okay? Now coming to Overnight Oats, it's a category we are creating. It's a big category in developed markets like U.S. because of the Bircher muesli and that's the this one. It is a category we are developing and True Elements in one of the pioneers as you know that, the oat historically, Marico has creased the category. It was a plain oats category, masala oats is something which Marico has driven, and we have significant success and experience in category development in the oats category, okay? Now coming to protein, I think you have to participate in the category. It's unlike other companies, the protein is the only driver of growth. True Elements is a far more wide spectrum and a broader participation. We believe that True Elements has a right to win and get a share. So it is more of a participation and getting some share of the category because at the end of the day, if you are a pro-health consumer who is using various types of this one, I can easily cross sell and upsell to that set of consumers. Now coming to the Flipkart, I think just a -- Pawan will take it up.

This is more in the context of the digital-first brands. Saugata mentioned in the opening commentary does not have any material impact on the Marico numbers reported, because Plix has a significant chunk of business coming in from foods, and therefore, it's more of an accounting adjustment where certain part of the expense is now getting net out from the revenue. On a like-to-like basis, there is some impact on the reporting of food, but if I were to just extrapolate this to an overall company level, there is no significant impact.

And this would be impacting other brands on Flipkart also? Is it specific to you?

It is for the brands where it is a B2C arrangement with Flipkart. And for us, it is largely on account of Plix. Nothing to do with Marico set of brands and nothing to do with even some of the other digital brands that we have.

The next question is from the line of Mihir Shah from Nomura.

So looking beyond FY '26 and just taking a context as a leaf from FY '25, despite significant gross margin pressure, you have materially stepped up your ad spends. How should one think about ad spends going forward in FY '27? And is there a threshold of margin that you want to work with on the gross and EBITDA level that we should keep in mind?

So I think our objective is to maximize growth while -- there seems to be some -- hello, can you hear me, yes, okay. So if you really look at it, our objective is to ensure that we continue to maximize growth and volume share while operating with a threshold level of margins. What I see in FY '27 is following is that I think there will be in terms of some of the raw material costs coming down, there will be an opportunity to get back some of the margins. Some of the other issue is that we will continue to invest. And as you know, that we started investing in the premium part of VAHO. We will continue to invest behind our diversification and the premiumization. So therefore, there will be margin improvement. But as I said that we will -- our main focus is also to ensure superior and top quartile volume growth as we continue to get into FY '27. We also expect improvement in Parachute volume growth. As you know that Parachute, some part of the volume dip has also happened because of two things. One, we couldn't supply to some of the institutional this one because of the choice which we took because of the profitability. And number two, the MLX drops. So I believe there will be higher volume growth opportunities in Parachute especially. And we will continue to invest. There could be slight increase in A&P, maybe. But I think the more important part of it is that we are extremely confident of the bottom line growth as once the input cost start coming down, and we expect the copra, and as I said, that in commodity, nobody can predict. But as far as we are concerned, given the outlook, given the crop, given the demand supply situation, we expect copra to definitely come down by March. And therefore, next year, and one of the things which we had alluded to in the earlier call in the previous quarter is that one needs to look at a double-digit profitability growth over a 2-year CAGR basis, which we're pretty confident about.

And if I may just add, I would just want to mention that gross margins definitely have bottomed out. And as we move ahead, it will only improve from here. And as far as A&P spend is concerned, we are very confident we'll continue to spend in double-digit growth in A&P. And we've also seen in past that in any deflationary year, followed by -- any inflationary year followed by deflationary year, we've been able to increase our operating margin by 200 to 250 basis points. So depending on where we end up this year, we are confident that next year operating margin will definitely see an improvement of at least 200 basis points.

Got it. Very clear, Saugata, from that aspect. Second question is on Project SETU. Again, looking beyond FY '26, what is the kind of benefit that this should continue over FY '27. And how should one look into in any tangible targets that you have that you can share on Project SETU, and the benefit of that?

Yes. So very difficult to allocate a growth, but I will give you what are the things we have done. The first benefit of Project SETU has come that wherever we have -- as you know, that usually, a wholesale dependency means that only they deal with high velocity power brands. So in most of the South and West, they dealt with Parachute, in the north and this one in the East, they dealt with Nihar and in the north and some parts of the West, they dealt with Shanti Amla. What it has done is Project SETU has given rain selling. And that has led to directly this significant improvement in the trajectory of VAHO growth, and we are extremely confident that we will continue to -- and this VAHO growth, which has happened is in the high-margin part of the VAHO growth because Shanti Amla is a slightly low margin, the rest of the place is a high margin, which has also given us the luxury of saying that we are not getting into a BTL fight below I mean in terms of trade spend and try to protect the price point price of Shanti Amla. So that operating leverage and the choice we now have the luxury of choice, thanks to SETU. The second part of SETU, which is now going to happen is that in markets where Parachute is dominant, how do we grow other and diversify the business, especially in the South. The third opportunity which we will tap is, as you know, there is a gap between Parachute rural market share and Parachute urban market share to the extent of at least 14% because I think it's 60% in urban, 60%, 60% and around 46%, 47% in rural. So that gap we want to bridge. The fourth part of SETU, which you will now see is that the urban part of SETU, which is we are under-indexed in food, we are under-indexed in chemists and cosmetic outlets. And I talked about the fact that in things like Honey, muesli, where the opportunity to grab market share because of the number of players are far lower in GT. Secondly, I think in chemist and cosmetic and this will also give an opportunity for trying out in limited options at SETU of some of our digital brands into GT, whether it's in chemist, cosmetic or food outlets. So that will be the last phase of SETU. So I think what will SETU ultimately do is it will first reduce that gap between direct, indirect coverage. But secondly, it will help in diversification, help in range selling, help in far more automation. And one of the other things that has happened is we are controlling the resource allocation, a lot of below-the-line spend that was wasted, we have now -- and we will convert that to above the line over the next 2, 3 years, which will also help in driving offtake-based growth.

Got it. Thank you Saugata for the detailed answer. I think the momentum that is -- we are seeing should continue and that is the confidence I was looking for.

Our next question comes from the line of Harit Kapoor from Investec.

Just two questions from my end. If you could just explain if the copra price coming down by about 15%, how do you see -- I mean, how does the market competitive activity work, is it that do you need to make some price revisions, MLH revisions? Or given that you had not passed on the full impact, you don't need to make any changes there. How does the copra price movement at this price, how does it impact the market activity for you in terms of MLH and price? That's my first question.

So at this current level, I don't see any reason for pricing action, we are very comfortable.

So the way to think about it is that this recent fall actually just plays out in terms of a slightly better margin profile going forward. That's the way to think about it.

Yes. So that's why we have indicated that we are a little more confident of trying to deliver double-digit EBITDA growth in the second half.

2 Got it. And the second question was on the LUP bit. You mentioned that there have been some grammage increases as well. So what part of the portfolio, what percentage mix of the portfolio have you seen these grammage increases, if you could just highlight that?

Okay. Let me just clarify. In Parachute, because of inflation, we have taken MLH drop. In the case of...

I was asking more from a GST perspective, yes.

Yes, Shanti Amla, yes that's some part of the portfolio. That is very marginal because as I said that we only operate in LUP mostly in Shanti Amla.

So that was in the context of value-added hair oil, where on the price point what has -- we could not have reduce the prices. And therefore, we had increased corresponding MLHs in those price point packs. And as Saugata mentioned, that's largely in Shanti Amla, other part of the VAHO does not have any significant contribution coming in from price point packs.

And last thing on VAHO, this quarter, obviously, has been monthly highest growth that you've seen in recent times, and you mentioned a lot of initiatives. Do you -- you also had a fairly favorable base this time around where we had very sharp reductions in the base. So I just wanted to get a sense of, how much of this is base led, and your confidence on continuing to maintain, may not be this level of trajectory, but at least a double-digit growth trajectory. Is that something which we're fairly confident about, sir.

Okay. Let me give you some piece of statistics. The volume, 2-year CAGR minus Shanti Amla, because as I said, that we are defocused the LUP of Shanti Amla. The value is around mid-single -- high single digit, sorry, 9%. And if you take this year also, it's -- the volume will be around for the premium part, which is the non-Shanti Amla portfolio is in double digits. So we are extremely confident of continuing to delivering teens growth in VAHO. And I think just to add that the very fact that we are focusing on the premium part of it, it also helps long-term margins.

The next question is from the line of Anand Shah from Axis Capital.

So I mean -- a few questions. I mean, firstly, on the digital first portfolio. I mean, you already sort of seem to be clocking much higher than your aspiration. So I mean, as per my math, you already probably would be in that INR 1,000 crores ballpark this year itself. So any chance sort of -- I think you've already upgraded the ARR guidance to that extent. But any chance where you will surpass? And which parts of the portfolio are firing here mostly. I mean can you give some granularity.

So I think we are getting significant growth in Beardo and Plix. And as you know, Beardo is around in the region of a double-digit EBITDA. Plix has broken even over the next 2, 3 quarters, we'll focus on significantly increasing the EBITDA percentage in Plix so that we are on our way to our 10% target in 2027. Our first -- True Elements is undergoing the integration. As you know, we got 100% sometime in September. And therefore, our first task is to ensure that we integrate it well. We obviously and also start our journey towards breakeven. And as we said in the last call also, our focus on Just Herbs and True Elements is first to get the breakeven. And I'm okay with a moderate growth. And -- but we are most happy to accelerate the Personal Care part of Plix. We are working towards improvement in the profitability of the other part of Plix and also driving the -- this one. But more importantly, I think we have started the process of synergies of the digital brands, cost synergies to drive profitability, including common sourcing, common logistics, common systems, common media buying, digital media buying. And that is a huge this one. Because we believe that while we are capable of growing at a faster pace, it's equally important to focus on the profitability. And once we get the profitability, we push the pedal and accelerate rather than just pushing the pedal.

Got it. Perfect. I mean, on the margin side, would it be fair to say you would already maybe by '26 end be in the low to mid-single digit in terms of margins for the digital-first portfolio?

Overall, put together, we may not be able to give you an exact number as to where we will be. But as Saugata mentioned, in Beardo we have moved to double digits. In the next 2 quarters, we are hoping that Plix will move to mid- to high single digits. We have a job to do in True Elements and Just Herbs. And Saugata also mentioned that in True Elements also our focus has been to sort of improve the profitability because we have taken this from the promoters into the first year. So we continue to standby with our guidance of a double-digit operating margin for the next year, where we feel that we should be able to reach that mark by end of next year.

Okay. Wonderful. And one clarification. I mean, True Elements would be clubbed in your foods reporting, that's correct, right?

Yes, that's true. And also the food part of Plix also gets reported in the foods.

In the foods part, yes. Okay. Got it. And second, I mean, you did indicate that you were sort of -- I mean, from inflation to deflation, eventually, you see 200 bps kind of an expansion on average, which has been the historical band as well, 200, 250 bps. So if copra is just in this price as if it is today and, let's say, it doesn't correct, then would that still hold up?

See, as far as copra is concerned, we believe that it will remain range bound over the next 2 to 3 months. And then when the flush season comes in, in the month of March, we will see some meaningful correction. So definitely, we don't expect the copra prices trajectory to continue at this level. Of course they already come off from the peak for about 15%. And after 3 to 4 months, we definitely believe that it will come down.