Marico Limited (531642) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Marico Limited's Q3 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] Please note that this conference is being recorded. Before we get started, I would like to remind you that the Q&A session is only for institutional investors and analysts. And therefore, if 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, good evening to all those who have joined the call. I would like to begin with a brief overview of the operating environment during the quarter. After which, I will take you through our performance and strategic objectives going forward. Demand conditions during the quarter remained stable. We continue to see the building block for a gradual recovery in consumption supported by moderating inflation, improved affordability following the recent GST rate rationalization, which has been transformative, higher MSPs and a healthy crop sowing season. We believe these factors provide a constructive backdrop for demand improvement across both urban and rural markets in the coming quarters. Moving on to our quarterly performance. The India business demonstrated a sequential improvement in volume growth despite an elevated pricing environment, which started tapering off towards the end of the quarter. Revenue momentum remained strong, aided by calibrated pricing actions across core portfolios over the last 12 months in response to the rise in input costs. Our franchises have continued to record strong offtakes with more than 95% of the business gaining or sustaining market share and about 80% gaining or sustaining penetration on a MAT basis. Among channels, while e-commerce and quick commerce were leading growth drivers, we saw a clear improvement in traditional trade, marking the outcome of consistent investment and targeted actions over the last 2 years. Project SETU has continued to strengthen our distribution fundamentals, execution capabilities and the coverage expansion remained firmly on track, led by deeper presence in upgraded towns and pan-India rural scale-up. We will now commence the initiatives and targeted expansion in urban channels such as chemist, cosmetic and specialty food outlets. These actions are enhancing our direct reach, improving product assortment and availability in rural, and will subsequently accelerate our premiumization and diversification and [indiscernible] general trade in the top towns. Delving deeper into the India business, I'll now share the performance of our key categories as continue to demonstrate inherent brand strength despite prevailing consumer prices, underlying volume growth after adjusting for MLH reduction remained positive, demonstrating remarkable price in elasticity and deep consumer trust and loyalty. With correction having set in and copra prices down by around 25% to 30% from peak levels, the brand will be passing on the benefit to the consumer in the coming months as and when we believe it's the right time to do it. While we expect near-term performance to remain stable using absolute consumer prices will support a gradual recovery in volume growth over the course of the next year. Value-added Hair Oil delivered a strong quarter with accelerated market share gains. Our value share on MAT basis stands at an all-time high of nearly 30%, showing considerably -- considerable progress towards premiumization of the mix and bridging the gap between volume and value share, along with our intended lines and long-term aspiration. We remain confident of sustaining a double-digit growth trajectory in the near to medium term supported by sharp strategic focus on the mid- and premium segments, consistent innovation across channels, enhanced direct reach to Project SETU and structural tailwinds from the recent GST rate rationalization which has driven affordability. Saffola Edible Oil had a soft quarter in elevated pricing environment, with revenue growth moderating as prior pricing actions largely anniversarized in this quarter. Like in the previous quarter, we have sacrificed volumes which are below our threshold margins across certain packs and channels. Going forward, the brand will continue to sharpen its premiumization agenda led by Saffola Gold and total variants and the recently introduced cold-pressed oils, which is doing quite well. Backed by strong equity and focused consumer activations, we expect Saffola to chart an improving volume growth trajectory in the coming quarters. The foods portfolio performed broadly in line with the stated expectations as we had talked about in the last call that we will take a pause on our growth, as we rectify some of the portfolio which is not delivering high on profitability. So Saffola oats continued to gain market share and consolidate its market leadership. As we had conveyed earlier, with the portfolio rapidly scaling up to ARR of INR 1,000 crores, our focus has been on stabilization, strengthening profitability towards building a sustainable profitable growth engine. We remain very bullish on value-added foods and Nutra opportunity India and our strategy to invest in fewer, bigger, better plays in terms of our portfolio approach. That being said, we are confident of resuming the accelerated growth trajectory in our organic food business over the next 2 quarters. We also announced the strategic investment in one of India's leading premium gourmet snacking brands 4700BC. This is renowned for its popcorn and also offers a range of innovative stack offerings such as Pop Chips, Makhana, Crunchy Corn and the recently launched Nachos with Avocado Oil. I would like to share our perspective on this investment. When you look at our Foods portfolio today among Saffola, which stands for healthy foods playing in the masstige segment, True Elements, which stands for the clean label, premium breakfast cereal, nuts and seed and snacking segment and Plix with the nutraceuticals, there was a gap in our portfolio of our premium gourmet snack, which is better for you and can deliver a mix of offerings for all locations. I'm particularly excited about how the better-for-you gourmet snacking brands are becoming a choice for the consumer who want taste and differentiated flavors as a part of their routine. We believe 4700BC is an underleveraged and under-invested brand that can, if afforded the required investment and our overall capabilities, including cost, channel, GTM and with a strong new product pipeline ahead, it will continue to push boundaries in the premium gourmet snacking arena. Together, we will tap the opportunity to leverage our existing scale in foods and drive synergies and broaden the brand's presence across channels. It is clocking at about INR 140 crores ARR in the last 3 months. We see tremendous potential for the brand to scale its ARR to 3x in the next 3 years. In Premium Personal Care, the portfolio comprising serums, male grooming and skin care grew in double digits and is expected to exit the year at an ARR of INR 350-plus crores. In addition, the digital first portfolio is expected to exit FY '26 with an ARR of INR 1,000-plus crores. We are on track to reach 2.5x of FY '24 ARR next year and we are making concerted efforts to move to double-digit EBITDA in the digital-first portfolio by end of FY '27. Moving on, the international business continued to deliver robust and broad-based growth. Bangladesh led from the front, supported by a steady core business and a scale-up of new franchises like shampoos. Vietnam and South Africa bounced back to deliver double-digit constant currency growth driven by targeted initiatives. MENA continued to deliver strong performance in key franchises across both the Gulf Region and Egypt. The NCD business also delivered accelerated growth. Overall, the international business is now exhibiting a virtuous growth flywheel, and we expect this momentum to sustain across markets over the medium term. To sum up, we delivered a strong and resilient performance in Q3 with both the India and International businesses progressing well in a steady operating environment. We remain sharply focused on execution, strengthening our franchises and driving sustainable volume-led growth. In India, we expect to drive improved trajectory in the core portfolio while driving the profitable scale-up of foods and digital first businesses. We aim to sustain the volume growth momentum even as pricing growth is likely to moderate over the course of the next few quarters. With input cost easing and margin pressure subsiding, we expect progressive improvement in operating profit growth rates over the coming quarters. As we look ahead, we are moving from stability to purposeful acceleration, leveraging a resilient operating model and a disciplined cost architecture. Our priorities are clear, sharp portfolio choices, enabling faster decision-making and driving agile execution. Importantly, our agility has enabled us to take targeted initiatives and successfully turn around portfolios within just a few quarters. This is exhibited by the turnaround of VAHO in India and more recently, the quick recovery in Vietnam and South Africa businesses. What gives us confidence as we move forward is that this acceleration is grounded in strong fundamentals and a high degree of accountability in the senior management. This balance of resilience and execution discipline, coupled with the tremendous leadership depth which we have developed over the past few years as well positions us to sustain momentum and further accelerate the growth flywheel we have built. With that, I conclude my remarks. Thank you, and we can now take some questions.

[Operator Instructions] Our first question comes from the line of Abneesh Roy from Nuvama.

My first question is on the new acquisition. So my questions here are, if you want to take it 3x in 3 years, if you could talk about what all are needed apart from the brand support. So in terms of distribution, for example, where is the company now? For example, INR 140 crores ARR, how much is coming from which kind of distribution channel? And where do you see the delta? Second is from a pricing, obviously, this is gourmet, so it's premium. Would you plan to have some kind of an offering, which also appeals to the smaller box GT? I do understand the larger box GT will have an audience, but the small box GT, is there a pricing or positioning which is possible? And if you could also talk about profitability. I do understand initially investments will be needed, and it's unfair to look at first year profitability for a brand which anyway may not be making profit. But from a 3 years perspective, what will be the expectation on the profitability?

Okay. I think, first of all, I would urge you to look at 2 interesting brands globally, which started off with Popcorn and has diversified and has become reasonably blockbuster brands. One is called LesserEvil in U.S. and the other brand is called Proper, which is a U.K.-based brand. And I'm sure we will follow the trajectories and getting inspired from these brands. And there's another big trend in U.S. is a brand called SkinnyPop, which is growing, again, which is a Popcorn and better-for-you brand. Now that will give you an idea of what is possible in terms of the portfolio. Now if I look at the overall broad sense of the portfolio of this brand, 4700BC, PVR cinemas is very low. It's just around -- just about double digits. There's a big institutional business and exports, but they are very, very good because as you know, the institutional business creates very good sampling opportunities. At the same time, it also ensures that there's no marketing cost of doing so. So 4700BC is available in the following airlines. It's available in all business class lounges of Etihad. It's available in Qatar, Cathay Pacific in first and business class of Air India, most recently in some of the European routes of IndiGo, which is it goes to Amsterdam, Manchester and just recently last week to Athens. It's available in Vande Bharat. It's available in 1 or 2 hotels. And that business, plus we have a very good business in -- just started that business in the Middle East. We believe there's significant opportunity now with the Marico access to the e-commerce and the other channels. So that's around 20% to 25%. The rest is all online, very little retail. So we believe that modern trade, for example, where Marico can give access and also the top end food is the best route to grow. If you look at the trajectory of some of the brands, let's take IB, Viva, Epigamia, they now have significant part of their business in retail, and that business is missing. I think in terms of investments, we are happy to do. And at the same time, you must realize today, we already have some digital brands like True Elements. There will be huge opportunities in shared costs and other things when they come into the Marico fold. So therefore, this will all happen -- there will be no incremental investment to expand into GT. So that takes care. And therefore, I believe it makes maybe INR 10 crores, INR 12 crores last year, it had made a loss. This plus True Elements together can now have an accelerated path to breaking even with all the tapping of the synergies. There is a strong innovation pipeline with this brand, and I think we will unfold. And if you really look at it, Indians, while they love healthy products, they don't compromise on taste, perhaps the indulgent gourmet, this one is going to grow. As people habits in terms of binge watching, OTT and other things like Friday night in. Those things which I've seen -- if you see in developed markets, this progress, the tailwinds towards adoption of this brand is very high. And therefore, this was a missing link in our entire foods portfolio. If you look at it, Saffola plays in masstige health, True Elements and clean, premium seeds and breakfast and snacking. So this was a gap out there. And it's a perfect gap. And I believe -- we also believe we love the founders who have a mindset of build to last rather than build to sell. And we are extremely confident about scaling this brand up, and it's a brand we all love. It's a very -- the products are very nice, and we are very, very optimistic about growing this brand.

And just to add on the profitability, Abneesh, the brand has gross contribution and CM2, which is ahead of the Marico's food business at this point in time. And it's a premium brand which has significant pricing power. So therefore, of course, we can also expect that the margins can go even higher in the future. And there are significant synergies in the back-end cost and GTM, which will be leveraged in the near-term and unlock synergies. So overall, from a profitability context, of course, we'll be investing at this point in time. But whether the brand has a path to profitability to reach, let's say, double-digit margin over a period of time, we are fairly confident it can really go there.

Sir, 1 or 2 follow-ups there. So one is, Saugata, you always mentioned Marico and you obviously want to take bigger bets. Now this is around 1% of your revenue. So does it fit that? Not everything needs to fit. So that was one question. Second is your example of the LesserEvil brand, for example. Those need a different mindset and you did say the founders, et cetera. So I wanted to understand, does this signal that now you want to play in the gourmet in the impulse category much more over a longer-term because this is a completely new white space you opened up till now, Saffola or the other brands have been mostly in the health space. This opens up the impulse and the gourmet. Obviously, this is too small. So I wanted to understand, does this open up much bigger opportunity on your own or say, even M&A-wise in the longer-term?

So I would think our digital business, entire philosophy is think big, start small, scale-up fast or drop fast. And therefore, it's a string of pearl strategy to do something big. We are another -- maybe a 2 years from now, we have a INR 2,500 crore plus digital business, which is bigger than some of the multinationals companies who have scale in India for 20, 25 years. So I think it is big. I think the digital business and the entire diversification agenda has been big. There are steps to that business rather than doing one thing. We will obviously have done big things. I think our VAHO turnaround is a big thing. We will see -- and I think there are opportunities in organically growing big things. The digital Plix actually is -- we took it at INR 150 crores. It should be hitting INR 1,000 crores again. So we have done this. The question is, I don't believe in buying something big and paying 6x for that. That's something which we don't want to do. We are far more prudent. We want the founders to have the skin in the game, grow with us and we learn the business from them. So I think the question is we have started small, but there is no reason we develop and business together rather than buying something big and then not growing it.

And just for the context, Abneesh, we diversified portfolio a couple of years ago was just about 11%, 12% and we have taken a target of reaching about 25%. We've already reached about 22%. So it's not about the size of the business that you acquire. It's all about the potential that we assess it can become. For example, Saugata talked about Plix. Similarly, we are very hopeful that all these businesses will grow bigger over a period of time.

And I think to answer your second question, Abneesh, you're absolutely right. I believe that with True Elements plus Saffola, we found that snacking, if I really want to grow snacking, it could become restrictive. And therefore, we opened up. Having said that, we will continue to play in the premium end, which is organized trade plus maybe metro food outlets. I don't think we have a right to win today in a paan plus or doing a INR 5, INR 10 product right now. We don't have the GTM, neither the capability. But at least opens up as India progresses and the premium set opens up, I believe there's enough critical mass. And you are right, I think this actually significantly improves the TAM expansion for our food business.

Sure. My second and last question is on hair oil. So overall, excitement in the hair oil is coming back in the minds of investors. We have seen the small hair oil company with the new CEO doing well. They have also called out hair oil as a category is seeing somewhat of a revival. You have done exceedingly well past few quarters in VAHO. So my question is, as a category in hair oil, how do you see next 1 year, last few quarters has been good for VAHO? And second adjacent question is, yes, volume growth is still quite strong for Marico as a company. But when Parachute start seeing deflation, and we have seen already 20%, 25% deflation in copra from top and next crop is also looking decent. As a company, would you see that challenge that suddenly the sales growth for the company in India business becomes a challenge at some stage? What is your take on that?

I think -- see, 2 things. One is this time, the absolute inflation was very high, okay, which actually impacted volume growth, and we had done some of the MLH reduction, which anniversarizes in the first quarter next year, okay? Secondly, I think you will be surprised because we were pleasantly surprised with the price elasticity of the brand. And therefore, in this -- in the -- when the deflation happens, some deflation has already happened, we will be far better prepared, including a far thinner pipeline to manage it. As far as hair oil VAHO growth is concerned, if you look at the VAHO growth, the 2-year CAGR is ex of Shanti is 14%. The 2 years -- and we -- ex of Shanti, the quarterly Y-o-Y growth is very high teens, 19%, okay? So I think we are -- at a 2-year CAGR, double digit is, I think, a great -- this one. I believe that there is enough opportunity. And I think this -- what is also helping is SETU because if I look at the biggest impact so far in the states where we have expanded distribution, improved the quality of rural distribution, converted a lot of indirect to direct has been the growth of the second and the third brand because that's where range selling happens. And SETU, we are today, if you ask me, we are just around -- we have done 25%, 30%, 35%. There is still 70% to go. And it's a 3-, 5-year project. I mean 3 years, obviously, was initially designed, but I'm sure if we can get it, it is going to continue for the next 3 to 5 years. So we are extremely confident about this. And one more interesting thing we are doing is that at one point in time, the volume value share gap in hair oils was 10%, it has now gone down to 5%. So a focus on abandoning the -- I won't call it abandoning, but holding forth in the bottom of pyramid and 10%, 20%, not doing anything irrational, but focusing on the packs like Jasmine, Aloe, Hair & Care and some of the other brands is actually helping, and we will focus -- continue to focus on value share. And as you know, these brands are actually high margin. So they're helping in the mix. They're helping in the overall gross margin improvement over the next couple of years.

That's all from me.

And sorry, just to add, I think just to reassure everyone, this is a category which is very close to India, not only that, it's a category that is significant even the Middle East, including Middle Eastern countries, Egypt. There is no -- I mean, this is a category that continues to grow, and we have great faith in this category, and we have ensured that we continue to invest behind this habit. And this habit is going to stay. I think that is something which we have proven in the last 20 years, contrary to some people thinking this category will die down.

Our next question comes from the line of Mihir Shah from Nomura.

Sir, just continuing on VAHO except for SETU, the kind of growth that we are seeing is really sharp. And apparently, the other players are also seeing sharper growth. But I don't see them marrying together because each of these subcategories have a different market. They are more ingredient-based hair oils, which are preferred. So what is really driving this growth? What is a sustainable number for VAHO that we can think about over the near-term, maybe the next 2 to 4 quarters. So that's part A. Part B is given VAHO has the highest margin in the core business higher than Parachute and Saffola. And as copra headwinds start to wane and those margins will start improving. Higher growth from VAHO can be -- can add to that margin expansion. So how should one think about that play as well? So that's my first question.

Okay. Coming to -- I think we are extremely confident of delivering double-digit value growth in VAHO. And as you see recent trends about also a double-digit volume growth is also very much possible. And see, it's a combination of different factors. I think the resource allocation is working. We have converted a lot of monies which were locked into BTL, below-the-line spends in the 10, 20 packs of Shanti Amla into ATL. We believe as the job of a market leader is to drive equity and not be satisfied if the competitor doesn't spend with SOV because ultimately, we have significantly invested in SOV. We have significantly -- if you look at the reach and the weighted distribution of each of the brands due to SETU has increased sufficiently and far more sharper positioning and a portfolio approach across states. You are absolutely right about the mix because the moment the mix of VAHO increases, that will be a margin kind of a tailwind. And I will want Pawan to answer the expectation on the margins, yes.

Maybe, the first thing that we said is, of course, value-added hair oil has better margins, and that exactly is the reason as to why we could still deliver reasonably resilient profit growth this year despite significant copra inflation because the mix has helped. Now as far as next year is concerned, again, giving a guidance with respect to what kind of a percentage margin we can deliver is difficult. But at least we are very confident of delivering at least mid-teens growth. We could try for more. And at least we would strive for improving the operating margin by about 150 basis points to about 200 basis points.

Understood. Got it. That's very clear. Second, on the copra led price cuts, given that this time around, the price increases were relatively very sharp, I think there's an expectation that the price cuts also probably will be very sharp. So wanted to get a sense on how should one think about the pricing in Parachute as you go down the quarter given copra is already down 30%. Maybe in a month or 2, you had earlier highlighted that price cuts can probably start in Feb or March. I wanted to get a sense of that? And how many times do you think that one will have to take price cuts to ensure that trade channel remains healthy in terms of stocking. So that's the second question.

Mihir, we haven't taken any pricing action so far, and there are 2, 3 reasons for that. Firstly, we have not taken a price increase in line with the increase in copra prices. Copra prices have shot up by more than 200%, but we had taken price increase of 60%. So now that the copra prices are corrected by 25%, 30%, we are not taking any immediate correction from a premium standpoint, I think premium to lose, we are still comfortable. And therefore, we need not be getting into pricing action immediately. Secondly, we're still awaiting to get a firm handle on how the copra price trajectory will move, which we'll get by March, April and then take correction in one go rather than taking in multiple steps because if you take pricing correction in multiple steps, it disturbs the trade rhythm. So that is what -- that is how we are looking at it. However, we may pass on some benefit through some sort of consumer offers et cetera, in lieu of pricing in the interim before we get a firm handle with respect to how the copra will behave and then we take out firmer price cuts.

See, we are -- we want to be clear about the visibility of what should be the price cut and take one price cut. We will not take multiple price cuts. The big change that has happened is that we work with far, far thinner pipeline because of our supply chain efficiencies and our AI-based forecasting models, which we do. So therefore, we are compared to, say, 5 years ago and all that, that the changeover, which used to take 8 weeks to 12 weeks, especially in rural, this is going to be much faster because of what we are doing now.

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

Just 2 questions. First is on Foods. The growth rates, you had already mentioned in the last quarter that you will relook at the profitability, just adjust it and then see an acceleration in growth. You've spoken about 25% CAGR as well in your presentation. Just wanted to know what is the time line that we can expect that you see a recovery in the growth rate starting to kind of pick up again on the food side? And the second question is on Bangladesh. Again, phenomenal performance in that market as you have continued to do extremely well, but there continues to be some macroeconomic uncertainties. So just wanted your thought at the last time something like this happened, you kind of went through relatively unscathed. Just wanted to get your sense on how do you see the position on ground. So these are the 2 questions.

Okay. As far as food is concerned, I think as far as the organic part of the food is concerned, we will get back into growth of -- in the coming 2 quarters. When we talk about food 20%, 25% growth, it's a combination of organic, inorganic, and there is -- we are absolutely certain we'll start getting back into 25% growth of food business. Now coming to Bangladesh, yes, I think we are waiting. We are closely monitoring the situation. So far, we have been extremely resilient even in that quarter of that quarter 2 when the issues were quite grim in terms of the -- I think it was in August that thing happened. That quarter, I think we grew by 9%. We delivered a 9% value growth. So I think we have taken steps out there, and we don't see any reason to be extremely concerned at this moment in time in terms of delivering business.

And if I just take one more question. The Parachute purpose that you mentioned is basically saying that there was a reduction in like the RPIs that you were meeting because you took a much lower price increase than we did and you wait for those RPIs to maybe slightly normal a little bit and then you take the price -- the one short price.

Yes, that's right. That's right. See, if you look at it, copra actually moved almost 80%, 100%. We took a 60% price hike. At current levels, our price premium is still tolerable. And therefore, we will wait, I think, by a certain time when we get the visibility of what will be the likely input cost for the large part of the year. When it happens, we will take one shot, one price we will take. And as I said, that the 2 differences are that we obviously have a far more thinner pipeline and a far better position in terms of our ability to handle this. Yes, in the past, we have struggled, but this time, we are confident that there will be no such issues as far as volume growth is concerned. And in any case, the absolute pricing was so high this time that had impacted volume growth.

Our next question comes from the line of Percy from IIFL.

My question is also on the copra pricing only. So supposing if this price remains where it is, which is like a 20% down. And you are saying that you're comfortable with this kind of a premium to the other players. In that kind of a situation, what kind of margin expansion can we expect on an overall consol basis for the company because of the pricing benefit on the copra?

So I think we didn't say that we'll not take any pricing action. We just want to get a firm handle of what the copra trajectory could be. If it were to remain in that 20% lower, then still we might take correction, but over a period of time, which we may not be doing immediately. And therefore, from a margin standpoint, I just mentioned, I mean very difficult to give you a margin percentage guidance, very confident of delivering mid-teens growth, but we definitely strive for, as I said earlier, at 150 to 200 basis points margin, we should try and improve.

Okay. Mid-teens growth in rupee terms on EBITDA?