ET Now: Recent data points suggest the government's rural push, good monsoons and higher MSPs have made green shoots visible for a sustainable and strong revival in rural demand. Do you concur with that?
Sunil Duggal: We are seeing early signs of rural revival. We do expect this to perhaps accelerate in the next four to five quarters leading to the general election in 2019. We are depending a lot upon rural recovery. We believe it will happen and the early signs of that are now visible.
ET Now: Rural markets, in particular, contribute a good 50% to your domestic revenue and that really has been a key area of focus for you. By when can we see you achieve double-digit revenue growth, from just the rural markets?
Sunil Duggal: In the second quarter, we did see double-digit growths in rural volume. It was considerably ahead of urban demand and I think rural demand will continue to outpace urban demand on next three to four quarters, or maybe a little bit longer than that.
So I think the demand is going to be sustained. But it remains to be seen how high the demand will be, will it continue to trend in double digits or will it taper down a little bit. It certainly is going to be much better than what we saw in last few quarters barring the previous one. I think the effects of demonetisation and GST are now behind us in the urban economy. The higher levels of stimulus the government is putting through the DBT pipelines are now yielding results. Leading to the elections, we should see further acceleration of stimulus by way of MSP hikes etc. and that will fuel rural demand for staples, perhaps significantly so. We saw that five years ago during the previous elections, and that is typical of what the trend is.
ET Now: Do you think spending patterns are picking up in the rural economy? Can you could give us some benchmarks there, because everything boils down to per capita income in the Indian economy? So we can talk about reforms and we can talk about jobs being created or perhaps there being a need for more jobs in the rural economy.
Sunil Duggal: We do not have hard data. It normally comes with a lag. So perhaps we will have some visibility about how high the incomes are trending up in the rural sector next month. But you are absolutely right. The key metric here for consumption of staples is the disposable household income in rural India and when that goes up, even perhaps by a small amount, we see a considerable surge in the consumption of staples. Because a small uptick may not trend into consumption in terms of higher value products of auto or two-wheelers or appliances, but the impact on staples is certainly visible. Also, I think we are not depending on the likelihood of rural recovery, we are also investing substantially in building our rural infrastructure. We started this process around the fourth quarter of last year, which was a pretty stressed period in terms of our business after demonetisation. With the GST about to happen, we did predicate that rural recovery will happen and we said let us build infrastructure in terms of putting more people on the ground. We put close to 300 people to build rural networks and that did cost a lot of money. But it was worth the investment and I think that is paying off. So even if the rural markets do not trend up as much as we would hope for, we still believe that our rural growth would be ahead of urban growth.
There is another thing happening, which is that the key feeder into the rural markets is now becoming the rural wholesale. So the urban wholesale has been the chief victim of demonetisation, particularly GST. That was the chief feed into the rural markets, which is now being supplanted by the rural wholesaler. That is another change we recognised and we have built infrastructure to support the rural wholesale and that is paying results.
ET Now: Which segments and product categories are selling the maximum in the rural regions right now?
Sunil Duggal: Mostly lower-value products, lower-value SKUs in personal care, particularly in oral care, hair care, products. Also products which we never really pushed into the rural markets, like our baby massage oil or Gulabari range or some of the consumer healthcare products such as cough syrups. We are now making concerted efforts to seed the rural markets with these products. So, there is a portfolio expansion also; the width has gone up and that also is fuelling our overall growth in the sector.
We are not just relying upon the traditional big brands, which were dominant in the rural belt, but we are putting in some of the more urban-centric brands in rural market too.
ET Now: You were one of the first few FMCG companies to take a price cut to pass on the lower GST rates to the consumer. This would have of course been a major fillip for the kind of demand that you saw from the rural economy for your products. How do you expect this to aid volume growth going into the future? Because I remember clearly you were talking about somewhere between mid single digits of 5-7-8 per cent kind of range for volume growth. Can it be pushed higher to 8-10 per cent now or even beyond 10-12 per cent?
Sunil Duggal: The base case perhaps at this point in time would be 8-10 per cent; the bull case would be perhaps 10-12 per cent and bear 5-7 per cent. So that is the kind of range we are looking at. But if the rural economy picks up, there is a good monsoon next year, and the stimulus is enhanced, I see no reason why the aggregate growth cannot trend up to double digits. There is also a favourable base, both in the current quarter as well as in the first quarter of next year, which will help at least optically in terms of restoring growth. I think we will have to see how growth trends up in the fourth quarter, which is really a normal quarter. That I think would throw a lot of light on how the future growth is going to be. But we are pretty hopeful that growth will happen and it will be driven by rural demand.
ET Now: But most of your products are lying in the low penetrated categories, when it comes to fruit juices, hair oil, digestives. The scope for double-digit growth in most of the categories remains on the back of expected improvement in the domestic demand environment. What I am trying to understand is whether the rural pickup is being supplemented with sustained urban growth or not?
Sunil Duggal: At this point in time, no. Pockets of urban centres are doing well. Urban retail is doing reasonably well. Modern trade is doing well, but other parts like enterprises particularly canteen stores in army are tending down. Urban wholesale, as I mentioned earlier, has been a big victim of GST. So that is trending down. The urban picture is not as benign as what we are seeing in rural. So it is very volatile here. There are pockets which are doing well and there are pockets which are not. But rural demand has been secular and it doing quite well.
ET Now: What is your sense on product innovations? You are working especially on ayurveda, because that is linked and perhaps a favoured product line within the rural economy? Does the demand continue to expand in the space and how do you plan to make the most, grab a larger market share? There is a fairly big opportunity for ayurveda products in the urban markets as well?
Sunil Duggal: I think it is cut across urban and rural. We have a large number of these products in our kitty, and we have been really under-invested in the past. We have not really driven them through distribution or media and that is what we plan to do in the years ahead. Instead of launching new products, resurrect much of the products that we have in our armoury and mass market them through larger levels of investment. I think that is a theme this company is going to play out over the next couple of years. We will look inwards for growth in terms of scaling up products, which we have rather than look at completely new areas for growth.
ET Now: We are almost at the end of Q3. Tell us how has Dabur done so far. Is it looking better than Q2, because you also have a lower base effect on your side?
Sunil Duggal: I think we would certainly make Q3 better than Q2. How much, I do not know, but one should not take comfort in the fact that good growth will happen this quarter because it is on the back of a weak base. The challenge will be in the fourth quarter, like I mentioned earlier, and if we are able to deliver double-digit growth in the fourth quarter, that would be indicative of the trends that lie ahead. So this quarter will definitely be better than second quarter.
The post Rural recovery a must going into 2019 elections, says Dabur CEO appeared first on News Wire Now.