'Rural demand for FMCG would come up in next quarter'

'We are seeing signs of improvement in rural overall in terms of demand, but I would still keep my fingers crossed.'

Tata Consumer Products expects to see its India growth portfolio grow at 30 per cent and expects margins to improve, says Tata Consumer Products MD and CEO Sunil D'Souza.

In an interview with Sharleen D'Souza/Business Standard, he talks about the company now turning optimistic on rural demand.

When do you expect to see an improvement in performance in the core portfolio of India business?

Now, for both of these (salt and tea) categories, the medium to long-term aspirations are about 5 per cent volume and a couple of bps on that value.

For salt, we are already at four. The big thing is, that the last price increase that we took was about 15-18 months back and now we've kept pricing stable.

Over a period of time, volume has come back. It is broadly in the ballpark. Tea is a bit of a slow starter. We had roughly 3 per cent volume growth coming in Q4 (January-March).

From a volume perspective, Q4 was slightly tough.

But, there is nothing fundamental that I see, whether it is in our brands, business, distribution, and supply.

If anything, we've gone deeper into distribution, strengthened in large towns.

Therefore, I would say a couple of quarters, and we should be broadly back.

In margin terms, they are in the range where we would expect gross margins to be.

So, profitability is not an issue. It's volume growth that we will push for.

What is your strategy to push for volumes in the core portfolio?

In salt, essentially, the volume growth will come out of two pieces - one is distribution expansion.

We're about 2.6-2.7 million outlets in total. We need to expand that.

Similarly, in beverages, it's about 2.6 million outlets. If you look at my key competitors, the distribution gap is the bigger gap versus the share of the store.

There are two aspects that were driving in the large metros and cities.

In all million plus cities, and in a substantial number of half a million plus cities and towns, we have now gone with three salesmen.

There will be a product-wise focus on distribution. My big gap in beverages and my big growth opportunity is the lower down pop strata in rural.

We've appointed distributors in all towns with a population of over 50,000 in India, and are building below that with a sub-distributor network.

Depth and width of distribution are what we're focused on. We have also increased our advertising spends.

Last quarter, we were up by 16 per cent versus the same quarter the year before, and we'll continue to do that to strengthen the brands and the consumer pool.

There will also be a little bit of innovation coming in.

In salt, we are also focusing on value-added salts because that is a big opportunity for us and the value-added salts in the last quarter grew 35 per cent, which accounts for about 9 per cent of the portfolio.

Will the growth business profitability improve going ahead?

We will do things. One is, so far we've defined, ready-to-drink Tata Sampann and Soulfull as part of the growth portfolio which will now have Capital Foods and Organic India which we aim to grow at 30 per cent.

Two - as we grow to scale in this portfolio, we will get the leverage of all the costs including branding, and logistics.

Three - as scale improves, especially in categories like Tata Sampann and even to an extent the raw material that we buy for Soulfull or the Capital Foods portfolio, will get the auto scale benefits of procurement, which will again improve margins.

Profitability will grow more substantially because Capital Foods and Organic India have significantly higher gross margins than even the core portfolio.

Overall, the growth portfolio will continue to grow at 30 per cent and margins will continue to improve.

What is the outlook for Tata Consumer Products' supply chain expansion?

We will be targeting to reach about four and a half million outlets.

But that will come more out of indirect reach than direct because our direct reach is currently at 1.6 million and that will move up marginally.

But the bigger throughput will now come through, especially having built distribution in the lower population strata, which is where the rural markets come in to pick up from wholesalers.

We would want to drive our wholesale distribution.

How do you see coffee prices moving?

With the yo-yo (prices) going up and down, I wouldn't try to predict.

I would only want to make sure that we are nimble enough to move pricing up and down in the US coffee business.

In line with what happens in the raw material, I would make sure that I'm able to take up pricing or take down pricing in the soluble business as prices go up and down.

And as far as possible, take advantage of any pricing opportunities there are for the plantation business.

How will the international businesses play out for Tata Consumer Products?

We have been lagging behind for the past couple of years.

But if you look at last quarter, especially overall last year, more specifically last quarter, they are now delivering Ebit margins of at least 200 to 300 bps ahead of our India business.

The UK, being the strongest turnaround, is now double-digit Ebit margin.

The restructuring in the international business is coming home and it has now translated into margin expansion.

The focus will be to try and drive growth in the core categories and make sure we expand our portfolio in those geographies.

It's volume growth for the base business and it is expansion of the portfolio.

How do you expect consumer demand to pan out in India?

In fast-moving consumer goods (FMCG), everything is pointing towards softness in rural.

The good and bad part is that we are stronger in urban areas than in rural areas.

As we are expanding distribution, we are finding that we are getting growth in the lower population strata.

In metros, we grew about 6-7 per cent, whereas in towns with a population of 50,000 to one lakh and where we are expanding distribution, we grew at about 8-9 per cent.

That remains an opportunity for me in the short to medium term.

We are seeing signs of improvement in rural overall in terms of demand, but I would still keep my fingers crossed.

I would be optimistic that rural demand for the overall FMCG sector would come up in the next quarter or so.

Feature Presentation: Aslam Hunani/Rediff.com