New government will have to focus on agri reforms, should ensure farmer wage goes up, says HUL's Sanjiv Mehta

Updated : January 21, 2019 07:13 PM IST

The worst is behind for us with respect to disruptions on the regulatory front, Mehta told CNBC-TV18.

A stable government and optimism will help consumer confidence go up: Mehta

Sanjiv Mehta is the chairman and managing director of Hindustan Unilever Limited (HUL). Mehta, 57, has been with Unilever for over 26 years and during the last 16 years, he has led businesses in different parts of the world. Mehta on Monday said the new government which comes after the general election will have to focus on agri reforms and they should ensure farmer wage goes up.

The worst seems to be over for the fast-moving consumer goods (FMCG) companies from the regulatory perspective, but the industry still faces challenges with regards to macro-economic factors and consumer confidence, Mehta added

In an exclusive interview to CNBC-TV18, Mehat also spoke about HUL's Q3 earnings, effect of GST and demonetisation, among a raft of other topics.

Watch the full video here:

Edited Excerpts:

This is the fifth consecutive quarter of double-digit volume growth. What has really driven volume growth for HUL and how sustainable is this kind of volume growth?

When you talk about sustainability I think I would rather portray a bit longer picture. If you look at the last six years of HULs performance we have added a delta turnover of nearly Rs 12,400 crore. Now Rs 12,400 crore implies that the delta turnover would be the largest in FMCG business in the country.

During the same period, our EBITDA has more than doubled. During the same period, while the BSE or the Nifty index or the FMCG index has gone up by 1.8 to 2, we have been rerated because of our performance and the HUL market capital has gone up by 3.5X. So, look at our six years performance and then you will get a picture on how our focus on the long term has helped the business.

Last five quarters have indeed been pleasing, we have had double-digit volume growth. On our size and scale, delivering double-digit volume growth is always pleasing. However, you have to remember that as the biggest FMCG company, we are part of the Indian macro eco-system and while FMCG per se is an industry which is more resilient, still it is definitely dependent on what happens around you from an economic perspective, from an inclusive growth perspective. We always say that what is important for FMCG is not just the absolute GDP growth but the inclusive growth.

Over the last couple of years, the FMCG industry has been through a tough time with demonetisation, with the teething troubles as far as GST is concerned. However, from your perspective, do you think that the worst is over for the FMCG space structurally and do you think that volumes could grow in perhaps mid-teens or around that band going forward?

In India, still two third of the population is in rural and that is the reason we always focus on rural India, we monitor the rural consumption very closely to get a sense of what is happening over there for the simple reason that the per capita consumption in rural is half the national average.

So, there have been challenges, not just regulatory challenges, if you look 2014-2015, 2015-2016 and 2016-2017 we had two consecutive years of drought, so it went through a turbulent period but demonetisation is behind us, GST is behind us from a perspective of the transition. The disruptions which happen with the regulatory changes are also behind us.

I wanted to understand with regards to the overall scenario of demand, in your earnings press meet you said that near term demand has been stable. Going forward, you said that you are going to be watchful of the macro economic situation. What are the key risks or the challenges that you perceive going ahead?

For FMCG there are two things, one is the macroeconomic factor and second is what we call as the consumer confidence, the feel-good factor. Let me first talk about consumer confidence. What helps consumer confidence? First, a stable government, then optimism about the future. It is when people feel the wage rates will go up, when people feel that for children there will be better employment opportunities, that is where the consumer confidence goes up.

Second is the macroeconomic factor. While we are resilient, it plays a big part. If we have to really harness the potential that exists in India then we will have to cross the chasm of growth which is the band of 6.5 to 7.5 percent, which has been the story for the last few years and move into 8 percent or 9 percent if not the double digit growth.

When you look at two big events that are coming up - the budget and the elections. A lot of rural sops, sops for farmers, high rural allocation is expected going forward, how will HUL benefit from that?

I am of the firm belief that the next government will have to put a lot of focus on agriculture reforms to really harness the latent potential of the economy in the country.

Rural has been growing 1.3 times that of urban for HUL…

It should be growing at a much faster pace. You are talking about per capita consumption that is half of the national average.

Over the next two quarters can we expect rural to grow 2X as that of urban, back to historical levels with the kind of boost that is on its way for the rural area?

First is we never give guidance. I wouldn't like to predict the demand. A lot depends on how much money, in what shape and form and whom does it reach to. When you look at, for instance, farm loan waiver, then it normally goes to the land owners.

We also have to ensure that the farm wages go up, that is when you put more money in the hands of a large number of people. So, one has to see in what shape and form the benefits go down to the rural areas before we can envisage and then also there is a lag period. It is not like putting on and putting off the button, it is not like you do it today and it happens tomorrow.

Let us talk about the other key risks that a lot of companies face which is input costs. We have seen softening input costs over the last quarter at least sequentially. Going forward what is your outlook on how input costs will move?

No one can today predict the oil prices and in the last six years we have seen massive volatility of commodity price - be it in vegetable oils or be it in crude oil and for us as a business crude oil, currency, vegetable oil, all this plays a big part.

So, one is not much worried about how the commodity prices are going to move because no point in worrying about something which you cannot control. I think what we have done as a business is enhanced the agility in the business so that we can respond with speed to whatever the situation might happen. We keep a laser like focus on strategic pricing and also very importantly on the price value equation.

When you talk about pricing, 2-3 percent has been the kind of price growth that we have seen over the last quarter. Is there scope for further hike in prices? Are they categorise that you would like to call out which could perhaps be categories where you could drive growth through price?

Let me give you a philosophy of pricing. First there is no one-to-one correspondence between input price and the final price of a finished product. We look at all lines of the P&L and when the prices go up we try to optimise other lines of the P&L and we are always circumspect about pricing. We take judicious price increase, we try to protect the price point packs and then we play the portfolio game.

We are number one in nearly 85 percentage of our portfolio. In this portfolio, invariably you will find we straddle the price benefit pyramid. If you look at our history in the last 29 out of 30 quarters we have improved our EBITDA margins. The only quarter where we failed is the demonetisation quarter and there too because we did not shy away from investing behind the brands for the long term.

Premiumisation has been a corner stone of your strategy. I wanted to understand you have done some realignment in your homecare portfolio as well. You have brought more focus on premium devices in the purifier space but in your overall portfolio would you like the portfolio to be a 50-50 premium versus non-premium, what is the kind of trajectory?

Let me give you a bit more sight into the market. If we breakup the market then you are talking about that market lengths the premium end which is 120 Index to the average of the market is about 28 percent and then you are talking about the balance 72 percent spread between the mid-tier which is the biggest part of the business and then you have the mass which is about close to 30-32 percent of the business.

Now in that scenario if you Index our shares then at the mass end if you take my market share as 1 then at the mid-tier my market shares are 1.2x and at the premium end my market shares are 1.3X.

So if the market premiumises which we facilitate to a large extent it is to my benefit because I have larger share in the premium end. As the country progresses you will find the average point is also changing because the mix changes between mid-tier and price and the premium end and of course everyone clambering for a product which provides bigger benefits.

New government will have to focus on agri reforms, should ensure farmer wage goes up, says HUL's Sanjiv Mehta

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