Consumption recovery may take a hit on inflation, weaker rains: Dabur India CEO

Mumbai: India's consumption recovery could face headwinds from increasing commodity inflation and weaker rainfall, with the impact likely to become visible in rural markets over the next two quarters, Dabur India CEO Herjit S Bhalla said, warning that resilient demand so far may not fully reflect the pressures building up in the economy.

"Inflation has been unprecedented this year. We thought Q1 was tough. Then we got into Q2. Q2 was at similar levels to Q1. Now we're getting into Q3. It's even higher than what we've seen," Bhalla told ET.

Most consumer companies have reported stronger earnings in recent quarters, but the recovery remains vulnerable to higher household expenses and a potential squeeze on rural purchasing power. If inflation sustains at these levels, its impact, along with that of rainfall, could affect rural pickup a quarter or two later, Bhalla added.


Dabur has not yet seen any significant deterioration in demand, but Bhalla said the company was watching the potential impact closely. Rural markets continue to grow faster than urban markets, although the gap has narrowed to around 150 basis points from nearly 500 basis points last year. A basis point is a hundredth of a percentage point.

"Both are growing. But the gap is narrowing, so urban's beginning to pick up and start to grow faster," said Bhalla, who took charge in April.

Dabur's rural business contributes roughly half to its domestic business, making it relatively exposed to any slowdown in hinterland consumption

For the quarter ended September, the company's India business reported volume growth of 5.5% year-on-year and revenue growth of 11%,

However, growth remained uneven across categories. The healthcare business grew 7%, but health supplements declined in low-single digits, while honey sales fell in mid-single digits and Chyawanprash grew only in low-single digits. Digestives and over-the-counter products performed better.

Home and personal care, which accounts for about 55% of domestic sales, grew 11%, while food and beverages expanded 17%.

Margins have also come under pressure. Dabur's consolidated gross margin contracted 60 basis points year-on-year to 48.8% in July-September, while earnings before interest, taxes, depreciation and amortisation (Ebitda) margin fell 70 basis points to 17.7%.

Bhalla said the company was taking calibrated price increases rather than passing on the entire cost inflation to consumers.

"Our growth right now has been balanced, which is roughly five volume, five price," he said. "We probably would have hoped for less price, higher volume. But that mix is changing."

About 80% of the inflationary pressure has come from the home and personal care portfolio, with most of the remainder arising in healthcare, he said.

"We've been taking calibrated price increases. So our focus is not to pass on everything to the consumer because we can't," Bhalla said, adding that the company was also relying on product mix improvements and internal cost savings to protect profitability.

The company is also doubling the number of villages it directly services to 100,000 and plans to use geotagging and artificial intelligence to improve salesforce productivity and ensure more focused product distribution.

"We want to enhance our quality of coverage in rural (areas). So we are doubling the villages that we go to directly," Bhalla said.

In addition, Dabur has exited six brands and rationalised about 20% of its stock keeping units (SKUs) over the past 18 months, reducing its portfolio to 1,600-1,700 SKUs from about 2,100.