Foreigners don't question consumer firm valuations, says Dabur CEO Sunil Duggal

Image: Amit Verma

Dabur India CEO Sunil Duggal says the company is now hardwired to be run by a professional management

Over the last 16 years, Dabur CEO Sunil Duggal has steered the organisation to become the country’s fourth largest consumer company by market cap after ITC, Hindustan Unilever and Godrej Consumer Products. In the last decade, Dabur’s topline has compounded at 16 percent a year to Rs 5,970 crore while the bottomline has risen by 17 percent a year to Rs 939 crore. The transition from being a family-owned enterprise to a professionally-managed company saw some turbulence initially, but Dabur is now considered to be a case study on how families can step back and let professionals take over. At a time when valuations of consumer companies have shot through the roof despite slow growth, Duggal tells Forbes India why he does not believe these companies are overvalued and how he sees categories evolving as per capita income moves up in India and in other emerging markets that Dabur operates in. Edited excerpts:

Q. What has been your experience as a professional manager in a family-owned company? There is the part about balancing the owners’ expectations with what you need to do.
It has been a transition from joining a company that was family-owned and family-run in the mid 1990s—the transition started happening about five years after I joined. It took a while for the whole thing to happen and there were some bumps along the road. Once the company started performing, the promoters withdrew; and they withdrew pretty abruptly. The performance since then has been in line [with expectations] and so they have shown no interest in coming back. Once the family distances itself from the day-to-day operations, it becomes more and more difficult for it to return. The current promoters have a good feel of the company but not so good so as to run it. The company is therefore now hardwired to be run by a professional management.

Q. Have you had to answer to the family instead of only to the board?
Within the family, we have our own relationships. It is not that we talk to them only via the board.

Q. Would Mr Anand Burman, chairman for Dabur India, for instance, call you once a quarter for a chat?
Absolutely. We meet over dinner or a drink. He wants to know what is going on. That is more to keep himself informed. His level of information need is higher than that of the other board members.

Q. Fast-moving consumer goods (FMCG) category growth rates have been coming down since late 2013…
That is correct. And it more or less converged with the coming of the present government as they moved more towards creating infrastructure and away from consumption growth.

Q. When do you see a pick-up or is this the new normal?
My own opinion, and this is a contrary opinion, is that by October, we should see some visible uptake in terms of consumption but not a dramatic one. So, if a category is growing by 1-2 percent, it would grow by 4-5 percent. These are volume growth numbers. The rationale being a good monsoon and some fiscal stimuli. The UPA-type growth numbers will probably be seen in 2017-end or 2018 because that is when the government will prime the stimulus pump for the next election. No one has won an election by talking about infrastructure building and not about consumption. That is what happened to NDA-1 as they did the right things, but still lost, and I don’t think this government would want a repeat of that. A lot of people feel there is an uptick around the corner, but I don’t think there is any meaningful uptick in the near future. That will take some time.
 
Q. How is rural growth faring?
They [the figures] are down in the dumps. Growth rates have fallen from 14-15 percent to 1-2 percent. In urban areas, they have come down from 8-10 percent growth to 1-2 percent growth. So the drop has been sharper in the rural segment. If we are to have any meaningful rise in growth rates, rural has to perform. I suspect the stimulus will be more aimed at rural voters and hence, I expect them to come back more sharply.

Q. How are investors looking at FMCG valuations? The private equity expansion has already happened and so further growth will have to be in line with volume and profit growth.
Every domestic investor questions FMCG valuations. But no foreign investor questions them. The two have a very different perception of valuation. Foreign investors see 2-3 percent dividend yields from the consumer sector because of high predictability of earnings. For them this is a bonanza because they come from a negative yield environment. Let’s say the foreigners are far more accepting of the valuations. This is the only sector where investors pay as much attention to topline and volume growth as they pay to bottomline growth. The margins are almost taken as a given.

Q. Are companies like Dabur attracting more long-term money, like from pension funds and so on?
Yes. Our domestic institutional investor component is quite low—25 percent of all the institutional investment is domestic and the rest is foreign. Among the foreigners, it is typically more sticky. There are some hedge funds, but they prefer to deal with stocks that are larger in size and more liquid. The domestics are not very long term. They book profits quickly. They buy cheap and sell when valuations are stretched. The foreigners buy and hold even through periods when valuations are stretched.

Q. India is now at $3,000 per capita income. How will the consumption story be different when India moves to a $5,000 or $7,000 per capita income level?
It’s difficult to paint a picture except that there would be a lot more premiumisation and a sharp fall in low unit packs (LUPs). The discount brands will come down dramatically. And people will look for more value in the product. Many more types of products will kick in like herbal, natural, organic, cruelty-free, etc. These will be the future drivers of growth. The whole consumer health care space will be a high area of investment. We will be investing disproportionately in over-the-counter (OTC) health care.

Q. Dabur has made four acquisitions since you took over. Are you always looking out for companies to buy?
Yes.

Q. Will a lot of the growth in future come from acquisitions or will it be organic growth?
In India, we have always been on the prowl for companies to buy. Nothing of value is available. These could be big brands, but the asking price is too high and whenever you do the spreadsheets, unless you factor in crazy assumptions of growth, the numbers don’t work. Overseas, our two acquisitions took time to integrate and we had a lot of learning to do as we were not familiar with those markets. Now we are looking at acquisitions again, but with the learnings of the past. First, factor in currency volatility and the inevitable devaluation of emerging market currencies against our currency. We didn’t factor that in as we didn’t realise that currencies could devalue so quickly and so suddenly.  

Q. What do you make of the Patanjali entry?
I’ve been asked this ad nauseam. A business of that size does peripheral damage wherever it goes and the damage is magnified because the categories are not growing. The category growth is so slow that whatever little share it takes further adds to the growth stress. He [founder and yoga guru Baba Ramdev] has come at an inopportune time for the sector as a whole. It is a disruptive model and that is why he can scale from zero to Rs 2,500 crore in no time. But whether he can scale to Rs 20,000 crore is the million dollar question.