On the margin front, while I understand the input cost etc. Could you share how should we look at SETU and any quantum of benefit from that initiative?
The objective of SETU is to improve our quality of direct distribution. As you know that our total distribution to direct distribution ratio was higher, which means that our direct distribution was lower than some of the benchmark organizations. The first impact of SETU will happen in terms of the quality of distribution in rural. It will help in range selling. It will also help in gaining market share and also drive some of the diversification agenda, like basically, what happens is if it goes through wholesale, wholesale only takes the high-velocity brand or the leader brand. When you do direct, you expect a better range selling. The second part of SETU, of course, is the urban part of SETU, where we do food, chemist and cosmetic outlets, which is the second phase of SETU. But I think the first thing of SETU is to improve our quality of rural distribution. As you know, we don't sell sachet, nor we sell Foods. Hence, the gross margin of our rural portfolio is fairly good. And therefore, our break evens are better compared to having sachets in portfolio. With that said, we will start seeing the results of SETU. SETU is doing decently well and the impact will visible from this year. You will see the impact on volume growth, and we also expect SETU to aid growth in VAHO.
On the quick-commerce, do you see the bargaining power increasing for you, given new players are expected to enter this. Already you're doing so well with 7% in Foods. So do you expect that now with bargaining power increasing maybe this can even grow faster, given new player's entry?
So just to clarify, I said 7% for the Foods category as a whole, For us, different brands have different contribution, but for Foods it is higher than BPC. Now coming to bargaining power, so the way we look at any new channel is that you first need to understand the shopper. So I believe the quick com shopper is different from the shopper in a marketplace, is different from a shopper in modern trade and different from a shopper in GT. For example, in quick com, we believe convenience plays a role, impulse categories have a higher throughput in quick commerce. And given the fact that a shopper in a marketplace has browsing time, in quick commerce, if you are not in the first four on the screen and it's a vertical mobile screen, you don't stand a chance. Therefore, I think it's important to understand that, therefore, how do I create a portfolio which is tailor made for quick commerce and it is not cannibalistic. Having said that, yes, quick commerce is taking some share from marketplaces, they're taking some share from GT. And therefore, what we need to do is to ensure that and have a tailor-made portfolio to ensure that we drive offtake and not just give price discounting and not have cannibalistic sale. As long as that and the category grows, I think we'll be able to ensure that we are not profit dilutive in any segment.
On the A&P spend. So India's largest consumer company also has cut its margin profile from the next two, three quarters' perspective because they've seen that macro seems to be improving and they want to invest. So is that also a thought process, one of the thought process in Q4? And if you could tell us if most of the increase in ad spend is for Digital brands and Foods essentially in Q4?
I think it is not fair to compare a particular quarter because there could be certain new launches. Having said that, I will give you a perspective of full year. In the full year, -we have grown our A&P by 18%. We have also significantly invested behind the diversification agenda in the international business. Having said that, we are doing two to three things. We are converting some BTL to ATL in core. We will continue to invest in core also. And let me tell you one thing, sometimes we fall into what I call the SOV trap. SOV trap means that if competition doesn't spend, we also stop spending. As a category leader, it is our responsibility to drive category growth in the long term. We are here to grow the category long term. We are not going to sacrifice the long term for some short term quarterly margins. We never believed in that. We have never done this. Therefore, we'll continue to invest in the core. Thus, A&P will be broadly on the same lines, which we have done now. We will benefit significantly from efficiency, if our A&P spend is at the same levels of last year.
As far as the Foods business is concerned and the serum and male grooming business is concerned, could you give a sense of what kind of annualized run rate we are running at if I take fourth quarter as a base?
In Foods full year we achieved Rs.900 crores. Therefore, you can expect at least a 20% to 25% plus growth in the Foods business. Now I'm not getting into serum specifically, but I think serum as a category is growing, and we are also growing. Usually, Q4 is a slightly slower for Foods, we are shy of Rs.1,000 crores in run rate in Q4. Usually, Q2 and Q3 are peak, especially during the festive season, such as Diwali and other festivities and when all the giftings are done. So we are slightly shy of Rs.1,000 crores run rate in Q4, but despite that we have a 40% + growth rate. So I think you can take a 25% to 30% as minimum growth rate for Foods as we move towards the next year.
On Beardo and the larger D2C portfolio that it's commendable reached a double-digit margin despite revenue is much lesser than some of the other larger D2C means you originally started out D2C. So just wanted to understand what has been the path to achieving these kind of margins at this scale? Is it measured A&P? Is it more focused on profitability and less discounts? Or is this a right mix of channels?
I think I alluded to my commentary being a listed company, our ambition or aspiration has to be greater than resources. We don't have the luxury of having resource greater than ambition.
My first question was with respect to the opening remarks you made that the growth for the listed FMCG companies may not be the right way to look at it or not necessarily representative of the overall growth. So just from your perspective, what would be your sense on the growth last year for the overall consumer space?
I cannot give a number. But all I can say is that the D2C and the smaller brands don't get captured and also some of the unlisted companies. Thus it could be a tad higher. That's all I can say.
Very similar to what Nihal just asked on with respect to Beardo getting to double-digit margins. Just from your lens, again, what would be the gestation period? Is it fair to say that the gestation period for a personal care D2C brand is about 5 to 7 years, whereas for Foods it could be much longer?
So I think it's very difficult. But what I can tell you is this is for food brands and I'm not talking nutraceuticals. Nutraceuticals, obviously has high gross margin. I don't think there is a profitable model for digital-only foods business in this country. So they have to get into GT. And if you look at some of the brands which have scaled up, they have gone into GT. The proportion of GT-led Food founder brands is always higher than personal care. For personal care brands perhaps I would say they should not go too much into GT.
On copra, copra has remained firm longer than expected. On gross margins, how should one think about that going forward? When should one expect gross margins to start showing improvement and for FY26, any level of gross margin that you have in mind that you can share?
Yes. As far as gross margins are concerned, given the fact that the copra prices have been higher than what we had anticipated, it will remain under pressure for the next one quarter for sure, and then we will see as to how the copra prices behave. And just to give you a sense on copra prices, typically, copra has 18-to-24-month cycle, and this cycle has lasted longer. The reason being the Northeast rains were not great leading to lower crop availability. But we are hoping to start witnessing some softening by the end of the first quarter. While there could be some pressure on margin on account of that in the next one or two quarters, we expect margin pressure to ease out starting end of quarter two. But having said that, I just want to allude to one point, which Saugata also mentioned, that we have pulled multiple levers of profitability over the last one to two years; such as expansion of margin in Foods, Digital businesses, some of the fast-growing premium businesses and also scale up of premium portfolio in the international business. Our dependence on copra as a lever of profitability has come down and will keep going down over the next few years. Also, as Saugata mentioned, we expect better improvement in VAHO performance in the next year. And if VAHO ex bottom of pyramid comes to the party, that will also aid margins. Hence, we are not overly worried about copra prices. But yes, for the next one quarter, margins will be under pressure. Hopefully, from quarter two onwards, we can start seeing some improvement.
On Foods. Foods has delivered a strong growth since past few years. Can one say the low-hanging fruits of placing new products and launches is behind and growth probably can moderate a bit from these levels? I just wanted to double check if that range can sustain in any new subcategories that you were thinking of adding or you will probably scaling the current portfolio?
I think there is a huge run rate for growth in Foods, and the reason is that we have not tapped the GT fully for Foods so far. I mean most of our Foods business has been skewed to OT. We are also significantly leveraging quick commerce. Therefore, there is a significant distribution opportunity available. The penetration of Oats and Masala Oats is still low in our country, and therefore, we have a penetration task. For instance, in Honey, we have a double-digit market share in the organized trade. We have a low single digit share in GT, because we have not focused on GT distribution yet, since we have been driving other initiatives. One part of SETU, which is urban part of the SETU is about driving Foods in chemists and cosmetic outlets. Also, we have True Elements - a brand with a strong equity and huge potential. You will see expansion into some new categories, which we are planning in True elements as well. Therefore, we are extremely confident on Foods growth. Secondly, Oats and Masala Oats, which is the core, continue to grow in double-digits. We have significant opportunity in Muesli and some of the other categories in addition to Honey. Muesli, again, we have been so far restricted ourselves to OT. We are just about testing waters in GT, but to give you a perspective, if we are available in all Masala Oats outlets, there is a 4x, 5x opportunity in Muesli as well. I think one of the things we are doing in the last two years is to ensure that we get the profitability right. Next, I think we have to get the GT distribution right in Foods.
On the expectation that we have of driving or aspiration of driving double-digit value growth in FY26 in India. Could you share your thoughts on what have you built in from an oil price perspective, especially given the recent correction in palm oil? Are you not worried about deflation and Saffola pricing hurting our ability to reach double-digit growth in FY26?
It is built on 3 different goals. One is our core business, where we definitely expect, first of all, the volume growth trajectory itself to improve. Further, we expect that in the first half of the year, the inflation led growth will definitely support. That's one. Second is Foods, as we just mentioned that we expect Foods to continue to grow at 25% plus. Hence, that's the second build. And third is, of course, the Digital-first businesses, which is growing at a much higher rate. So if you do the math around these 3, you'll arrive at that double-digit top line growth which is fairly possible in FY26.
On this quarter, Foods growth at 44%, it has come off on a pretty good base. Actually, the base growth was also over 20%, so this is the highest growth quarter for us in the year for Foods. So I just wanted to get a sense of anything incremental that we've seen in Q4, whether it's been a little higher on distribution or certain brands or in the portfolio which have done incrementally better because this number is higher than what we've seen probably in the last 8, 10 quarters.
No, it's a combination of three elements. One is our core Foods that we said that has grown in double digit in the full year. Additionally, there are True Elements and Plix. All the three are driving the growth. And as I said, that obviously 44% may be a number which is slightly higher than our aspiration for the full year. But I think one of the other things we have done, in the last 2 years, is that we have significantly made efforts to improve the profitability of Foods. Therefore, one of the things we are going to do with improvement in profitability, is that we will be going into GT in a more meaningful way and also scale up products like Honey and Muesli. And if you look at interestingly one piece of data, if quick comm has been contributing to 3% of FMCG and especially in BPC, in Food quick comm contributes nearly 7%. Quick comm is a big driver of food. And between Plix, True elements and Saffola, we are also investing significantly in quick comm to drive Foods growth. Having said that, I think as long as I think we will be happy if we can deliver 20% to 25% plus growth in Foods over the next 2, 3 years.
On Parachute. So there's a 30% increase now on prices. Could you just give us sense of what's happening in the market? Where is this regional unorganized player in terms of the RPI between Parachute and the regional or unorganized players? And you did speak about some supply chain issues that the competition is having due to which they are also having to take price increases.
During the inflationary cycle, we are more competitive in relative terms, because we absorb some part of the cost. Also, due to our procurement efficiency, our consumption cost is not like what we have the buying cost or the market cost. Hence, there are two things. One, for the small players, because of the high cost of procuring copra and the fact that they are risk averse in buying copra, because if the copra prices go down, they'll be stuck with that. As a result, what happens is that the stock pressure reduces. Therefore, in the last couple of weeks, we have seen less competitive presence amongst smaller brands. Second, availability is also a problem as they have to get working capital to buy copra, at higher prices. As far as branded competition is concerned, I think last year, we saw a little unreasonable competition but perhaps they are not making margins. They have now taken price increases in line with the cost increase and sometimes disproportionate, which also helps us in a way. And therefore, what we are confident about is that as soon as the hyperinflation settles to moderate inflation, it's unlikely there will be a major deflation, although nobody cannot predict commodity prices. Although, as copra prices settle down in Q2, you will see the volume growth happening.
On the international business. Sales growth has been quite decent in the past few quarters. If you could discuss volume growth in Bangladesh and MENA how the trends have been and how the mix has changed. And would you be worried on the benign crude oil prices for the MENA growth from a 1-year perspective?
Not really. Benign crude oil will not impact MENA, we are a challenger in the region and we are growing. I think there is enough opportunity headroom for both market share gains and profitability as we scale up. A significant portion of growth came from volume growth because there was very little inflation in MENA. I think the one big change that has happened is if you look at Bangladesh, 7-8 years ago, Parachute Coconut oil formed 90% of the business, it is now sub 60%. And as I mentioned in my opening remarks, the share of premium has now gained significant critical mass and we are growing, whether it's in shampoo, baby, we have launched shower gel and body lotion in the Middle East. And the other interesting thing was we were not present within Hair Oil category in Egypt in the last couple of years, we are gaining rapid market share there which provides headroom for growth. Hence, according to me, there is a significant headroom for growth in MENA for both top line market share and profitability. In Bangladesh, we have been resilient and the diversification agenda continues.
On your digital-first. It has done quite well and you have been one of the early movers and early in M&A, and most of them have done well. From an FY26 perspective, will it be more of stabilizing these four to a better profitability with a very good growth or you think you need one more M&A?
As I alluded to during my opening commentary, we see two cohorts in the digital business. The first cohort consisting of Beardo and Plix. We expect the ARR to hit Rs.1,000 crores plus as far as these two brands are concerned. They are already profitable. We don't need to incur extra cash burn to achieve disproportionate growth, I think will accelerate growth in these two brands. At the same time, get scale efficiencies and continue to improve EBITDA. As far as the other two brands are concerned, which is Just Herbs and True Elements, we will now grow maybe 20% to 25% on a sustainable basis, but accelerate the journey to breakeven period so that in 18 to 24 months, we see some site of a breakeven. And therefore, overall if we look at the blend, we are well positioned over the next FY '27 to move the overall digital business EBITDA to double digit. Now yes, there could be brands available, but we will continue to use the same model. We firmly believe that it is much better to take a majority stake and learn from the founders rather than acquiring 100%, because that gives us a far better way of integrating and as we keep on integrating our experience and capability keeps on increasing.
If I were to look at our India P&L for this quarter, the absolute EBIT has actually declined. So despite having about Rs.400 crores extra revenue, the EBIT itself hasn't moved much. So how should I see this and how much of this is, you think, because of raw material inflation impact and how much of this could just be a mix impact?
I think, Karthik, you're referring to the segmental results that we have published, over there you would see a marginal decline in EBIT. But it also includes the digital. If you were to adjust the digital business bleed, etcetera, EBITDA for quarter four for India business has actually grown by about 4% to 5%.
The 30% price increase cumulative we have taken in Parachute. That's over what period?
So starting from last year quarter one, if you look at quarter 4 results, we have taken about 23% price increase, 22% value increase and a 1% decline in volume, so that's 23% price increase. Very recently, we've taken another round of price increase of about 8% to 9%.
In Project SETU, you said that VAHO would be one of the main beneficiary as on date. Does Project SETU improve your presence in under-indexed geographies of VAHO or it would be both in under-indexed and the existing strong geographies?
Yes. Let me give you a perspective, if you look at historically, Parachute strong markets are basically the South and Maharashtra. And value-added hair oil markets are strong in the North. Having said that, I think in strong markets of the South and Maharashtra, especially South, this will help in diversification by putting the second or the third brand in because we have huge distribution already. In the case of some of the under-indexed markets, like in the North such as UP etc., where we are under indexed, there also, we see growth in VAHO. Basically, what it will do is in the South it will help in diversification of VAHO. It will also help in Parachute rural market share because in rural we can now reach directly. In the north, it will significantly improve the performance of VAHO, especially under-indexed markets. Hence, we are actually relatively more under-indexed in our direct distribution in the North compared to South.
How has been the competitive environment in VAHO and also in case of Saffola edible oil, because in edible oil, there has been very sharp inflation. How has the market share behaved there in case of edible oil and how has the competitive environment been in VAHO?
So first, let me clarify, I mentioned only coconut oil. As far as Saffola is concerned, we have taken a conscious decision that we will ensure we deliver modest volume growth, and we will definitely not sacrifice on margins. We will operate at a threshold level of margin. And as you know, in any case, Saffola operates with a significant skew in OT as well as metro. Therefore, we believe that we will be able to give modest volume growth as long as there is no significant volatility in the raw material prices. I think in coconut oil, what has happened is that in the last year, we were facing two sets of headwinds. As you know, in the FMCG market, during COVID and the immediate period post COVID, a lot of smaller players had gone out of circulation or their presence had reduced. Sometime from 23-24 onwards when inflation happened, a lot of the small players started getting into the market. And obviously, in one year, we witnessed maybe because of inflation - our biggest source of growth in coconut oil is unbranded to branded, that slowed down and sometimes it went reverse. What we are now seeing in this period of inflation and if you look at this hyperinflation, small players' ability to buy, their working capital and the ability to store, they don't have position building, they become much more uncompetitive. At the same time, we have seen a case of organized competition also taking significant price increases, so that they don't make a negative gross margin, both of which will help us. And that's why we are confident that Parachute volumes will start coming back in a couple of quarters.
What will be the effective tax rate in the next few years?
You can take it at around 22%.
On the Foods part of it, just wanted more clarity on where is snacking in the overall scheme of things. Has that also achieved a certain threshold profitability and if it's an important part of the 25% growth that you are targeting or more in the pilot stage and maybe the growth will be beyond FY27 for that segment?
So we continue to be in the pilot stage. I think it's important first to get the GTM right. As you know, snacking is not OT skewed, because if you have to get snacking to scale, we have to get our GT in Foods right. So, when it comes to Saffola Foods growth, there are three key focus areas. First is to continue to invest behind increasing penetration in Oats. We will continue to drive honey, and we want to scale up Muesli, snacking comes next. And of course, as I said that you will see significant some new category entries in True Elements and Plix continues to do well. I believe that nutraceuticals, where Plix operates, the headroom for TAM expansion continues. We can get into some other things, like if you look at a nutraceutical band, you have five elements in any nutraceutical company. And one is weight management, one is cardiovascular health, diabetes, gut health, bone health, stress and sleep. Now Plix -- the name is agnostic. It can operate in all. And therefore, the headroom for growth in Plix is tremendous. And I believe that Plix is a very strong equity. It has strong digital capability. The founders and us, we are working together, partnering and creating this explosive growth. And therefore, there is enough headroom for growth. Therefore, for us, food is at 3-vector growth and not a single-vector growth.
One question I have on GT channel it has been under pressure for quite some time, and you alluded you to some of the steps taken to pressure apart from our SETU initiative, could you tell us what are the states which we have taken? And when you see growth recovering in the channel?
I think we believe that the urban GT will continue to be stressed, because I think if you look at the organized trade share in the top 5, 6 cities, it's increasing, also with growth of quick-commerce, quick-commerce is also taking a slice from GT. Having said that, what we are trying to do is ensure that through a significant number of steps, we want to manage and ensure that our partners continue to get ROI. But I believe there is significant opportunity in GT and it will continue to be very, very critical and a source of competitive advantage. There will continue to be entry barriers in the smaller & mid towns and rural. And that is why we are investing a significant portion of our effort in SETU, because in rural I don't see OT impacting rural even in the next 5-7 years. And that is where I think a lot of our SETU initiatives and investment is going. We believe that for large FMCG players, defocusing on GT is not a great thing to do, but we should at the same time we believe it is "and" growth in India. It's not 'or' growth like what has happened in some of the other Western markets. GT will continue to be ever important even in 2030.
On Bangladesh. Now it's very commendable that we achieved double-digit growth in a tough environment. However, the dividend payout has been a record high in FY25. I just want to understand the reason behind it. Does it indicate that the growth opportunity in Bangladesh is now limited and maybe you're looking at other international markets - how do we understand this?
Surplus cash lying on the balance sheet, and it is only prudent to return it back to the shareholders rather earning interest income on that. We are not compromising any investment opportunity, the A&P also continues to grow. And we believe that through continued investment, we will continue to grow in double digits. So it's more of a surplus lying in the balance sheet that has been brought back.