Edible oil volume growth is way ahead of what the market has been expecting, but given the price cuts the company has taken, I wanted to understand what decline in realization can we expect going forward as well as the prior quarter?
Although the market has shrunk in terms of consumption of edible oil due to higher prices, the Adani Wilmar brand Fortune and our other brands have done relatively better because we have a larger range of oil and because of our penetration in the rural market, tier 1 and tier 2 markets.
Now prices have fallen from the top by about 25-30%. In some oil, it’s down by 40% and we’ve been able to gradually pass this benefit on to consumers thanks to the government which has started a lot of measures between them and we’ve been able to pass that on fairly comfortably.
Now in terms of profit margins, it’s different, and as a brand we’ve been able to manage net profit pressures. However, we have always looked at volume growth with greater passion because we felt that increased market share in the long run would be beneficial for companies like ours.
Have you made any price cuts and will you be subject to further price cuts?
In the last quarter, we twice issued press notes with price cuts. From now on, we’re not quite sure how things will turn out because we usually consider July, August and September to be technical months. In a technical month, weather conditions in the United States, India or China play a very important role in stabilizing prices. In addition to the exchange rate, the third is the geopolitical situation. All three of these things combined would have a technical issue rather than a fundamental one. I can’t comment on how the prices will be, but for sure if there is a cut, we are here to convey the benefit to consumers.
What is the outlook in terms of your margins? I talked about this reduction in the price of raw materials. If this is likely to continue, when do you think we can see this feature working in your margins?
In our profit margins, we usually look at ways to reduce our fixed costs rather than increase prices. Now the reduction in fixed costs comes from scale. Q1 volumes were a little better than last year Q1 but from now on, Q2 will be even better. The approaching festive season and calming prices will help increase volumes.
Now once the volume goes down, our refining costs go down, the cost of utilities goes down, the cost of manpower goes down, warehousing, logistics and even shipping costs go down. So, to this extent, we get a lot of benefits that will help improve the end result.
What about market share? We have seen an increase in edible oil market share this year compared to last year. What kind of market share gains can we expect in fiscal year 23?
This quarter we went from 18.1% to 18.7% and as a group with our joint venture partner, we’re at about 19.7%. But going forward, since we have a portfolio of oil, our focus will always be on pushing mustard oil. India produced a very good crop of mustard this year and Fortune mustard oil is the number one mustard oil. So our focus will be on improving distribution there.
Rural India still needs direct distribution and if we can reach more rural retail outlets directly then we can do a better job. Our direct reach today is about 5.75 lakh outlets but in general 1.6 or 1.7 million outlets we cover directly and indirectly so the focus will be on distribution.
There is a 15% jump in sizes. Can you tell us about the performance of the metro compared to the non-metro cities, the smaller cities?
The rural market is under pressure. Our previous contribution from rural areas was 35% of our total volumes. This has been reduced to 31%. In the rural market the SKU due to the joint family was 16kg times and 15l jars and we’re seeing more and more frequent buying of pint bottles, one liter bottles, and one liter bags, and the stakes for these items have gone up dramatically.
This is an indication that consumers want to buy frequently but cannot afford it all together. These are the issues in the rural market. But from now on, after a good monsoon season, farmers are usually happy when they start looking for a good harvest. By October, if the harvest is good, we will see a lot of recovery in the rural market in the third quarter.
Will this be accompanied by further price cuts? Price cuts were taken into account following government guidance, especially for edible oils, but with commodity prices falling globally, when will we see Adani Wilmar pass on all the benefits to consumers?
Increasing or correcting prices is an ongoing issue, and whenever international prices fall, we have to pass on the benefit as we compete with other brands in the country.
Secondly, we want to increase our market share and obviously we have to be price conscious and get into awareness. I can’t say how much we can reduce but in the last 90 days the prices have been reduced by roughly 30-40 rupees per liter.
Today’s price is a fairly comfortable price for consumers and at these prices, when we interact with consumers at the retail outlet, they feel completely satisfied and comfortable. Of course, everyone wants a lower price and we would too but when that happens, we will for sure. But the current situation is still much better than it was three or four months ago.
Going forward now that there will be a GST surcharge on unpackaged foods, what will that mean for a company like Adani Wilmar? Also, we’re waiting for full integration as far as Kohinoor goes. Adani Group is definitely on a shopping spree across sectors.
In terms of GST, we follow up with the government and various authorities that there should be a level playing field when you want investments in terms of higher capacities, better packaging lines and better quality products. Let me tell you, the government got it. There are brands that use this to bypass the 5% GST. Only 10% of staples are branded today, 90% are still sold in bulk.
So from a consumer point of view, we don’t see much difference. What will happen is that people in urban areas buy rice, wheat, staples, or pulses. Now that these brands are registered trademarks, the quality will be good as there is some burden on providing better quality. Now all this will give a lot of benefits to organized players like Adani Wilmar.
We have a presence in all categories in which GST was issued such as dal, besan, wheat flour, maida, souji and then basmati rice, non-basmati rice. In all of these categories, we’ll see better brand engagement coming and that will be beneficial to the organization as we can invest more in building higher capabilities and start scaling.
For mergers and acquisitions, we are constantly looking for alignment in terms of brand relevance, distribution suitability or relevance to the organization’s objective. We are now in the food basket. We feel that the country will consume better and better quality basic materials in the coming days. The share of branded products will increase and so we are looking to buy assets or brands as we did in the case of Kohinoor to increase the basmati rice business. This is an ongoing relationship. There is a team that continues to work on it and is looking forward to these kinds of opportunities.