In an interview with ET Now, HUL Chairman Sanjiv Mehta talks about handling the second COVID-19 wave, rising input prices and magical price points that need to be maintained, even as inflation rises.

We’re back where we were last year, locked up in our houses, is your company better equipped to deal with it, having seen an year of the COVID-19 pandemic already?

We identified, at the beginning of the pandemic, what our focus areas would be, and we haven’t taken our eyes off of them since.

Those areas are also very simple – one, the safety and wellbeing of all the people who are with us; two – ensuring that our supply lines keep running. Three, ensuring that we keep our fingers on the pulse of consumer demand, behaviour of people, how they are changing, what is happening to demand, etc. Four, and an important bit, is – while we are a cash rich, zero debt company – there is a huge focus on cash and cost so that the wheels of the entire value chain keep working. Lastly, we look at how can we help communities. These are the areas and our focus on them has helped us tremendously.

During this period I was talking about resilience – for instance, when we talk about building resilience in the supply chain, it really means that you need to have free capacity. So, we created about 30% more capacity in the supply chain. If there are vagaries of demand, we can fulfil those.

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Now, another important bit is the speed that we’ve brought into our entire operation. And when we talk about speed we look at it from three lenses – identifying issues and opportunities, the speed of decision making and the speed of execution. So, via those we’ve ramped up our muscles significantly and if I weren’t focussing on the health and wellbeing our people, then we would not have 55 full-time doctors in the company. That’s are about 40% more than pre-COVID levels. We’ve got about 45 fully equipped ambulances in the company and we’ve created 30 isolation centres for our people.

All these should help us navigate the current situation.

Let’s talk business. At the start of the pandemic, people were hoarding packaged goods and hygiene products. Is FMCG still seeing the same?

No, it’s different, and the reason for that is very simple. This year is unlike last year when we went into a hard lockdown and then people’s immediate reaction was to hoard. This time around, there are these vital containment zones, localised lockdowns and even in micro containment zones, you still have stores open – albeit for few hours – they can hop across and buy essentials, so at this stage we aren’t seeing any significant hoarding happening. I’d also like to assure all our consumers that supply lines are running, our factories are running and we will do our utmost to ensure that they reach the farthest corners of the country.

The first wave didn’t hit rural areas as hard but that’s changed this year, with the second wave battering tier II and tier III cities. How is that is going to impact businesses such as yours?

You are absolutely right. Last year infections did not spread into the hinterland or they were very low; I think it’s very important for us as a country to ensure that we prevent that from happening.

First, I think every citizen of our country has got a role to play in this and the biggest one is to help prevent infection to themselves and also prevent the spread. Thankfully, you don’t need to wear a Hazmat suit to prevent infection. Just wear your mask properly, wash your hands with soap or sanitizer, and keep physical distance. I think everyone should be obsessed about these because that is the only way we will be able to prevent India’s healthcare system from coming under acute pressure. These behaviours are simple to adopt and I everyone should do stick to them passionately.

Second, from an economic perspective, I think the government did a great job last year with the rural population getting the direct transfer benefit, the food subsidies that they gave and ramped up the outlay on MGNREGA. I think if we expect any impact coming the way of rural areas, the government might have to reconsider those benefits because we have a large population in our rural areas and incomes are limited and consumption is limited, so, I think that is one area the government will have to keep a very close watch on.

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As we stand today, we are talking about end of April, we were into the same kind of momentum that we ended the March quarter in – strong growth, strong sales – and if we look at the numbers now, the last two weeks are nowhere close to what happened the same time last year. For the simple reason that supply lines are running, economic activities – while curtailed – are still running and that has made a huge difference. As a country, we’ll have to keep up a fine balancing act between protecting people and running the economy.

Predictions from both the IMD, Skymet and all other weather channels hint at a good monsoon, is that also going to aid recovery for the rural end of the market?

Absolutely. If we just pause and reflect, before the pandemic broke, rural growth had become really muted, and thanks to all the intervention that the government did and a good monsoon and good harvest helped things. I think we saw very clearly, consumption picking up and with rural per capita consumption significantly lower than urban, for a country like India we should have rural growth outpacing urban for years ahead, that is something which we should be very conscious about and keep a close watch on.

You are absolutely right, if God is kind we’ll have a good harvest and if we are able to prevent infection from spreading deep into our rural areas then I think consumption will still remain pretty robust.

While that is relieving to hear, let me get some numbers. You sound pretty confident that rural demand is going to remain as is, while we have seen a strong double digit growth in terms of volumes – almost 16% – there was also the low base impact at play. How much of this growth is sustainable, and is there a possibility that you could be back to high single digits?

Let me give you a bit of a math as to where we stand at the March quarter – excluding the GSK business which came into our home – the Horlicks and Boost brands, our business grew by 21% and volumes grew by 16%. If I were to look at the March quarter of 2020, the base period there is -9% and if you were to ask me had that last 10 days of supply disruption not happened in the March quarter, we could’ve achieved more. Remember, this was a time when rural growth had really slowed down, so I would say that growth would have been somewhere in the vicinity of two to three percent because that was muted consumption. We are talking about that about 11% difference, out of the 21% would be accounted for the shift that would have taken place in the previous days. So, then I cast my pie and see the sequential improvement and if I come to a point that it has reached about 10% growth – intrinsically – in the March quarter, excluding the disruption in the base then I would say, for a large business like ours, it is pretty good because the last decade, our CAGR over has been 9%. So it would be in sync with the average we delivered over the decade. The other important bit was in January, February – there was a huge amount of hope, optimism and confidence, although on the back of a great budget.

All these factors which would have propelled the economy forward. I do not believe that all the fundamentals benefits that India has have disappeared, so if in the next couple of months we can keep going then I believe we could get back into an area of good economic buoyancy.

Let’s about individual segments, there is inflation in commodity cost. For instance, in your skin cleansing portfolio, you’ve taken a seven to eight percent price hike as against a 40% inflation, which was seen in palm oil prices. How much of a price hike would you have to undertake to negate cost pressures?

Now, this is a very special circumstance we are seeing when three of the big commodities which have backed the input prices have seen a price increase – palm oil, raw tea and fossil fuel-based chemicals or derivatives.

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Now, if you look at how we play the game when inflation happens is, first, we do not look at one to one correspondence between input price increase and finished goods prices. We play along the lines of the cost. We may be a large company, very profitable, the fifth most valued company in India, but we have typical Indian middle class values of frugality. We bring in huge focus on cost and over the years our cost saving agenda had been giving us savings between 7% to 8%.

Secondly, when we look at all the lines of promotion, we optimise everywhere with the kind of spends we make on advertising and promotions, the kind of spends we make on trade promotions etc. We optimise that. Then we look at the science of price, we have to straddle price benefit and that endeavour always has been to protect magical price points and ensure that the price value equation remains intact. So, we bring in lot of science to pricing and ensure that we take price increase in a very calibrated manner. While our focus is always on volume led competitive growth – because we do not want to lose our consumer franchise – we also try to ensure that our business model remains intact. We have very healthy EBITDA margins of about 25% and they have seen a significant increase over the last 8-10 years so we would like to preserve this business model as much as possible, while ensuring that the consumers don’t leave.

As a consumer, I’ve noticed that since the pandemic, more consumers have become price conscious. So, while you are saying that you are going to undertake price hikes but in a calibrated manner, will it not dent your margins at some point?

That is the reason we played the entire lines of profit and loss, it is not that we just look at the variable margin, we look at PMI spends, we look at our freight spends, optimising every bit of it. The savings agenda that we have is an aggressive one, we will ensure that we have fuel for growth. We will bring everything into play. For instance, you talked about palm oil prices going up by 40%, and we have taken a price increase which is significantly lower than the input increase has been because we’ve been playing the portfolio, we’ve been playing different lines. That is how we try to do it so that the price impact is minimum. Just to give you an example, if you have a sachet of one rupee you would not want to take a price increase on that; an increase to two rupees would be lethal. So, we would not want to do that. We try to protect magical price points as far as possible and look at packs, segments of the market and brands we can take a price increase in.

It’s true that when times are tough consumers, rightfully, get more value conscious, but one of the things they also do when the times are tough is that they gravitate towards trusted big brands, brands with purpose because they cannot afford a risk of picking up a brand which might not deliver on its promise.

Which are the categories you are comfortable taking price hikes a little more than normal?

We have to be very conscious about India’s per capita income, and how that changes across levels. When I talk about a price benefit pyramid, let us take the laundry category, for instance or skin cleansing. We have brands which are below the average price to the market, but great brands, trusted brands like Lifebuoy. Then we have brands which are at the average, like Lux; then we have premium brands like Dove and Pears which are more insulated because of the kind of consumer they are targeted at.

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Similarly, when you look at our laundry category, at the mass end we have Wheel washing powder, at a popular end we have Rin, then we have Surf Excel, then we have the Matics and then we have the liquids. That is what I meant by straddling the price benefit pyramid. Even if you look at Surf Excel – which is a premium powder – we have a 10 rupee price point pack which caters to a large section of consumers who may not be able to afford the big packs but can still get absolutely brilliant cleaning with Surf Excel at an accessible price. That is the game we play and that is how we try to ensure we minimise the adverse impact on consumers while still trying our best to protect the business model. It is a fine balancing act, and not very easy when inflation is very high and some price increase will be inevitable.

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