Nawal Sharma, President & Head Business Transformation, Kwality Limited

India Infoline News Service | Mumbai | April 17, 2017 08:35 IST

With the imposition of GST, there would be ease of doing business in India as we do multiple indirect taxes and compliance costs would fall.

Nawal Sharma, President & Head Business Transformation, Kwality Limited, has 25 years of experience across multiple industry business transformation (Consulting), Telecom, BPO and FMCG and have worked with companies like Reliance Communications, Bharti BT Internet etc.
 
Kwality Ltd. (Kwality) was incorporated in 1992 as Kwality Dairy (India) Ltd. The company was set up as a backward integration unit of Kwality Ice Creams India Ltd and was acquired by Dhingra Family in 2002. Kwality is one of the fastest growing private sector dairy companies with a new range of innovative products and enjoys a large presence in Northern India.


 
Replying to IIFL, Nawal Sharma said, “With the imposition of GST, there would be ease of doing business in India as we do multiple indirect taxes and compliance costs would fall.”
 
India’s dairy products business is vast with the fairly strong presence of unorganised players. Do you think unorganised players may dominate in the future?
 
Dairy market in India worth approx. INR 6 lac crore (growing @15% y/y) is 80% unorganised and only 20% is organised. It is highly fragmented.
 
However, the organised segment is growing much faster. Organized segment grew at a CAGR of 20.4% during 2010-2014 as against unorganized sector CAGR of 14.2% during the same period driven by Rising disposable incomes/middle-class, increasing urbanization, changing lifestyles/preferences, increasing health awareness and brand awareness especially in urban markets leading to strong demand for branded products, thereby organized segment; Tier-I and Tier-II cities offer significant growth opportunities for retail.
 
Companies are enhancing their focus on brand building/marketing activities with aggressive spending and expansion of their marketing & sales team to create strong brand recall, customer retention, and reach.
 
This trend is expected to continue in the coming years. As per IMARC, during the period 2015E-2020E, organised segment is expected to grow at a CAGR of 19.6% as compared to 13.3% for the unorganised segment. This would result in organised segment accounting for 26% of the total market in 2020.
 
Though in terms of value share, the unorganised segment will continue to dominate, but the growth of organised segment will continue to surpass the unorganised.
 
As the trend continues, in the long run, the dairy industry in India will be dominated by organised players and move towards consolidation just like any other industry.  
 
Kwality Limited’s business is mainly positioned in North India. Do you have any plans to expand the business in other parts of the country?
 
We would like to strengthen our foothold in Northern parts of India, however, for our high-shelf life products we may explore other markets as well but only for high shelf life and high margin value-added products provided we have ample supply-chain capabilities available with us to cater to the same and the market is attractive enough.
 
Recently, we engaged Ernst & Young to develop comprehensive growth strategy/roadmap for the next 3-5 years. This encompasses assessing market potential/mapping for various VAPs for existing and other markets pan India, competitive benchmarking, identifying lucrative product categories/sub-categories, analysing our internal capabilities/readiness, developing distinct value propositions for products, sales & distribution/channel development strategy, creating detailed ‘Go-to-Market roadmap’ for new target markets including business plan/investment requirements.
 
Having said that, all our business targets can be achieved in North only as it is the largest consumption market in India.
 
Unbranded products still dominate the Indian dairy markets. How do you plan to change the present climate of the market with the branded products?  
 
 As discussed above, the dairy industry in India is highly fragmented and dominated by unorganised segment. Rising disposable incomes and increasing brand awareness especially in urban markets resulting in strong demand for branded products. Consumers are rapidly shifting towards branded products due to it high-quality and other added benefits like fortification/added nutrients.
 
Milk is considered to be super food in India and forms an essential part of our daily lifestyle. In addition to urban markets,aspirational consumers in Tier-II cities of India are fast graduating towards branded products.
 
We expect this trend to continue and benefit the organised segment as a whole.
 
Also, In the recent past, change in demographics, increasing number of nuclear families, and rapid urbanization have resulted in significant demand for branded value-added products (VAPs) like cheese, condensed milk, UHT, flavored butter/milk/yoghurt, protein-based beverages/health supplements; VAPs expected to grow at a healthy rate of 23% annually till 2020E on the back of : 
 
Increasing Young Population – Value added milk products like cheese finds usage in convenience foods for Pizzas, Pasta, Burgers et al
 
Aggressive Growth plans of QSR players – Rising demand for milk, condensed milk, and cream especially from coffee chains
 
Changing lifestyles and Increasing health awareness is evolving low-fat high-protein dietary patterns especially among millennials and young population, driving demand for products like low-fat yoghurts/cheese, protein-based health drinks/supplements among others.
 
Convenience – Instead of making at home, availability of ready-to-eat/Drink, single serve/family packs of high-quality dairy/VAP products on the shelves is gaining significant traction and making life easier working professionals/nuclear families.
 
For our marketing and brand building activities, we roped in reputed organisations like McCain for Creative, Zenith Optimedia for Media Planning, Digital Quotient for Social Marketing. Also, we have signed leading Bollywood actor Mr Akshay Kumar as our brand ambassador to get quick consumer mind share and in line with our brand positioning ‘Active Performance’.
 
We have inked an Ad for Equity deal with leading media houses ‘Times of India’ and ‘Hindustan Times’ that offers access to their Print, TV, Online, and Radio platforms for brand building activities at best rates.
 
We intend to roll-out differentiated products in terms of either product, packaging, or communication or with a hybrid/combination of above attributes.
The objective is to create a distinct imagery among consumer’s mind that products of Kwality are differentiated and healthy, enabling them to live their lives ‘Non-Stop’.
 
We launched our new brand campaign in Sep’2016 encompassing various ATL (Print, TV, and Radio), BTL (Sign-boards, billboards, bus shelters, unipoles, hoardings, among others) and customer engagement activities like ‘Scratch n Win Offer’ for consumers to experience our products. This integrated marketing campaign is aimed towards brand building, channel development, enter new markets/strengthen distribution network, and expanding consumer base in our target markets.
 
We would be undertaking brand-health check-up exercises regularly with the help of external consultants/auditors to gauge the impact of these brand building activities in terms of brand salience, reach, affinity, consideration, and repeat purchases to devise an action plan for subsequent marketing activities.
 
Is Dairy business in the country attractive enough to lure the private equity investors?
 
The dairy industry is the sunrise sector in India and offers significant investment opportunities for both financial and strategic investors. India is the largest consumer and producer of milk in the world, accounting for over 18% of global market share. In India, over 55% of the population is directly/indirectly involved in agriculture/dairy and dairy is the largest contributor to agri-GDP. Our country has the largest number of milking animals and the industry is insulated from any turbulence in global milk commodity prices as it is very much protected. The GoI has enhanced focus on this sector to improve income levels of the farmers and has introduced strict norms on the import of milk and milk products, the imposition of high import duties, enhanced preference to indigenous cattle. The organised segment is growing faster than the unorganised on the back of rising disposable incomes/middle-class, increasing urbanisation, changing lifestyles/preferences, increasing health awareness and brand awareness leading to strong demand for branded products. All these factors make the sector extremely lucrative for financial investors.
 
Also, the biggest concern/challenge for any private equity player is to make successful exits. We have enough precedents available to support that investment in dairy companies have offered successful exits to private equity players.
 
The valuation is still very low for the majority of dairy companies in India given the high-growth market potential and growth opportunities available. Additionally, the high margin branded value – added segment offers tremendous prospects for organised players to unlock significant value for themselves.
 
Supply Chain management is the backbone of dairy business in India. How can GST affect the supply chain management in the dairy business in India?
 
Yes, Supply chain management is the backbone of the every industry and for the dairy industry too. With the imposition of GST, there would be ease of doing business in India as we do multiple indirect taxes and compliance costs would fall. All the dairy products are expected to be in the lower bracket of GST 0%, 5% or 12%.
 
Currently, when we sell our products in other states (via distributors) through C-Form, it attracts an additional 2% CST cost which is borne by the consumer. Post GST implementation, this additional burden would no longer be applicable, thereby, would reduce the price of the product to that extent.
Also, transfer of products to Depots/CSA would become expensive as GST would be applicable on such products, thereby, increasing the inventory holding costs to that extent. Currently, no tax is levied on such transfers.
Further, to ensure ample supply to cater the demand for all products, dairy companies would take strategic decisions on setting up of Depots/CSA across geographies/target markets product-wise.
 
What are the initiatives taken by Kwality Ltd. to connect more with the farmers for getting a large amount of raw material?
 
We would continue to increase our farmer base with our farmer connect-programs which include providing best of the cattle feed at subsidised rates, organising health camps, providing veterinary services, artificial insemination, farmer education directed towards basic hygiene and best practices for cattle management, call centre support, aiding financial assistance/insurance.
 
 
Direct procurement would be supported by our MoU with Bank of Baroda, to disburse INR 4,000 crores of loans to our one lakh farmers in initial phase out of our established network comprising of ca. 325,000 farmer families across ca. 4,500 villages in U.P., Haryana, and Rajasthan which are amongst the largest milk producing states of India. The funds would be available at a preferential rate and shall be utilised primarily towards purchasing of milking animals, smartphone, and a two-wheeler. We would get the same extended to our remaining farmers in subsequent phases. Through this unprecedented arrangement, our company has cracked the toughest building block in the value chain i.e. Direct Procurement. It would allow us to develop a robust engine to increase our procurement directly from farmers which currently contributes 22% of our total milk handling capacity of 3.4 Mn litres/day. We intend to increase our direct procurement to over 50% over the next 3-4 years. This marks a giant leap in this direction and would accelerate the transition towards B2C by enabling faster shifting of our product mix towards consumer products, primarily fresh milk and value-added products.
 
Regions of focus would be in UP, Haryana, and Rajasthan states only as they are close to our plants and key consumption markets.

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