Marico Annual Report 2018-19

RISK MANAGEMENT AND MATERIALITY

Managing Risks Judiciously

Risk Management

In a VUCA (volatility, uncertainty, complexity and ambiguity) environment, it becomes most important to ensure effective risk management. Risks are an integral part of any business environment, and it is essential that we create structures and processes that are capable of identifying and mitigating risks consistently. For Marico, risks are multi-dimensional, and thus, they need to be looked at in a holistic manner, straddling the external environment and internal processes. If upside risks are mitigated well, it could lead to business opportunities. Similarly, if downside risks are not addressed adequately, it could lead to reputational issues. That’s why Marico’s risk management process envisages that all significant activities are analysed across the value chain, keeping in mind the following types of risks:

TYPES OF RISKS

Business
Risk

Financial and Governance Risk

Operational
Risk

We have constituted a Risk Management Committee (RMC), in line with regulatory provisions. The Committee comprises the Chairman of the Board, the Managing Director & CEO and the Chief Financial Officer. The members of the leadership team are permanent invitees to the RMC.

The primary responsibility of the RMC is to assist the Board and Audit Committee in monitoring and reviewing the risk management plan and implementing the risk management framework of the Company.

Business Risk

Types of Risks	Strategic Response
Changing consumer preference Demand could be adversely affected by a shift in consumer preferences. Given the explosion of social media, the speed of such a shift could be unparalleled.	Investment in consumer in sighting to adapt to changing consumer preferences Actively monitor social media trends to spot early consumer trends; quickly respond to these trends with innovative offerings
Underperformance of acquisition deliverable Acquisitions may impose a financial burden on the parent entity or expose the Company to country-specific risks. Integration of operations and cultural harmonisation may also take time, thereby deferring benefits of synergies.	Define key performance indicators to evaluate the success of acquisition Set a monitoring process to review progress periodically Apply governance practices of the parent organisation immediately to ensure controls Resource acquisition plans ahead of the curve
Competition Increase in the number of competing brands in the marketplace, counter campaigning and aggressive pricing by competitors could create a disruption.	Diversification in product offerings (entered into categories such as healthy foods, skincare, haircare) Protect volumes in preference to short-term profitability Invest in brand building Agile response mechanism to counter competitive moves
Low success rate of new product launches The success rate for new product launches in the FMCG sector is typically low. New products may not be accepted by the consumer or may fail to achieve the sales target. This risk is even more pronounced in cases where industry leaders invest in creating new categories.	Invest in a new product development process with a funnel approach to introduce new products over time Prototyping approach to new product introductions to maintain a healthy pipeline Identify and invest in big-ticket new ideas in the chosen categories for driving growth Resilient presence in marketplace with adequate investments in brand building
Private labels Expansion of modern trade could lead to the emergence of private labels. While the risk of private labels has been low in India, this could change quickly with e-commerce gaining traction in urban India.	Invest in brand building to improve the saliency of our brands in the consumers’ mind and partner with modern trade and E-commerce in category management

Financial and Governance Risk

Types of Risks	Strategic Response
Foreign currency exposure Marico has significant presence in Bangladesh, South East Asia, Middle East, Egypt and South Africa. The Company is thus exposed to a wide variety of currencies. Fluctuations in these currencies could impact the Company’s financial performance.	While the ‘translation risk’ will continue to be unhedged, Marico has a well-defined hedging framework for managing any foreign exchange risk. The Board-approved policy in this regard is periodically reviewed for its effectiveness.
Macroeconomic factors Factors such as low GDP growth and high food inflation could result in downtrading from branded to non-branded or premium to mass market products.	Focus on value-added products available to masses at affordable prices by driving aggressive cost management Focus on franchise growth in preference to short-term profitability Portfolio diversification, which is one of the pivots of future
Compliance Inadequate compliance systems and processes pose a reputation risk for an organisation. They may result in financial losses and penalties.	Invest in compliance systems and processes Ensure all functions and units are aware of the laws and regulations to comply with Ensure adequate monitoring mechanism towards compliance Communicate periodically to reiterate the importance
Volatility in interest rates (Funding Costs) Though the FMCG sector is not capital intensive, fund requirements arise on account of inventory position building, capital expenditure undertaken or funding inorganic growth. Changes in the interest regime and in the terms of borrowing could impact the financial performance of the Company.	Well-defined framework for capital gearing Maintain a liquidity chest for immediate working capital requirements In case of foreign currency borrowings, implement hedging as per policy Manage interest rate risk to investments; implement Board-approved investment policy

Operational Risk

Types of Risks	Strategic Response
Change in input costs Unexpected changes in commodity prices could impact margins. The past few years have witnessed wide fluctuations in input prices. As a result, overall uncertainty in the environment continues to be high.	Invest in forecasting capabilities Ensure supply assurance of key commodities through farmer engagement programmes Build strategic positions as a hedge against price volatility
Talent acquisition and retention Mismatch in hiring and attrition of skilled talent may adversely affect the Company’s ability to pursue its growth strategies effectively.	Marico’s culture of openness, transparency and meritocracy helps attract top talent Marico’s talent value proposition of building challenging, enriching and fulfilling careers is aimed at retaining top talent Invest in ‘hiring right’ and ‘talent development and engagement’ best practices
Political risk Unrest and instability in countries of operation could significantly impact the business. Marico operates in developing and emerging economies of Asia and Africa and is exposed to political risks and potential unrest in these markets.	A comprehensive insurance programme to hedge all those risks that are insurable At a macro level, our country selection template emphasizes geopolitical stability and robust growth
Environment and Climate Change risks The growing focus on conserving natural resources, rising global temperatures and GHG emissions could impact the Company’s operations and prospects, further impacted by increasing domestic and international regulations and control measures.	Adopt cleaner technologies Invest in renewable energy projects Focus on safe and sustainable products Promote environmental stewardship and circular economy

RISK MANAGEMENT PLAN

01 Identify

Identify top risk for each function/business unit level

02 Quantify

Rate the risks on 'impact' and 'vulnerability' factors
Prioritise top 10 risks at the Company level

03 Mitigation Plan

Develop mitigation plan for each risk with relevant measures and result metrics
Recommend the plan to the Board for approval

04 Implement

Implement the risk mitigation plan

05 Monitor

Examine whether the mitigation plans are on track
Periodically review the existing risks and related metrics

Materiality

For Marico, material issues are those that may have an impact, directly or indirectly, on our ability to generate and sustain economic, environmental and social value for us and our stakeholders. We periodically evaluate our material issues to introspect as well as shape the future course of action. We conducted a materiality analysis exercise in FY18. The responses received were further ranked on the level of importance to our business and to our stakeholders. The details on the exercise and the outcome can be referred to in our FY18 sustainability report.

TOP QUARTILE MATERIAL ISSUES

Business

Business Growth and Profitability
Future-ready Capability Building

Environment

Responsible Resource Consumption (Materials, Energy and Water)
Climate Change (Emissions and Waste)
Sustainable Supply Chain

Social

Product Responsibility
Community Development