BRITANNIA — earnings call
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Prepared remarks
Moderator · Conference Operator
Thank you very much.
We will now begin the question and answer session.
The first question is from the line of Abneesh Roy from Nuvama.
Please go ahead.
Abneesh Roy
Yes thanks and congrats on a very good set of numbers.
If I see last five quarters sales has been stable at 3300 to 3600 Crores number quarter-on-quarter jump of 18% so I had question on that how much would be the pricing growth quarter-on-quarter plus biggest festive was earlier this time how much is one-off because of the inventory built up because of the festive season-related pipeline filling and when I refer to slide number 10 your new products have seen very strong growth quarter-on-quarter 70% to almost 2.9x quarter-on-quarter so is there inventory filling because of that because you are seeing good demand which could further accelerate if you could explain any one offs out here?
Varun Berry
There are no one offs Abneesh.
Abneesh I must say that Abneesh from Nuvama sounds a little funny we are used to your Edelweiss so I was a little taken aback, but to answer your question first of all no one time at all it is all progress made from a zero base, we have seen very good demand, we have been able to do enough for our brands this quarter, we have taken a step back on that but we have gone back on it, we are supporting our brands and we have done a lot of innovation as I have spoken through the deck and that is giving us momentum with our customers and this is despite the fact that we had taken the price increase before some of all peers so that was your first question.
What else did you ask?
Abneesh Roy
How much should be the pricing growth says quarter-on-quarter and Y-o-Y if you could give that number?
Varun Berry
Total pricing that we have taken is approximately 22.5% and this is in the phase of 32% inflation.
Venkat what is the pricing that we have taken this quarter?
N. N. Venkatraman
Q2 versus Q1 has been about 7%.
Varun Berry
We have seen inflation of 3% but we had some catch up to do so we have taken 7% price increase this quarter.
Go ahead Venkat.
Britannia Industries Limited November 07, 2022
N. N. Venkatraman
Year-on-year is this question that Abneesh was asking so year-on-year is about 18% Abneesh, but what Varun was referring to is over a period of longer six or seven quarters is what he was referring, so year-on-year is 18%, quarter-on-quarter is about 7%.
Abneesh Roy
So does it imply 4% to 5% kind of volume growth, 18% Y-o-Y pricing?
Varun Berry
Yes approximately mid single digit volume growth.
Abneesh Roy
One related question Varun was on your direct fleet expansion which was extremely strong but I do note that in FY2022 it came down also sharply versus FY2021 was it just a COVID- related impact and now in the rural when I compare the market share between you and Parle could you give us some sense where is the indexation now versus say six years, seven years back when you started the focus on Hindi states where is the gap now?
Varun Berry
Still a big gap Abneesh while we have made up it is too small to really make a big difference so just to give you an idea we are probably now about 18% share in a market like UP, large state of UP I am just giving you some rough numbers we would be about 18%, seven, eight years back we were probably 11% to 12%.
Yes good progress but still a long way to go.
Abneesh Roy
Varun last question is on your overall group related and your long-term debt so I do see ICD is coming down versus six months back and quarter-on-quarter it is stable which is okay which is good but on the long-term debt 1000 Crores it has gone higher I understand capex is happening plus also the investor concerns on the group entity of Bombay Dyeing-related SEBI issues so if you could address is there a better way of financing this capex through the internal accrual rather than the long-term debt and on the group related could you address some of the concerns I know there is no direct impact but if you could address what are the concerns?
Varun Berry
Yes, I think this question was going to come up in any case so let me address that.
So Bombay Dyeing they have already clarified while I am not on the Board of Bombay Dyeing but whatever we know is that Bombay Dyeing has already clarified through their press release that it is fully compliant and we exercise its right to appeal against the SEBI orders right and I also understand Venkat correct me if I am wrong I understand that the company has since filed an appeal with the Securities Appellate Tribunal as well right.
N. N. Venkatraman
That is right.
Varun Berry
What you have heard I have also heard the same.
As the matter is subjudice I do not think it is right to comment on that any further than this but happy to clear if there is any more information that we get we will be happy to clear any other doubts that you may have on a Britannia Industries Limited November 07, 2022 larger basis.
Coming to the debt that you are talking about we have taken debt yes, we have taken debt for our Ranjangaon expansion a lot of that in dairy the dairy plant is almost ready and should be commercialized soon, so dairy then we have got a factory coming up in Tamil Nadu, a factory coming up in UP to fund that and we have got the loan at a very low price.
We have got a loan at what Venkat 5.8%?
N. N. Venkatraman
That is right.
Correct.
Varun Berry
While our treasury is 250 to 300 basis points more but we do understand what you are saying.
I think we have fairly measured in what we are doing, Venkat happy if you can comment on that as well.
N. Venkatraman
You covered them all.
I think the borrowing currently is at about 5.8 and our treasury is yielding roughly 8.5% but the point being made by Abneesh is clear.
Like you rightly said group ICDs have been coming down from what was about 740 Crores in March it is currently at about 590 Crores.
Abneesh Roy
Sure Sir.
Thanks that is all from my side.
Moderator · Conference Operator
The next question is from the line of Kunal Vora from BNP Paribas.
Please go ahead.
Kunal Vora
Yes thanks for a great quarter and thanks for the opportunity.
My first question is on raw material so in raw material what would be the broad breakup between wheat, edible oil, sugar, fuel and how much wheat inventory do you typically hold and how does the wheat procurement work do you mostly acquire after the rabi harvest?
Varun Berry
Wheat, palm oil and sugar are the three largest components as far as we are concerned.
Manoj do you want to comment.
Manoj Balgi
So wheat, palm oil and sugar roughly together would constitute about 65% of the value of procurement and wheat is typically procured during the harvesting season that is in April, May, and June.
Kunal Vora
What is your initial view right now, do you think wheat prices will ease up or any initial due there?
Manoj Balgi
Wheat prices are quite high and I think government is taking actions to stabilize those.
Britannia Industries Limited November 07, 2022
Kunal Vora
My second question is on the management change with Rajneet joining what will be the role division between the CEO and MD, Executive Vice Chairman and should we expect any changes in the strategy?
Varun Berry
No I think it is going to be simple as management working so Rajneet will take full charge of day-to-day operations of the company.
He will also use his digital e-commerce experience to build a pathway to bringing Britannia’s digital quotient up and building digital interface which can make this company into a data driven organization so I think that will be a big part of his agenda as well.
I will continue to have overall responsibility for the company as Managing Director.
I will also focus on strategic priorities like building future categories, geographical expansion, strategic partnerships, JVs, M&A, driving the ESG agenda and obviously mentoring and guiding Rajneet through this process.
Kunal Vora
Okay understood.
That is it from my side.
Thank you.
Moderator · Conference Operator
Thank you.
The next question is from the line of from Arnab Mitra from Goldman Sachs.
Please go ahead.
Arnab Mitra
Hi Varun and team.
My first question was on the commodity inflation you mentioned that 32% number given where palm is currently and the rest of commodities are how would you expect this to trend in 3Q, 4Q and in that context do you then expect your gross margins to continue to sequentially improve from where it is in this quarter?
Varun Berry
I do think that prices are going to stabilize.
Palm oil has already shown some signs of stabilizing, it actually went down quite a bit before surging a bit upwards thereafter, but in wheat because the country has produced less wheat I think that is going to remain a little firm till the time the next season comes through.
As far as sugar is concerned we are seeing a little bit of upside as far as sugar is concerned and I have already spoken about milk and milk products that is on the complete boil so I do not think it is going to cool down substantially but yes it is going to be stable to slightly cooling down I would say in Q3 and Q4. Venkat and Manoj if you want to add something please do so.
N. Venkatraman
No you have covered it.
Varun Berry
That is how we see it.
I do not think there is going to be complete cool down happening in the next two quarters because there are fundamental issues.
Wheat has an issue of availability, sugar is not an issue of availability the government is trying to keep the prices firm so that farmers, etc., can get the right amount of return and palm is out of our hands but seems to be coming at the right level so let us see.
I think things will be equal to or slightly better.
Britannia Industries Limited November 07, 2022
Arnab Mitra
Thanks Varun for that clarity.
My second and last question was on your volume growth.
You have seen this sequential 7% price increase and yet volume growth has actually probably slightly stepped up in a relatively weak macro environment so from what you have seen on the ground are you reasonably confident that the price hike has been well absorbed and there will be no negative effect on volumes going ahead and therefore there is complete step up in the quarterly run rate any concerns that could kind of slowdown as pricing starts affecting volume?
Varun Berry
Arnab the point is that pricing has affected volume.
We were seeing a lot more volume growth.
Yes we have come back reasonably well in this quarter but still I would say at the lower end of volume growth and the result of that really are the price increases that we have taken.
Now the question that you are asking is why is that we are obviously doing a little better than what other categories and other companies are doing the answer to that are two one is the execution which is the distribution build, etc., that we are doing which is keeping our share up we are getting more shares but share is one part of it, the second part is that even the category is growing and the reason for the category growth is that it is a category which is the cheapest form of food and when there is inflation which happens across different categories obviously the impact on the higher categories, etc., will be a lot more and because we have the cheapest form of food and we are wholesome and tasty as well.
I think we have been slightly better than all the other categories and we probably benefited out of that so those are the two reasons.
Arnab Mitra
Okay thank you so much Varun.
That is it from my side.
Moderator · Conference Operator
Thank you.
The next question is from the line of from Shirish Pardeshi from Centrum Brooking.
Please go ahead.
Shirish Pardeshi
Hi good morning.
Hearty congregations Varun for becoming Vice Chairman.
I think two things just one observation on slide 10 you have seen so many new products so I was more keen at least the trade is very positive on Croissant so maybe if you can help me what is the number we look at this year and maybe next year specifically for Croissant?
Varun Berry
So we are looking at exit rate of about 150 Crores which is I would say a reasonable number for a product which has just been launched.
Shirish Pardeshi
Okay and you normally used to give the NPD contribution what was the NPD contribution in Q2?
Varun Berry
It is approximately 3.5% of the revenue.
See the thing is that our overall revenue has also been growing pretty fast but this is in our definition.
If you were to look at the total NPD Britannia Industries Limited November 07, 2022 contribution it will probably be about 5% because we look at a shorter period that is why it is 3.5% but overall it will be about 5%.
Shirish Pardeshi
It is interesting to see that last year we started with Potazos and in this slide I am not seeing Potazos any comment so is that product still on or it is low focus for us now?
Varun Berry
No, it is doing quite well for us.
We have spoken about it so we do not want to repeat what was done earlier otherwise it will become a very long session with you guys.
Shirish Pardeshi
My second question is on the growth path, you normally used to give 3 year CAGR so I am more interested what is the 3 year CAGR volume growth?
Varun Berry
Three year CAGR volume growth will be quite substantial.
I would hazard a guess it will probably be 8% Venkat would you have that number?
Shirish Pardeshi
Meanwhile let me ask the last question on the dairy part you mentioned that dairy has now gone up and I think somewhere last two quarters you have been indicating it is about 550 Crores so may be if you can spell it out what are the new categories product distribution and what number we should model in FY2023 and 2024?
Varun Berry
Growths are reasonably good in dairy.
We have been seeing reasonably good growths but we are working on some very strategic measures as far as dairy is concerned and hold on in the next 15 days or so we will come back and chat with you on what we are looking at as far as dairy is concerned.
The pressure on dairy is not topline at this time.
The pressure is bottomline because of the milk prices going from Rs.30 to Rs.41 so that is the big pressure as far as we are concerned and obviously as we start to commercialize our dairy factory again there will be a momentum but we will have to make sure that we do it all in a way that it all becomes the way we conceptualized making this business a very large part and as I have promised we will be back discussing with you in the next 15 days or so on how we are looking at making this a very solid business for us in the future.
Shirish Pardeshi
All the best to you Varun and Rajneet welcome to our interaction.
Thank you.
Moderator · Conference Operator
Thank you.
The next question is from the line of from Percy Panthaki from IIFL.
Please go ahead.
As there is no response from the current participant we move to the next question from the line of Manoj Menon from ICICI Securities.
Please go ahead.
Manoj Menon
Hi team very impressive performance given the context so I got one clarification on the sales part of it and the other one on the marketing part of it and if time permits just also want to understand 5.8% loan it appears extremely good so just was wondering if you could tell us Britannia Industries Limited November 07, 2022 where it is available if it is PP or something like that, anyway so the first thing is on the sales side of it Varun could you just help us understand the exact modalities which you are actually using to get this sort of outcome, for example you talk about 28% if this sub stockist or is it actual distributors, point number two is it just a classic case of awareness higher than availability and you are just driving it?
Varun Berry
These are distributors but they are not as organized as our large distributors.
They are appointed in a smaller area, they cover anywhere from 40 to 100 outlets in their area.
These are all small areas which are rural, small town, villages, etc., 10,000 kind of population kind of areas.
Now what we have with them we do have handles and we do get data their sales, etc., we get all of that data but obviously the quality of supervision, etc., tends to be I would say much below what we do with our larger distributors.
It is a hub and spoke model that we do because we have to break bulk as far as the distributors are concerned so we will create CNFAs who then distribute to these smaller RPD so it is a different model.
It probably cost us a percent more but it gives us a long-term sustainability in that area or in that village and the way it works is that after they become larger so let us say they start with 30 lakh a month kind of business or 20 lakh a month kind of business and then they get to larger size as we see them graduate to a larger size then we can start to service them directly, then we cut out the C&FA, we make them distributors so the evolution continues.
I am just trying to simplify things so that you understand what we do.
Manoj Menon
It seems actually a very much repeatable sort of model.
One linked question on the sales side of it is that when I look at the direct touch points which you have comfortably more than two million currently which also happens to be the best in class let us say largely at par with lever the question automatically which comes is maybe there is another lever which will have is let us say more line selling or extracting more from the current set of outlets any colour on that?
Varun Berry
So that is the KPI as well.
I will actually let Vipin answer that but we have this KPI of how many lines that we sell to each one of the outlets so actually the way we look at it is that in urban the objectives that we have is to get depth of distribution and in rural it is about width of distribution because we want to start in rural, we want to get our products into those outlets.
If the outlets do stock our product but they buy it through a wholesaler or something then half the time they will not be available, those products will not be available, the wholesaler is not trustworthy as a direct distributor going to those outlets so we try to make sure that we go there directly, we deal with the customer directly and we put our products in there so that is how we look at it but over to Vipin.
Vipin Kataria
Hi Manoj so there are a few things that we do to increase our range and Britannia as you know more is a range driven organization right so we have got 25 odd brands, so I think the first thing which Varun explained is using the entire technology which is handled and various Britannia Industries Limited November 07, 2022 app.
Now these handles and app are basically predictive as well as prescriptive analytics right which basically tells that this needs to be cross sell or up sell to the outlets right so that is the first principle that we apply.
There is a lot of empirical data through the tech basically predicts that this is going to be the forecast for this retail or the wholesale outlet and therefore that is the active selling that we do.
The second part is that our distributors or super stockist they have got these stock norms which basically ensure that the entire range availability is there at that point in time right and therefore that can be then connected with the retail market right, so therefore it is a fairly full driven system.
The third is that in rural we have a got a fairly large foot on street team which is taking these orders directly right and therefore we keep impacting the range.
I think the fourth and the most important is that the range selling is also part of the trade term or the margins that we give to our super stockist and RPDs and therefore it is a self motivating commission which basically helps us sell this entire range.
So these are the four principles basically we apply and therefore it is a scalable model for all the states.
Manoj Menon
Thank you so much Vipin, Varun for the exhaustive response.
I had a question on marketing but I will come back in the queue but just quickly if I may request Venkat on the 5.8% loan some more colour on it given that it seems to be very low and very attractive?
N. Venkatraman
Essentially our including bonus debentures that we had issued the last year.
It also has some borrowing that we have done in respect to the dairy project through our funding arrangement which is available with the animal husbandry.
The third is the normal term loan and I think we have managed to borrow it right in time.
Manoj Menon
Understood.
It is a blended rate okay sure.
Moderator · Conference Operator
Thank you.
Ladies and gentlemen we take the last question for today from the line of Avi Mehta from Macquarie.
Please go ahead.
Avi Mehta
Hi Sir.
I just wanted to ask on the margin side clearly we are seeing while input costs have risen you have been able to kind of pass them on quite effectively we are arguing that input cost remains quite stable and are likely to kind of moderate down in that kind of context would you say that a path forward to reach back to the 18% to 19% EBITDA margin exist?
Varun Berry
Listen I think we also dream like you.
Those numbers were reached during COVID.
Yes obviously we would want to endeavor to get to higher numbers but I think it is important that we make this as gradual as possible and create funding opportunities for new products or new categories and we support these new products and get them to be of a certain size.
The problem is that it is not a problem actually it is actually a good thing but the base business is so large that 150 to 200 Crores kind of innovation becomes a drop in the ocean.
So we have to create much larger pieces of innovation as we go forward and that is what we will endeavor Britannia Industries Limited November 07, 2022 to do as we move forward.
We will try to see how we can make each one of these categories fairly large.
There are three innovations which are over 100 Crores, milk shakes has become 100 Crores plus last year, Croissant will become 100 Crores plus this year, wafers is headed towards 100 Crores plus this year as well.
So there are three or four categories which are going there and similarly products like Biscafe, products like Potazos are becoming very close to that number as well so as we start to create these kind of innovations and we take them to scale I think that is the time when it will all start to show on the adjacent category growth and that is really what our endeavor will be.
So yes we will try and maximize our profit as we go forward and we have shown you that while managing to make sure that we gain our market share and we also grow our topline but we also want to support all of our existing products.
Avi Mehta
We have seen another quarter of market share gains in this year congratulations on that but that I was trying to reconcile it with the fact that things are opening up you highlighted biscuits being the cheapest so price is an aspect and we have taken sharper price increases so in that context is it that the competition still not back to normal and probably they have structurally impeded to a lower level is that the reason I am just trying to kind of reconcile because what you said is biscuits will be cheaper and pricing would be the aspect but you took higher price increases?
Varun Berry
You are right.
So see the point is that what hits us hits other competitors more than us because we got scale right so all other competitors can do is take short term advantage of getting prices below us for 4 months, 3 months, 6 months, 8 months whatever it may be and that they have done already and it has not really impacted us in any big way.
Yes in pockets it did impact us and we took whatever action was necessary to make sure that we get back to what our plan was but at some stage it all comes back to normal.
Now I would say that 95% at least the A players are at the same level as they were pre the inflation.
Yes the smaller players sometimes take their time and they will continue to sell their product in a small territory at a much lower price, etc., but it all normalizes.
Finally it impacts everyone and as I have said in the past as well everyone has got used to profits.
Biscuits were not a profitable category so people were not really making big profits and they were living with whatever conditions they were in.
Now everyone got used to profitable existence and why not it has to be a profitable company to be able to become more successful in the future and everyone is on that path now which is very, very good thing and frankly I am very proud of the fact that we have been able to garner that in some way.
We have been able to guide the entire industry to look at competition in execution way rather than pricing advantage so I think it will all get back to normal.
I do not think there will be any big issues on that front.
Avi Mehta
Got it Sir got it.
Thanks a lot for this and wish you lot of luck for the future.
Varun Berry
Thank you Guys.
Thank you very much.
Good night all of you and we will see you soon.
Britannia Industries Limited November 07, 2022
Moderator · Conference Operator
I now hand the conference over to Mr. Mayank Mundra for closing comments.
Over to you!
Mayank Mundra
Thanks everyone for spending time with us on this call today.
We look forward to interacting with you again.
Moderator · Conference Operator
Thank you.
Ladies and gentlemen on behalf of Britannia Industries Limited that concludes this conference.
We thank you all for joining us.
You may now disconnect your lines.