Ladies and gentlemen, good day, and welcome to Britannia Industries Limited Q2 FY 2022 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Yash from Investor Relations. Thank you, and over to you, sir.
Thanks, Neeraj. Hello, everyone. This is Yash from the investor relations team. I welcome you all to the Britannia earnings call to discuss the Q2 FY 2021-22 financial results. Joining us today on this earnings call is our Managing Director, Mr. Varun Berry, Executive Director and CFO, Mr. N. Venkataraman, VP Procurement, Mr. Manoj Balgi, Chief R&D and Quality Officer, Mr. Sudhir Nema, and VP Sales, Vipin Kataria. Before I pass it on to Mr. Varun Berry, I would like to draw your attention to the safe harbor statement in the presentation. Over to Mr. Varun Berry with remarks on the performance.
Good morning, everyone. Let me start with the presentation. If you could just get to slide Number three. What we have seen this quarter is that the economy seems to be opening up, which is pretty evident from the COVID cases dropping dramatically from where they were during the second wave. Similarly, business, you know, various business resumption indexes are showing that businesses are back beyond where they were pre-COVID. That's the good part. However, all this is happening in a highly inflationary environment. Two things which are really driving inflation. One is the crude oil prices, and second is the palm oil prices, which is one of critical ingredients for us. I'll talk more about this as we go forward. Our approach...
Next slide. Our approach to the inflationary environment has been, you know, obviously, if you look at the pressures, the pressures are coming, as I said, from palm and fuel, which is leading to increases in corrugated boxes as well as in laminates. What we have done is we've, you know, there is no substitute for price increases in an environment like this. We have actioned price increases. You know, the point is that when we do a price increase, only a 1/3 of that is a direct increase in your MRP. You know, 2/3 of that happens through grammage reduction, which takes a little longer period. We've actioned those, and those will be falling into place as we go forward.
We also doubled down on our focus on cost reduction, which is giving us. I'll talk about that in a little more detail as we go forward. We've you know, focused on discretionary spends, which can be eliminated because these are very difficult times. That's the approach that we've taken to the inflationary environment. Now coming to you know, our results. Our performance, I would say, has been fairly resilient in the current circumstances. If you were to look at the consolidated revenue on a year-on-year basis, it's gone up 6% on a reasonably high base of last year. Sequential growth is also 6%. If you look at a 24-month growth number, it's 18%.
From an operating profit standpoint, while you look at year-on-year, we've dropped 19% versus last year, which was really the peak for us. The first six months of last year were the peak for us as far as operating profit was concerned. Sequential growth has been 1%, and a 24-month growth has been 14%. However, the positive thing in this whole story is that despite actioning pricing and obviously you know this reflects on the pricing you know power that we have in our brands, we've continued to gain share. In fact, this has been a period of very high growth as far as share is concerned. Last year, we'd seen a tepid growth in market share.
This year we've accelerated that, and we are seeing very, very good market share growth in this year. Moving to the next chart, which is chart Number six, which shows the 24-month, you know, which shows the revenues. If you look at the 24-month growth for the year, it stood at 21%, with a very healthy sequential shift, which I've already spoken about. We continue to focus on our strategic planks. You know, we've spoken about these in the past as well. Innovation, well, you know, it is a strategic plank. This year, because of COVID too coming, we had to prioritize, you know, some of these for later in the year.
Distribution and marketing also during that period took a little bit of a hit, but our rural focus has continued, and we've made great progress as far as rural is concerned. Our cost focus continues, and I'll talk about where we are at on that. Other businesses, some of the businesses have done really well during this period. Our sustainability agenda has gained a lot of momentum during this period. Coming to innovation, while some of the you know, innovation ideas were deprioritized for later in the year. You know, we launched the Milk Bikis, which is iconic brand in Tamil Nadu, you know, as Milk Bikis Classic as it used to be 40 years ago.
That's done extremely well because it's nostalgia in Tamil Nadu, and it's doing extremely well. We have launched a bridge product between snacks and biscuits, which is called Potazos, and that's doing extremely well. We're extending it pan-India. We also launched Treat wafer sticks across the country. We also commercialized our facility in our Perundurai plant, where we can produce these flat wafers as well as wafer sticks. We launched Marble Cake starting in the east, and it'll be flowing across the country as well. Next slide, please. Slide nine . From a marketing activity perspective, while we kept our marketing activities fairly focused, there were some very interesting campaigns.
For Bourbon, we had, you know, three cricketers and, you know, it came out to be and it was applauded by our consumers as well. That's doing quite well. Milk Bikis, Doodh Roti ki Shakti, you know, which is the protagonist is Pankaj , what's his name?
Tripathi.
Tripathi also continues to do very well. We've done a NutriChoice digestive new campaign. We did a Jim Jam campaign, which we exposed this quarter. There's been a fairly good mix of, you know, marketing activities this quarter on biscuits as well as on cake. The Marie Gold startup activation for the third year running, you know, it's been very successful in the first two years, has also been started off. Getting to our distribution agenda. You know, as I said, we've done some really good work as far as rural distribution is concerned.
As you all know, our share in rural is lower than what it is in urban, and hence we keep doubling down on rural distribution. As you'll see, we've reached 25,000 rural distributors, which is giving us a very good growth, which is evident from the other two segments in this slide Number 10. On the focus states, you know, the growth is outpacing the country's average. We are 33% higher in the focus states. If you remember, the focus states are the ones where you have a bulk of the country's rural space, right? If you were to look at rural, in rural, we've gained 2.5x the share that we've gained in urban.
Both these are pointing towards our agenda working and we gaining more momentum in weak states as well as in rural. Moving on to the next slide, which is slide Number 11, about channels. You know, what had happened during the pandemic, during COVID one as well as the second wave, was that we had seen a muted, you know, modern trade growth. It had gone down below what we were seeing in traditional trade.
As we look at what's happening in Q2 of 2021-2022, which is the quarter which has gone by, again, modern trade has picked up, and we are seeing almost a 10% higher growth in modern trade than what we are seeing in the other parts of the business. We had lost a little bit of momentum because supervision was not possible. Salesmen were not able to go to the market. On our direct distribution agenda, you know, from 23.7 that we reached in March 2021, we had dropped to 20.8 in June. We've started to pick that up, and we should be back and beyond the number in the coming months.
Now, the third plank, which is driving an ecosystem of efficiencies, we continue to double down on this. You know the planks that we work on. Obviously, you know, productivity, zero-based budgeting, reducing waste and, you know, saving wherever possible and reducing distance to market. On these, you know, we have gained strength, and we are 6x what we'd got when we'd started this program in 2013-2014. So it's approximately INR 250 crore of cost efficiencies that we are getting out of the programs that we are running. On Page 13, you know, we've seen some, you know, even in our other businesses.
We've seen sequential shifts across, you know, out of home consumption coming back, you know, which is reflected through the milkshakes, et cetera, the lassi that we'd launched. We are seeing that happen. We are seeing a consistent increase in market share on, you know, commercialization of our Treat Stix as well as our flat wafers products. We've seen a healthy double-digit growth in dairy business, the milkshakes and the lassi products that we have. We've also seen we've done a huge distribution revamp in our Middle East business, specifically in UAE, which is starting to give us very good market share gains. Nepal continues to do really well.
In fact, you know, a person who'd gone, you know, someone that I know had gone to Nepal, to the base camp of the Everest, and they were saying that wherever you go, you get nothing else but tea and Good Day. So I was delighted to hear that, while I've not seen it myself, but that's what they said. Similarly, our Africa expansion plans are doing well. There are three countries that we are looking at seriously, and we've already started manufacturing operations in two. Moving to the next slide, which is slide Number 14, which is about sustainability. Now as you know that we've issued our first sustainability report in August 2021, and the Dow Jones Sustainability Index scores are weighted.
What we've done is we've got the ESG metrics integrated into our management team here. Everyone owns these numbers. Some of the targets that we've taken for ourselves and very important targets. If you were to look at from a people perspective, we are looking at 50% women at our facilities by March 2024, which I think is a fairly lofty, but a very good target to take. We have, you know, looked at more than 1 lakh beneficiaries to be reached through our Britannia Nutrition Foundation by next year. From a resources standpoint, a 60% renewable electricity by March 2024, which is again, a lofty target, but we are very excited about it.
We are looking at removing plastic trays from our products by March 2023, which would mean 20 lakh kg of plastic being removed from our products. We are looking at water consumption to be reduced by 30% in our factories through recycling and reuse by March 2024 versus what it was in 2020. From a health perspective, we are looking at a reduction of sugar by 8% in all our products by March 2024, and a 6% reduction in sodium again by the same date. From a governance standpoint, we are targeting second or third quartile in S&P Global CSA in food product sector this year. There are three ESG policies which are to be released in the next quarter.
The sustainability policy, the human rights policy, as well as the vendor code of conduct. Great progress here, and we will keep you updated on how we are doing against these. Getting to the meat of it. Let's get to page Number 16. As you see, you know, these are the four major commodities that we consume. For us, these are numbers which are internal to Britannia. Flour is a deflation of 7%. However, if you look at the market, it's an inflation. It's a slight inflation, not a large inflation. We've been able to, you know, maintain a deflation because we've been buying at the right prices. Sugar is a deflation of 2%.
Again, if you look at the market, it's inflation of about 2%-3%. What's happening is that both flour and sugar from India have got export parity. We've got to watch out and see how this pans out and how much export we see for these two commodities from India, which will definitely reflect in the pricing as we go forward. These two have been reasonably good for us. Where we've had the pain is in RPO, where the market inflation is approximately 54%, while through some forward buying, et cetera, our inflation is 46%, and milk, which is at an inflation of 15%. A bulk of the inflation is coming out of RPO for us, right?
Then if you were to get to Slide 17, it shows what are the other components of inflation that we are facing. Industrial fuels, there is an inflation of 35%. Freight, which is basically diesel, is an inflation of 20%. Obviously, the oil prices are leading to an inflation of approximately 20% for our laminates. There has been some you know, waste paper issues, et cetera. Plus, shipping, international shipping has become very, very tight and very expensive, which is leading to an inflation of 46% for corrugated boxes. That's the story on inflation. If you go to Page 18, that shows you know, how inflation has hit us this year.
If you were to look at the cumulative inflation, which is reflected by the brown bar, the cumulative inflation in the last six years is less than what we've seen this year in 2022, in the full year of 2022. That's the quantum of inflation that we are facing. Now, obviously, there are forward covers, there are cost efficiency programs, and all of that we are working on. In a situation like this, there is no substitute for a price increase. We've gone ahead and we've implemented pricing.
As I had said in the beginning, 1/3 of our pricing is through MRP changes, and two third is through damage reduction, which takes time because you've got to experiment, you've got to you know, get the settings right, of the machines, et cetera. It's taken time, but the entire inflation is gonna get covered through either cost efficiency programs, or you know, the pricing that we've taken by the end of this year. As I said in the beginning, despite being the first movers on pricing, we continue to build our competitive you know, landscape pretty well by gaining market share. Now, moving to Slide 19.
You know, despite the inflation that we've seen, our consolidated operating profit is comparable to our pre-COVID levels. If you were to look at quarter one and quarter two, both put together, they're approximately INR 506-INR 507 crore, which, you know, compares reasonably well to what it was pre-COVID. Yes, last year, we'd seen, you know, a herculean task in terms of what we'd seen in terms of profit achieved was amazing. Now compared to that, it's a drop. Pre-COVID, we seem to be moving in the right direction. Now getting to the final slide, which shows the story, you know, on our quarter performance.
If you were to look at quarter performance, you know, it is, the numbers are there. Net sales of INR 3,554 crore, operating profit of INR 508 crore, and the PBT and PAT thereafter. If you look at the year-on-year numbers, we've grown 6% on net sales. We are down 19% on operating profit. We are down 22% on profit before tax. And profit after tax is -23%. Obviously, there is a reflection of a INR 35 crore income tax benefit pertaining to quarter one of FY 2019-2020, which was taken in quarter two last year. That's why the PAT is looking, you know, much lower than the rest.
If you were to look at the 24-month growth, 24 months is a reasonable growth. If you were to take away, you know, that INR 35 crore here, actually our PAT would be at a growth of 4.5%. Is that right?
Four.
4%. Yeah. It would be at a growth of 4%. Now, if you were to look at our year-to-date numbers, similarly, on a 24-month basis, we've grown 21% on net sales, 27% on operating profit, 18% on PBT, and 18% on PAT. You know, if you look at our profit from operations and all of these as percentages, yes, you know, in half year, we have seen a decline versus last year, but reasonably comparable to 2019-2020. With all of the pricing initiatives coming into play, we should be coming back to where we would like to be. That's from me. Over to you for any questions that you might have.
Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. A request to all the participants, please restrict to two questions per participant. If time permits, please come back in the question queue for a follow-up question. The first question is from the line of Abneesh Roy from Edelweiss. Please go ahead.
Yeah. Thanks, Varun. My first question is on the pricing dynamics. If I see tea and soap companies have taken high single digit to double digit kind of price growth, and they saw inflation. In your case, it seems to be limited. A related question is, you said you have taken one third of the pricing hike by MRP and two third by the grammage. If you could tell us two, three years back, when Parle's market share was far behind us, now the gap is lower, then also was it a similar thing in terms of one third on MRP?
Yeah. Abneesh, this category is a lot price driven. You know, the price points make a big difference. INR 5, INR 10 in any case is you know, is fixed, right? If you can't make it INR 6 and INR 11 because consumers just shy away from buying that. You have to do grammage reduction there. Wherever you have round price points, you have to do grammage reduction to take a price increase. Yeah, things have always been like this. A large part of the portfolio has been on fixed price points, so not much has changed there, right? If that's your question, then not much has changed. What was your first question, Abneesh? Sorry.
Essentially why the grammage cut cannot be a bit more because it's a two-player industry. You and Parle dominate, and volume growth also is not high. How will the players grow if they don't cut grammage in this kind of scenario? What is the issue in the grammage cut being slightly more higher?
No. What we are saying is that we will take as much pricing as is required, right? The inflation will be completely covered through our pricing initiatives. It's just that why we mentioned that 1/3 and 2/3 was to just give you the pain of grammage reduction. It takes time, right? One third of it was taken immediately. All you need to do is print the price, right? If it's INR 26 going to INR 28, you just have to print the price. It can happen in a day, right? When you're doing grammage reduction, you have to do trials. You have to make sure. Sometimes you have to reduce the size of the biscuit. Sometimes you have to reduce the size of the package.
All of that takes a lot of trials and takes a lot of time. Especially for products like cake, et cetera, it takes a very long time because shelf life and all of that has to be tested. That was the only reason to tell you that number.
Sure. Varun, one follow-up here. If I see you are one of the few FMCG company in which gross margin pressure quarter-on-quarter is at 119 basis points. When I see your raw materials chart, RPO is down quarter-on-quarter and milk, sugar are largely stable. Flour has gone up quarter-on-quarter. Has the competitive intensity gone up with Parle? Because Parle last one and a half years has done because of COVID. Do you think that could also reverse going ahead? If you could address quarter-on-quarter the GM pressure.
No. From a competitive standpoint, we've only become stronger, Abneesh. You've only seen, you know, a stronger show from us, right? We are not facing a competitive pressure. I think everyone's doing what is required. Yes, we have taken the first mover, you know, because we are market leaders, so we have to be first movers on pricing. Despite that, we've seen no pressures on market share.
Sure. My second and last question is on this news article, Britannia to create post of CEO reporting to MD Varun Berry and succession planning. Could you clarify on that what exactly it means? Because I think half of your second tenure is still left. Wanted to understand the ramification for that.
No, no, Abneesh. There is no ramification for that. You know, that we'll talk about that when it comes to it. There was no official announcement or anything like that. We will talk about that as we come closer to time. I'm here, don't worry.
Yeah. Okay, Varun. That's all from me. Thanks a lot and all the best.
Yeah.
Thank you. The next question is from the line of Arvind Mehta from Equirus Group. Please go ahead.
Hi, sir. Thanks for taking my question. I just wanted to clarify one bit. Is the understanding correct that our margins should become better, should improve from 2Q levels in 3Q and reach normality by 4Q? That's what you are highlighting because the price increase, especially the grammage pass-through takes time. Is that understanding correct, sir?
No, that's absolutely correct. The other thing is, there's one joker in the pack, which is the inflation itself. You know, every quarter we've been thinking of, you know, inflation at some stage stabilizing, but that hasn't happened. I guess we'll have to be nimble, and if there's a requirement, we will have to make sure that we do whatever is necessary under those circumstances. If inflation goes up from where we are at, we might have to take a little more pricing. We'll be absolutely nimble on that.
Perfect. Just a follow-up on that. By normality, is this supposed to mean the 15%-16% EBITDA margin seen in the earlier years, or would it be closer to the 19%? Because you did highlight last quarter also that 19% is one-off, but should we kind of assume something in between the two, between the 15%-16% seen earlier and the 19%? Is that the right way to look at normality?
Well, the right way to look at it is that last year was, you know, something which, probably, will take us some time to reach. I would say normality would be from where we were pre-COVID and beyond.
Okay.
Not where we were during COVID and beyond.
Okay. Somewhere closer to the pre-COVID levels is what we should be then. Okay. Got it. The second question was just bookkeeping on the ICDs. It seems to be an increase from 1Q levels. Is that understanding correct? If yes, where is that primary cost?
ICD as of 30th September stands at INR 505 crore. Which is not-
It was INR 460 crores, right?
Four seventy crores. Four seventy crores.
Yeah.
In the last quarter. Marginally higher.
Okay. Is this any specific entity you would love to call out, or is it just broad-based across the group?
No, it is two entities, which is Bombay Burmah and Bombay Burmah only. It depends on the timing of repayment and timing of placement of ICD space.
Okay. That's all from my side. Thank you very much.
Thank you. The next question is from the line of Shirish Pardeshi from Centrum Capital. Please go ahead.
Yeah. Hi, Varun, and Venkat. Good morning, and happy Diwali. Just two questions from my side. Could you expand on the bit that you said in the press release that your weighted inflation is about 14%. So far now, whatever measures we have taken in the quarter, how much we have covered from this and what is going now in the market?
Shirish, the total annualized inflation is going to be approximately INR 1,300 crore on an annualized basis, right? And we will cover that entire inflation by the end of this year.
Okay.
On an annualized basis.
Is it fair to say that one-third would have been already taken, the price increases and cost measures what you have taken is covered?
In fact, everything is actioned, right? It just takes a little more time to implement it, and that's why, you know, it's gonna go towards quarter four, the completion of that. Everything has been actioned.
Okay. Just one follow-up on this, cost control, what you mentioned that it has gone up by 6x . Somewhere in the past you mentioned a number of INR 200-odd crore. If that number is different, higher or lower for FY 2022?
What is INR 200 crore?
The cost containment or the efforts what you have taken in terms of.
Yeah.
cutting the cost.
Yeah. Cost efficiency programs, I just said it's approximately about INR 250 crore now.
Okay. INR 250 crores. Okay.
Yeah.
My second and last question on the distribution front, in the domestic and also in the international. Part one is that in domestic you said that you're pre-COVID level. But then, you have also mentioned that your rural distribution, distributor points has gone up to 25,000. This is the direct distribution which you are undertaking or it is an indirect distribution which you have now accounted?
No, this is direct distribution. What we do is that we have these rural distributors who cover small villages. They cover anywhere from 20- 50 outlets per distributor. We provide them the IT infrastructure, you know, through a handheld, et cetera, so that we have control over where they go and what they service. That's as far as our rural distribution is concerned. In urban areas, because of the COVID, you know, impact, we did lose a little bit of steam in terms of our direct supervision, which we've spoken about. We are confident that we'll be, you know, very close to where we were pre-COVID and beyond in the next six months or so.
Could you spend a minute or two on the international business, what's happening in Africa, any status? You said Nepal last two quarters has done well. What is it that we can expect as a contribution from Nepal for 2022, maybe 2023?
Nepal is a small business. It's just crossed INR 100 crore, which is good because, you know, in a country where we were exporting product, now with a plant there, we have become market leaders, and we are seeing very good traction for all of our products. We haven't even launched some of our products there, so we are looking at expansion plans as well. You know, finally, it's an INR 100 crore business. That's how we build our international business by building these, you know, small businesses across. As far as the Middle East business is concerned, we had to take a step back to leap forward.
The step back was that we had a master distributor in the UAE, who was not able to give us the kind of distribution and the performance that we were looking at. They had got more involved with their logistics business and their distribution business was taking a back seat. We have now, you know, gone ahead and changed our distributor. We've got a very aggressive and a very good distributor there. In the last 3 or 4 months, we've made some very good headway there. We had been losing share bit by bit in UAE. Now in the last 3, 4 months, we've seen share gains, and we've gone to the level that we were at our highest share there.
That's the good news there. As far as Africa is concerned, we are not taking the high CapEx route. We are not investing in our own factories, but we are looking at contract manufacturing facilities. We've already got two contract manufacturing facilities, one in Egypt and one in Uganda. Now we look at how we scale that up and how we can use those facilities to even export to other African countries. That's as far as our Africa business is concerned. Does that answer your question?
Yes. That's it. Yes.
Okay.
Thank you. Thank you, Varun and the team. All the best.
Yeah.
Thank you. The next question is from the line of Mangalam Maloo from CNBC. Please go ahead.
Hey, Varun. Thank you for the opportunity. You know, from the conversation that you've had with everyone else so far and the conversation that you've spoken on the presentation, et cetera.
Yeah.
It's-
Yeah.
It sounds like the worst of margins are behind the company and the best of demand is yet to come. Is that thesis correct? If yes, then what are the factors that can accelerate or decelerate this thesis?
Mangalam, in today's environment, I can't comment on the demand. I think the demand for most businesses seems to be coming back, right? It's a month-to-month, quarter-to-quarter change that we are seeing. However, I think there seems to be momentum, you know, as far as we can see currently. Yes, your understanding is correct. As far as margins are concerned, we've taken all of the measures and all of the actions that will get us back to where we would like to be. If the demand scenario continues the way it has been in the last three months, then we should be in a very good place.
Ahead of festive season, did you not see any sort of momentum coming by in terms of demand as well? The new launches that you've done, we see a lot more, Britannia products in stores right now, and most of them are the premium end as well. So, how much does that account for as a percentage of your sales right now and going ahead?
Our premium products actually have been doing really well. Frankly, Mangalam, we don't do, you know, the bottom of the pyramid products with very little that we do of glucose, et cetera. To that extent, I think we've seen momentum on our premium products in the last three or four quarters, and we are hoping that that momentum will continue. What we are doing as a strategy is to look at some of our premium products to even fight with the value products, you know, with the right margins. Good Day and now Milk Bikis North, which is rest of India Milk Bikis.
They are two products which are, while they are premium products, they are fighting all of the value products, you know, at the right price points. That's our strategy, and hopefully we'll keep seeing traction on those as we move forward.
I meant new products as a percentage of sales, and how are they likely to be going ahead? The innovation.
Innovation, what we target every year is about 5% of our revenue.
Mm-hmm.
Innovation for us is products which are launched in the last 24 months.
Mm-hmm.
Products which have been launched, let's say three years ago, fall off the, you know, the innovation bucket. We look at about 5% of new products coming in every year.
Another word on the margin itself, in terms of inflation. You said that you have gone ahead and taken forward cover, et cetera. What if, you know, the prices normalize because these are unprecedented times? Then do you stand to lose that benefit by having bought forward contracts?
It doesn't seem like that, Mangalam. It's very clear that you know, we've seen very positive results till now, and it doesn't seem that the prices are gonna fall. We've only got covers for another 3-4 months till the end of the year. I think we'll only benefit from that.
I think so.
When you do that, there is a chance that you could, you know, because you're using your judgment to do it. This time, I think our judgment is right. Venkat, do you wanna comment on that?
Yeah. No, I think you said that right. In the first three quarters, Mangalam, I think between the market inflation and our inflation, I think we have been able to save almost about INR 200 crores.
Thank you very much. We move to the next participant. The next question is from the line of Percy Panthaki from IIFL. Please go ahead.
Hi, Varun and team. Good morning. My first question again is on cost. Just wanted to understand, so first of all, very surprised that for the first time you have given some guidance on what price increases could happen in the next two quarters. I think you're the first FMCG company to do so.
If I take your guidance, 10% kind of price increase going through in Q4, do you think the market construct enables you to take that kind of a price increase, in the sense that earlier, let's say three, four years ago or whenever, you had a cost inflation, at that time, your margins were not sitting at such a high base, and therefore, the entire industry was okay to sort of pass on this benefit?
With such high margins in the industry, do you think that the competition might take a call saying that, No, we don't want to pass on a 10% kind of a price increase, and instead, let me try and focus on gaining market share or sort of. I mean, something of that sort, which would make you uncompetitive if you really go ahead with your planned 10% price increase?
No. Percy Panthaki, the thing is that, first of all, it's not a guidance. We've spoken about it because it has been actioned already, right? In this quarter, we've actioned all of this, so we thought that if we've actioned something, then all of you need to know about that. That was the first thing. Second, I think what has happened over the years is that the, you know, the margin table for the entire sector, entire industry has gone up, and people have gotten used to making a certain amount of profit. Once that happens, then people are not, you know, bickering for a small piece here and a small piece there. I think we've reached that stage of maturity as an industry.
I don't think we'll get back to a dog-eat-dog kind of a scenario, as far as, you know, pricing is concerned. You know, what we've seen, we have taken pricing and, you know, in certain cases, competition has followed. Certain competitors haven't followed. Over a period of time, I think, the market leaders' actions hold important for the entire industry. What we've seen even in the past, while you're right, for the last five, six years, we haven't seen too much inflation, but what we've seen in the past is that if there is inflation and if we take the right price increases, competition usually follows.
I think it's the industry is at a very different level of maturity currently, and hence you know I'm not a soothsayer, so I don't know how this is gonna work out. I personally think that this will pan out well for the entire industry.
Sure. Secondly, I just wanted to understand the mechanics of this price increase on the margin. This quarter, with a 4% price increase, you clocked a 15.7% EBITDA margin. Now, with another 6%, this 4 going to 10 mathematically, unless the cost inflates further, you should be at a 20% margin with a 10% price increase. Where am I going wrong in this calculation? Because you clearly would not sort of be comfortable with a 20%, right?
No, no. See, the quarter-on-quarter inflation is also there, right? If you were to look at the kind of inflation that we've seen quarter- on- quarter, it's quite a bit. Venkat, do you wanna comment on that?
No, absolutely right. The inflation that's going to happen in quarter three and quarter four have been factored because some of these are covered through forward contracts. So we are reasonably clear about the Q3 numbers. So those have been factored, and therefore, like Varun mentioned earlier, the joker in the pack is really the inflation that's going to be there in quarter three.
Can you just give me one number as to what is the inflation between what you have actually experienced in the Q2 P&L versus what the spot prices are today?
I gave you the number. You know, let's take RPO. The inflation was 54%, but because of our forward buys, our inflation was 46%. That's the kind of data. It's between, let's say, on each commodity, 5%-8%, right? The difference. Once that cover, you know, goes off, then, you know, obviously prices will go up. We've taken all that into account as we've looked at what kind of price increases that will be required. See, when we started off, we did not realize that this inflation is gonna be there for a very, very long time.
As we realized that this is more of, you know, the norm for the future, that's the time we decided to take a very clear call on what is required and then we took action on this.
Okay. Last question, if I may be permitted.
Sure.
Have you seen or do you expect to see any kind of down-trading in the biscuit industry?
See, down-trading happened a lot last year, right? If you remember, last year during COVID, there was a huge amount of down-trading which happened. Will down-trading happen again? Very difficult to say. I personally think that with the economy opening out, with things looking brighter, there's a sense of, you know, fulfillment as far as people are concerned, consumers are concerned. In these kind of times, you know, when things are looking a little brighter, usually down-trading doesn't happen. My personal feeling is that this is not the time where we will see down-trading, but yes, we'll see as we move through this time.
We haven't seen it in the last six months, and we are hoping that we don't see it in the future as well.
Okay. That's all from me. Thanks a lot, and all the best.
Thank you. The next question is from the line of Arnab Mitra from Credit Suisse. Please go ahead.
Yeah, hi, Varun. My question was that, you know, this kind of a 10% price increase happening after a very long time in the industry. As you cut grammage, do you expect the volume consumption in the category to go down as consumers may consume less, given that it is happening through a grammage cut? Or do you expect that dynamic to be made up through higher volume? The second thing is, you know, if the volume growth does remain very tapered, let's say almost a flat number, will it be something which worries you or, given that your market shares are doing fine, it's okay to have this kind of a low volume growth for this period of time?
No. You are, you're absolutely right. We are gonna see a period of low volume growth, not just for us, but for the industry as a whole. You know, and you know, it's not a great place to be. Considering the kind of inflation that we are seeing in the marketplace, there is no other alternative. I think we'll have to take it in our stride. We will probably see a scenario of low volume growth for a year or so, and then things will, you know, start to come back to normal.
Sure. Varun, my second question was on the non-biscuit portfolio. During the COVID period, you had taken a bit of a step back there because of obvious reasons. Now, given the very high inflation, those, do those things still remain a little bit on the back burner, or do you see next two, three, four quarters you're going a lot more aggressive on the new products, non-biscuit portfolio I'm more talking about?
No. We will go very aggressive on that. What we are doing, even in the non-biscuit portfolio is we are actioning price increases there as well for most of our products. With that done, we will make sure that we you know put in all the right initiatives, whether it's advertising or sales promotion, activation, et cetera, and we go aggressive behind our non-biscuit portfolio as well. Just to let you know, even in our non-biscuit portfolio, we've seen a very good momentum on market share.
Okay, thanks. Thanks, Varun. That's it from my side.
Thank you. The next question is from the line of Harit Kapoor from Investec. Please go ahead.
Hi, good morning. First question was on non-biscuit, you know, on the non-biscuit innovation agenda. You know, over the last 18 months or so, you know, that agenda has been partially derailed because of COVID. You know, and we've had the ambition to be total food. I just wanted to get a sense of, you know, the next 6 months, do we see, given the high inflation in biscuit and non-biscuit, you know, some of this innovation agenda to get postponed to maybe FY 2023? Or, you know, the category-led, you know, innovations that you were looking at prior to COVID and the intent in some of these categories, these new categories, you know, all that innovation starts to come back.
I just wanted to know the timeline on, you know, when we can see a higher push there.
No. We will start to see a higher push in the next quarter or so. The innovation was not put on the back burner because of inflation, right? Innovation was put on the back burner because of COVID, you know.
COVID.
Most of the innovation products are on-the-go products. Hence, you know, because on the go was out of fashion, that's the reason why we put that on a back burner. Now with price increases all taken and the margins stable moving back to normal, I think we will be looking at going aggressive on the non-biscuit portfolio and innovation portfolio.
Got it. Second question was on the distribution side. You know, with we have had significant penetration gains on rural distribution. I just wanted to understand, you know, what can be the universe for this for you know? Already at 25,000, you know, do you see yourself now getting close to a steady state there where further expansion is unlikely? Will the focus be more on throughput rather than addition? And this question is more from a maybe two, three-year perspective.
No. That always is, you know, a balancing point. Throughput is important. You know, as I've said in the past as well, our share in the rural markets is 70% of what it is in overall, right? We've got a much lower share in rural markets. You know, the first target for me is to make sure that we equalize the share in rural and urban, right? The difference between rural and urban share is huge for us, right? For that to happen, there's no reason besides distribution for our rural share to be lower than urban. It's our own inability to get to all of these villages and, you know, all of these areas where we have lower share.
The target is really to equalize this, and I would say it's not gonna happen in a hurry, but the rate at which we are going, maybe in the next three years we'll have the same share in rural as we have in urban. I think with that objective in mind, our rural push will continue for a lot more time.
Okay. Thank you. Wish you all the best. Thanks.
Yeah.
Thank you. Ladies and gentlemen, we'll take the last question from the line of Vivek Maheshwari from Jefferies. Please go ahead.
Hi, good morning, Varun and team. First, a very basic question on Slide 18 where you have shown, you know, the price increases. Just to get it right, what you have essentially done is 10% price hike, of which 3% is explicit and let's say 7% is grammage. That 3% price hike is getting reflected in second quarter already. 1% is grammage, which will move up to 7% by exit. Is that understanding correct?
That's a very complicated equation, but yes, I would say more or less.
Explicit price hikes, whatever you have had to pick up, that you have done already, which is why.
Yes. Yes. Yes.
The 4% number jumps up to 10%, right?
Yes. The rest are all these grammage reduction numbers that will come in Q3 and Q4.
Got it. Second, Varun, you know, a few of your, you know, at least the personal care peers have, you know, sounded a word of caution on rural with, you know, either AC Nielsen showing, you know, a deceleration or their own numbers, you know, by the exit showing some kind of deceleration, where. What is your experience and outlook on rural? I know-
No, our outlook is very positive. We've seen very good growths in rural, and I think it's not so much about economy, it's more about our ability to reach to those villages and distribute our products. We continue to be bullish as far as rural is concerned.
Okay. Got it. Last thing, I mean, if I draw a parallel with Marico's Parachute, we have generally seen in high inflationary environment, Marico ends up passing on the hikes to the customers, and there is an unorganized to organized shift, which is in favor of typically Marico. Now, in case of biscuits, there are more than one player, so let's say three, four organized, but the unorganized tail is also quite large. Do you think this I mean, if Britannia is facing this headwind, the unorganized will be far more impacted. Do you think this will be the next 12, 18 months could see actually the larger guys benefiting from a share gain standpoint?
See, I can only talk about what's happened in the last six months since the inflation became rampant. What you're saying has played out, right? The larger players have been gaining and the smaller players have been losing, right? You're right. You know, with our scale, we can get you know, lot better bang for our buck in terms of you know, countering inflation while the smaller players have a difficult time. In the past that's happened. I don't know how it plays out in the future as well. We will make sure that we bring in all that's required to give us the upper hand as we go forward.
As you know, 35% of the biscuit market is unorganized, so we'll try and see what we can get out of it.
Got it. Thank you, and wish you and your team all the best.
Thank you.
Thank you very much. I now hand the conference over to Mr. Yash for closing comments.
Thank you, everyone, for spending time with us on the call. We look forward to interacting with you again. Thank you very much. On behalf of Britannia Industries Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.