Ladies and gentlemen, good day, and welcome to Britannia Industries Limited Q3 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 would now like to hand the conference over to Mr. Mayank Mundra. Thank you, and over to you, sir.
Thank you. Hello, everyone. This is Mayank from the investor relations team. I welcome you all to the Britannia earnings call to discuss the financial results of Q3 2021-2022. 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, and Chief Marketing Officer, Amit Doshi. The analyst deck is uploaded on the BSE website for your reference. 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. Thank you.
Good morning, everybody. I hope all of you are keeping safe in these completely unprecedented circumstances. Now, getting to the deck, let me take you straight to page number three, which gives the highlights of our performance for the quarter. Our consolidated revenues on a year-on-year basis grew by 14%, and our 24-month growth was at 20%. Operating profit, however, dropped by 13%. On a 24-month basis, this was positive 7%. We continue to make progress on our market share. In fact, the delta between us and the number two player widened this year and this quarter. Moving on to the next slide, which again shows you the strategic planks that we work on.
These have been consistent. We'll not drain this slide, because you're aware of what we are doing. Getting onto the first plank, which is distribution and marketing. Some very exciting stuff here. You know, the first one, if you see on the left-hand side, is a product called 50-50 Potazos. We've done a national scale-up of this. It's a bridge product between a biscuit and a salty snack. We are now running at a run rate of INR 70 crore on this product. We've got a very interesting advertising as well for this, and that seems to be giving us not just quarter-on-quarter, but month-on-month growth as well, on this product.
The second one, on this page, is the Milk Bikis Atta, which has also been doing extremely well. We are now at a run rate of approximately INR 400 crore on this. We used to be predominantly a South Indian brand, with most of our revenues coming out of Tamil Nadu and Kerala. This run rate that I'm talking about is not the two states that I just mentioned, but outside of these states. It's becoming a pan-India brand, and it's giving us a great response from all of these states. We have you know certain other products which we've advertised this quarter, the Layerz, the Cream Cracker. Cream Cracker, by the way, is doing extremely well.
Tiger Krunch, which we sell in a very few states, about seven states. Again, all of these high double-digit growths. The Tiger Krunch is at a run rate of INR 300 crores today. And similarly, you know, other products which are on this slide, the Choco Lush, the startup program on Marie, and we had some key promotions on biscuits as well as cakes. Now moving on to the next slide, which is about our second plank, which is driving efficiencies in distribution. You know, every company which has reported results has spoken about a slowdown in rural, especially for the FMCG products. However, we've seen no slowdown as far as, you know, rural is concerned. We continue to, you know, build on our distribution in FMCG.
In fact, our market share growth in rural is two times what it has been urban. We continue to make progress. We continue to grow our business in rural areas. Our direct reach agenda did take a little bit of a setback during COVID, but September onwards, we are once again on this program to build direct reach. In December, we reached almost 22 lakh outlets. The next slide, which is on cost efficiencies across functions. On manufacturing, in the last 7-8 years, we've built this 7.5x . The clients are the same. Energy efficiency, where we have both power and fuel.
As far as fuel is concerned, we are now looking more and more at sustainable fuels. We are looking at solar, we're looking at wind. You know, that agenda is moving very well and giving us efficiencies as well. Second is on automation, which reduces our labor costs. The third agenda really is on the productivity and efficiencies within our plants. All of these have moved well. As a result of that, we've seen the kind of efficiencies that I'm reflecting on this chart. The second one is on material. The material efficiencies have also gone five times what they used to be in 2013, 2014. The various planks here are also pretty familiar to you.
The reverse auction process, you know, there are some forward covers, localization of procurement near our factories. You know, packing material efficiencies, tray removals and also, corrugated boxes, and bringing some efficiencies and standardization to those. Those are the kind of efficiencies that we are looking at as far as material is concerned. Then finally, moving on to distribution, which has also gone 4x from where we were in 2013-14. The pillars there really are, distance reduction, truck utilization, and reverse auction for transportation rates. As a result of that, the total efficiencies that we've seen are 5.6 times what they used to be in the year 2013-14.
Moving on to the next slide, which is on Good Day. We've recently relaunched Good Day, where we've got, you know, every pack carries four different types of biscuits, which have four different smiles on them. There are multiple smiles in every pack, which is a very exciting proposition. You know, we've taken this with a approach of 360 degrees. We are looking at a print campaign. We've got digital, we've got outdoor, and we've got new TVC, which is doing well. We are very excited with the position that we've taken on Good Day. On the adjacency businesses, again, we've seen very healthy growth with consistent margin delivery on bread and Rusk.
Cake, because it's on the go, it's not done as well, but you know, it's a matter of time as we, you know, move forward to normal life. Our dairy drinks has grown two times this year. Our local operations in the international business in Uganda and Egypt have started and are scaling up. We've seen a strong growth in Croissant in the present markets. I'm happy to say that we are almost there with the new product. The design has been finalized for our all India launch, which should happen in a quarter or so. We've attained product superiority, you know, at a very high level of confidence against competition. This national launch should probably happen in the next financial year.
Milk collection for our dairy factory has gone up almost two times from 35,000 to 60,000 liters per day. We've also increased the number of farmers from 1,500 to 2,500 who are providing us the milk. Nepal continues to grow handsomely with very healthy margins. Moving on to the next slide, which is slide number 10, which is our sustainability agenda. As you know that we are working on four pillars: people, resources, growth, and governance. We've taken targets for ourselves in each one of these pillars. The first one on people. We've taken a target of taking 50% women in our facilities, which are 15 factories that we have. We employ over 17,000 workers in these factories.
As of date, 42% of these workers are women. Our target is to take this to 50%. This 42% also we achieved of late. We are tracking very well versus this target. The second agenda there is about, you know, our Britannia Nutrition Foundation and the beneficiaries. We have achieved our target there. We have 1.15 lakh beneficiaries of the products that we provide, you know, to malnourished children and women. We will keep scaling this up as we go forward. The second agenda is on resources. As I was talking to you about, energy, 60% renewable energy by March 2024, we seem to be on track on that.
Eliminating 20 lakh kilos of plastic trays by March 2023. We are on track on that as well. Water consumption to be reduced by 30% through recycling and reuse by March 2024. Again, we are on track on that. On the growth agenda, 6% reduction in sodium. Again, on track. 8% reduction in sugar by March 2024. Clearly on track on all of these targets that we've taken. On the governance front, we are targeting second or third quartile in the S&P Global Corporate Sustainability Assessment in the food products category this year. We've made great progress there. As you can see from the comments on the right-hand side.
Current year, Dow Jones Sustainability Index rating has gone up to 37, which is three times what it was earlier. We're making good progress there as well. We've rolled out three ESG policies, which is the sustainability policy, the human rights policy, as well as the vendor code of conduct. We've also got the ESG metrics integrated into our, you know, the top teams' key performance indicators. Just going back to the comments on the side. You know, we are already at third position amongst FMCG peers in India from a sustainability index perspective. Moving on to page number 12, which shows our revenues.
Our revenues are at INR 3,531 crores, which is a 14% growth versus last year. If you were to look at the 24-month growth, it's at 20%. If you look at what's happened to commodities on slide number 14, you'll see that every commodity has moved up. If you look at wheat prices, they are on a uptick. Sugar prices also from where they were, you know, in the second quarter of 2021 are on a uptick. Crude prices, you all also are aware of, where it's going. Palm is on a complete boil. This is the international picture. Coming to our own story.
If you were to look at where we are at, we've had a quarter-on-quarter inflation, which is third quarter compared to second quarter of 4%, and a year-on-year inflation of 20%. Right? Inflation has been the highest that we've seen in a very long time. Flour quarter-on-quarter has been a 6% inflation. Sugar quarter-on-quarter has been a 5% inflation. RPO quarter-on-quarter has been 3%, and year-on-year has been 45%. Similarly, milk quarter-on-quarter inflation of 5%. Basically, why are we showing you the quarter-on-quarter number? Because just to make you understand that we did not estimate each quarter to move up so sharply.
Our entire agenda was based on what we had estimated inflation to be, but that has surpassed our expectations, you know, by a fair margin. Now moving on to the next slide, which is slide number sixteen. If you look at industrial fuel, there is a quarter-on-quarter inflation of 18% on industrial fuel, and a year-on-year inflation of 57%. Right? Freight and diesel, again, on a year-on-year basis is 24%, while it's flat on quarter-on-quarter. Laminates, again, there's an inflation of 21% year-on-year, and even on a quarter-on-quarter basis, it's moved up by 1%. Similarly, corrugated boxes, while there's been a slight correction, but year-on-year inflation is at 39%. What is our response to these inflationary pressures that we are facing? Clearly three.
One is in the area of value creation for consumers, which is controlled discretionary spends, cost efficiency programs that we run very successfully for almost nine years now. Third is obviously there is you know we have to take price increases because there's no way that with this kind of inflation, the first two pillars will be able to help us meet the inflation equivalent numbers. On the controlled discretionary spends, you know, we've really focused our A&P spends. We've controlled rigorously controlled our overheads, and we've leveraged our fixed costs in every which way we could. The cost efficiency programs are doing extremely well. We will beat our target for the year by a reasonable margin.
It's in the area of accelerated programs in every function that we are running, as well as the IT transformation projects that we've taken up last year. Price increases, we have taken judicious price increases, and we have taken them ahead of competition because we are the market leaders. Onus is on us to lead the market. Getting to the next slide, which shows the material inflation quarter on quarter. So on a cost base, you know, the material inflation was 4% in quarter one, 14% in quarter two, and in quarter three, it was 20%, right? So the price increases that we've already taken, we took a 1% price increase in Q1. We took a 4% in Q2.
In Q3 we've taken 8% price increase, and we plan to take, you know, a 10% price increase in Q4. Now, the issue is that the price increase that we've taken in Q3 are only taking care of the inflation in Q2, right? Because if you look at the commodity base, it's about 60% of the total cost. So 8% price increase does take care of 14% inflation. But in Q3, we've seen further inflation happening. And that's what we've got to address. No one could have estimated that the quarter-on-quarter inflation would be so high. Now coming to the next slide, which is on the key financial lines. This is our consolidated report.
If you were to look at Q3, our net sales, as I've already said, 14% growth on a year-on-year basis and a 20% growth, 24-month basis. Similarly, operating profit -13% and -7%, profit before tax -18% and -2%, and profit after tax -19% and flat, versus 24 months. Similarly, on the right-hand side, these are the numbers for YTD, for the three quarters of this year. If you look at the table at the bottom, which gives profit from operations. YTD we are at the pre-COVID levels of 14.4%. And similarly, you know, on profit after tax as well. That is, you know, the presentation from me.
Very happy to open the house for questions.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their 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 your question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Abneesh Roy from Edelweiss. Please go ahead.
Yeah, thanks. My first question is on two of your adjacencies. When I see the milk drink that has become double and also sourcing of milk also almost has doubled. Is this more of a sourcing capability which is required or sharper pricing? Second is on cake. Cake you have said because of travel it has got impacted. In Q3 most of the travel was fairly normal. The other companies have called that out. Cake, is there any other issue? It's a tougher category, I understand. What will make cake come back to good growth?
Abneesh, the point is that the milk drinks, there's no connection with the milk that we collected, because, as of now, it's all about sales and distribution and marketing on the brand. And that's what's given us, you know, the results that we've seen. The milk that we are collecting is being given to our contract packers as of now. It's not being used because we are not producing our milk cakes in our factory yet. That will happen only, you know, two quarters later. That's the first question for you. The second is on cake. You know, cake, it's not that we've done badly on cake. We've grown on cake.
We've done, you know, our growth has been reasonably well, reasonably good in the third quarter. However, I was just comparing it to the other two products, which is Rusk, you know, just on a complete boil. It's growing very high, double digits, et cetera. Cake you've got to remember that, you know, there is a little bit of tiffin for kids, and there's a lot of out-of-home consumption which has suffered. While, yes, it did come to, you know, at least in the first two months of Q3, it did start to become a little normal, but still not gone back to the fully normal state.
That's helpful.
Yeah.
My second question is on the market share differential with the number two player. What has changed here? Because down trading is a clear trend currently, and you have taken pricing growth ahead of the competition. Maybe your grammage cut could have been higher than the competition, which also has an impact on the grammage. Could you explain in FY 2021 when Parle was closing the gap and now you are again increasing the gap, what has changed?
Our agenda remains the same. What we've done is, I'd spoken about those two or three big-ticket initiatives, Milk Bikis, for instance. Marie continues to do really well. You know, Hindi belt agenda. All of that is giving us the kind of momentum that we need. In fact, in this first four, five months of this year, we've seen a very, very high market share growth because all of our brands were really, really doing well. It became a little flattish towards the end of the six months because of all the pricing premium, et cetera. I think we have the capability to charge a premium, and that's what this reflects.
Our brands have the power to charge a premium when necessary. It might not be for very large, you know, periods of time. You know, you can't do it forever. You know, if it comes to crunch time and we have to take a price, we can hold on to a premium and still gain share.
Sure. Last quick question. When I see, Varun, Potazos and Croissant, if you could give us some number for Croissant. You have mentioned Potazos are INR 70 crore. My questions are essentially, is the success of Potazos giving more confidence on scaling up the salty snacks? When you say Croissant is strong growth in existing markets, does it mean that this is largely a top 20 city or top 40 city kind of a potential? Because you have been trying a lot, you have been aggressive on pricing, but you still say that it is strong growth in existing markets. What is the pan-India potential there?
No. Yeah, that's true, Amit. We are only in our, you know. We've started this in South and East, and we continue to be only in Calcutta and Chennai right now, and of course, modern trade. These are the three areas that we are in, and those are the two towns and modern trade where we are doing really well, right? We haven't opened this because you see it's a very new product, and we have to. What we'd set for ourselves was we will not expand this till we find that, you know, perfect product which the consumers are really, really liking. I think we are almost there. With this, we will be launching it pan-India.
Yes, it's not gonna be a product which is gonna get to the hinterland in a hurry. We will look at launching it in the big towns to start with, establish the habit and then start to take it to you know the rural markets and to small towns as well.
Salty snacks, more confident?
On Potazos, now that's a very interesting one. You know, the idea, as you know, is not ours. The idea was a Bangladeshi brand called PRAN. I think we perfected that. We had a great product. Our product wins against everyone else in the market. It's showing us the way because we are seeing month-on-month growth and huge month-on-month growth. You know, the point is that if you have a product like that, you have a lot of efficiency in the system. Because salty snacks, there's a lot of air in the bags. Here you are able to give a lot more product to the consumers, because we are not transporting just air, right? I think it's a great product.
It's a good brand. We've got very good, very interesting advertising. We've also got the efficiencies related to that. This will make us, you know, get into the salty snack territory with a bridge product.
Thanks. That's very helpful. Thanks a lot.
Yeah.
Thank you, Mr. Roy. Before we take the next question, I'd like to remind all participants, please limit your question to two per participant only. You may rejoin the question queue if you have a follow-up. The next question is from the line of Avi Mehta from Macquarie. Please go ahead.
Hi, Varun. Hi, team. I just wanted to first, you know, kind of, go into the slide number 18, which you have mentioned. Now, if I go back to second quarter, you had clearly indicated that EBITDA margin will normalize sometime by fourth quarter. Now, obviously, because of inflation that seems to, that would be pushed out. Would it be fair to expect EBITDA margin to remain flattish now in fourth quarter, on a sequential basis, and with movement to normal more in the first quarter? How should we look at that?
Yes, I would say so. I would say that that's where it's gonna pan out, because while you know, see, the thing is that when you have such a rampant inflation-
Mm-hmm.
It's also a little bit of a tightrope walk because it's not about competition, it's about the consumer itself, right? We don't want the consumer to feel a pricing shock immediately. While you know there can be a huge increase that you can do, but that can lead to one, the consumer feeling the shock. Second, it could lead to inefficiencies in our plants with you know the volumes not growing. Because despite all our pricing, we've been growing volumes fairly well, right? That's what we are trying to do. We are trying to make sure that we normalize. Obviously, we want to normalize and get back to where we were.
In the interim, in this dramatic inflation period, we would like to make sure that we do not shock any stakeholder in this entire bargain, which is including the consumers, the producers, you know, all of the stakeholders need to move in unison.
Varun, should we not look at unit? I mean, first quarter will be difficult because typically, I remember in the last conference call also you had highlighted that it takes time for these price increases to flow through. Which is why, you know, in your chart also, you're seeing the 10% flow through in fourth quarter, while it was taken in third quarter. In that essence, then normalization is more first quarter, second quarter, or how should I? What is your internal kind of thought process right now? If you could help us understand this better, please.
No, I usually, you know, we don't give any, you know, future view to where the business is going. You know, because these are very, very uncertain circumstances, I would think that, because now we know the picture, right? We understand. We'd never estimated that the quarter-on-quarter inflation is gonna be so high. Now that we know the picture, the time that you're talking about is starting now. It's not like, you know, we are gonna be waiting for quarter one to, or quarter four to, look at what we want to do as a price increase in quarter one . It all starts now, so I think we should be in a good place, reasonably quickly.
Okay. Perfect. The second bit I just wanted to. You know, you have done almost a 5% kind of volume growth this time. Now as we go forward, despite the price hike, would it be fair paradigm to say that rural distribution expansion should offset these pressures and hence we are kind of looking at a volume growth sustaining and that is what is the focus? Because I sense that from your earlier comments. I just wanted to reaffirm that.
Ideally, yes. You know, we would say the most important thing is to get your number of packs to keep growing and also your tonnages to keep growing, and we would like to keep it that way as we go forward.
Okay. Perfect, Varun. If it's okay for bookkeeping, I see the data.
Mr. Mehta, I'm so sorry to interrupt you.
No problem. Thank you.
A reminder to all the participants again, requesting you to please limit your question to two per participant only. You may rejoin the question queue if you have a follow-up. The next question is from the line of Percy Panthaki from IIFL. Please go ahead.
Hi, Varun and team. Good afternoon. My first question is on the distribution front. I see that versus March 2021, your direct distribution in September and December has sort of reduced. What is the reason for this? Connected question to this is that 21-22 lakh outlets is a fairly decent distribution number. I think you would be in the top two or three as far as FMCG is concerned. Even I think HUL is somewhere in the region of 2.5-2.7 with such a wide basket of offering. Do you think there is much more leeway in terms of expanding the direct distribution? And if not, does that sort of take away one lever of growth from your story?
No. Let me answer your last question first. I do think that there is enough potential for us to increase our direct distribution to about, you know, 30 lakh outlets or so. Because what we've seen is that it's not... If we are already in the market, getting to these outlets which are within that purview is not, you know, too much additional cost. Second, if we get to those outlets, the kind of execution that we can provide and the kind of market share that we can gain in those outlets is tremendous. We will continue to go on that front. What was your first question, Percy?
Versus March 2021, there's a drop in September, December 2021.
No. Percy, I will let Vipin answer that, but in short, basically it's the COVID factor. You know, we keep coming against waves of this, what happens is that, you know, supervision drops a bit. Our distributors are stymied. They're not able to get to the market. Those kind of things happen, and then the human factor comes in and you have to really think of what is best for all the people in the team. You know, it's better that they do not. You know, even if we have to take a step back from distribution, at least our people remain safe. That is really the reason. Vipin, are you on the call? Vipin? Are you there?
No problem, sir. I'll just ask my next question. Next question is on the price increases. Last quarter also, you had mentioned that by Q4 the price increase would be 10%. In this presentation also it is 10% only. Now, given that, the QOQ inflation has been more than expected, haven't you taken any more price increases so that the 10% number can go up actually?
No, actually we did do that, Percy. But there were a few places where we had to, you know, hold our price increases, you know, because there were some areas where we thought that these were probably a little premature because we've seen some early signs. Depending on, you know, whether it's rural markets or you know in the dairy, et cetera. We've rejigged it a bit, but now we've had the time. First of all, you know, even if you look at Q4 versus Q3 now, we are still seeing inflation of 2%-3% quarter-over-quarter.
Now, what we are doing is we are looking at, you know, making sure that we take all these into, you know, consideration and then plan our price increases accordingly so that we are able to match up to whatever inflation the business is seeing.
Okay, sir. That's all from me. Thanks and all the best.
Thanks.
Thank you. This is the operator. I'm sorry to interrupt, but we have unmuted the line for Mr. Vipin now. We proceed to the next question from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.
Hey. Hi, Varun and team. Good afternoon. Thanks for the opportunity. I am still stressing on the volume growth. You have personally said that we have reported a very strong high single digit growth. I just wanted to understand what is the domestic volume growth? Maybe if you can share in terms of the INR 4,400 crore run rate in Milk Bikis, what is the volume growth which you have seen and what was the number that INR 400 crore last year?
The total volume growth is 5%. Domestic volume growth would be slightly more than that, right? Because our international business has been, it's not on a growth trajectory this year. It will be slightly more than that, but it's a very small business. International business is a very small business. It doesn't impact overall growth to that extent.
on Milk Bikis?
Milk Bikis has been seeing very large. The non-south Milk Bikis has been growing somewhere in the region of revenue growth are 40% plus. And volume would be in the same vicinity, I would say. Maybe slightly lower.
Okay. My second question is on the dairy business. Though it is good that we are ramping up our collection, but at what point we will start manufacturing in-house and maybe a follow-up on that, what is the CapEx we are incurring, I mean, maybe next one year, and how much has already gone into?
A lot of the CapEx has already gone in. It's only the processed cheese CapEx which is not yet hit the ground. You know, if you happen to be anywhere in the vicinity of Pune, we would be very happy to show you our plant. We are very proud of the way it's turning out. It's looking really good and we are hoping that we will be commercializing parts of the plant. It's not gonna all come together, but parts of the plant we'll be commercializing towards the second quarter of next financial year.
What is the total overall CapEx we are going to incur on this?
About INR 650 crore is the total CapEx, a bulk of which has already gone in.
Okay. Thank you. I have questions. I'll come back in this one.
Yeah.
Thank you. The next question is from the line of Nitin Jain from Fairview Investment Advisory. Please go ahead.
Yeah, thank you for the opportunity. I just wanted to know where we are on the intercorporate deposits. Where is the number this quarter?
Venkat, do you wanna comment?
Yeah.
Venkat?
The group ICDs.
Yeah.
Group ICDs as of 31 December is at INR 580 crore.
As of the last quarter, you were at what number?
INR 505 crore, I think.
Quarter-on-quarter it has moved from 505 to 580.
Yes.
Okay. Thank you.
Yeah.
Thank you. The next question is from the line of Varun Kapoor from Investec Capital. Please go ahead.
Yeah. Hi, good afternoon. Just had two questions. Firstly, you know, you spoke about rural market being slower for you. I just wanted to understand, is it a function of, you know, some of these new initiatives on the biscuit side that you're taking place, you know, specifically on Milk Bikis because, you know, or is it just a demand trend that you are seeing, you know, at the end user level?
No, it's certainly market share. As I mentioned, our share gains in rural are two times what they are in urban. It's our distribution initiatives which are giving us the upper hand in terms of growth. If you've seen, you know, some of the Nielsen numbers which are being published for FMCG, it seems that the growth for rural is half of what it is in urban in the last quarter. To that extent, I think we've, you know, been able to buck the trend and keep our rural agenda moving forward.
Right. Is there a, you know, some level of concern at your end also, you know, as we pass on these price increases, you know, what could be, you know, the impact there? Because, you know, as we have passed these price increases on, initial sense which we're getting over the last, say, 30-45 days in terms of the market acceptance, are you seeing that impact in, you know, there or you're seeing that, the share gain or even the overall growth has been fairly robust?
Well, you know, the market price increases as they've been this year will certainly gonna have some kind of impact. What we are trying to do is overcome that through market share gains and our distribution agenda. We are hoping that momentum will continue. I will let Ritu comment on that. Ritu?
Yeah, hi. So if you see chart specs, you know, we have gone more deeper into, in fact, we've been able to, you know, appoint about 3,000 distributors or dealers, which basically means that we have opened up 3,000 more towns. You know, that is what Varun was referring to that, you know, this growth impetus in rural is distribution-driven. Therefore the agenda here is that, you know, we keep going to, you know, the hinterland and, you know, direct in, it has a lot of wings in terms of carrying those brands. You know, that is what is giving us the growth. The second part of that growth story is all the focus states, which are the Hindi states. You know, mainly UP, Rajasthan, MP, Chhattisgarh. These states also are showing pretty rich response.
I think the price increase that we had started right in August and September has been well taken by the market. Like Varun has been mentioning, we have not given, you know, a rude shock to the market. We took it, you know, piece by piece, month by month, and therefore we've been able to hold onto our growth momentum.
Got it. The last thing is on the clarification on Potazos. If I heard you correctly, Potazos is going to be your brand for the savory extension. Compared to maybe pre-COVID where you were also looking at Treat Bites et cetera, would this be the key play or you'll also look at the extruded space as well?
No, we will continue to look at the extruded space. Again, as you know, I'd spoken about Croissant, the extruded space also, it's in test market. In test market obviously there are lots of things which are coming to the fore. We are making sure that we get our act right with whatever feedback that's coming from the consumers. As and when we are ready, we will start to look at the next phase of launch for extruded products as well.
Okay. That's it from me. Thanks.
Thank you.
Thank you. The next question is from the line of Jaykumar Doshi from Kotak Securities. Please go ahead.
Hi. Good afternoon. Thanks for the opportunity. Varun, I would like to know your thoughts on, you know, build versus buy when it comes to expanding in adjacencies. Are you looking at, you know, brands, from a inorganic perspective? Does your balance sheet in any way constrain you from potentially acquiring, you know, some good brands in adjacencies that, you know, you would otherwise have done given the cash generation that the company has?
No. That's a good question. I don't think we are averse to one versus the other. Obviously, as of now we are looking at the build model, but if there is an opportunity of buy, we would look at that as well. I think what we do is we are very, very stringent about, you know, acquisitions. Because, see, most of these acquisitions, in terms of, payback, et cetera, are very, very weak. We have a very clear screen through which this has to pass. We've done quite a few valuations and acquisitions, but if the paybacks are not there, we don't move forward with that. We will continue to do that.
If there's the right opportunity, we are happy to look at buy as well.
Right. Second bookkeeping question on this development of Chipita at a global level. Does it change anything for you in India, in terms of the JV that you have?
No, it doesn't. The business which has been bought out excludes the India JV.
Understood. A very small bookkeeping. Is there any way you can quantify what is the, you know, impact on volumes from, you know, grammage cuts that you would have done on the price point packs?
Well, it would be in the region, as I had said last time, we do about 65% of our price increase is from grammage cuts. Right? Taking that into consideration, it would be anywhere in the region of 4%-5%.
Understood.
It's very difficult to quantify that impact.
I understand. Thank you so much. That's it on my side. Thanks a lot.
Thank you. The next question is from the line of Manoj Menon from ICICI Securities. Please go ahead.
Hi, team. One question on the quarter. You know, when I look at the price increase volume and all those interplays which you just mentioned versus the gross margin, is there a mix angle also been a headwind for you, whether it is the channel mix, category mix, product mix, SKU mix? You know, and what I'm getting at is there also an angle of, let's say one of your most profitable brands like a Good Day, you know, need to catch up to the overall growth or something like that?
No, I don't think it's product mix, but channel mix is certainly there because what we've seen is during these COVID waves there are certain channels which you know completely caved in. Mainly modern trade, you know, reduces considerably and e-commerce gains considerably and you know those kind of things do happen. I would think that more of a channel mix impact, not so much of a product mix impact.
lot of brand mix impact, right? I mean.
Yeah.
Understood. Secondly, Varun, a philosophical question, actually. You know, when I look at the NPD journey which you had embarked upon, as I recall, post, let's say, from an articulation point of view, 2015, 2016. Now, you know, where are you currently? I mean, in the sense. For example, what I guess it would be very helpful to understand, if you could help us understand, let's say, you know, how do you define NPD internal in the company? Anything non-discretize NPD? Or, you know, what are the structures you have? What I'm trying to understand is, you know, where are you in the journey, in terms of structures, learnings, you know, or even, you know, the readiness, et cetera.
Is it that, let's say, you have done a lot of investments or you still need, you know, let's say, a new structure, people, you know, revamp, et cetera. How do we think about NPDs over the next, let's say, 2-3 years?
From a structure standpoint, we've had you know evolution within the organization. We've got a very clear and very strong leadership in these areas. I'm actually fairly happy with the way that has panned out. We've also got you know we've given the power to you know the teams to take decisions and move forward and you know make a few mistakes and you know step back and look at their mistakes and correct et cetera in certain new categories which are completely new to the system. From a progress standpoint, I would say it has been average.
I would say it's been average because, one, it's been a very unprecedented situation with, you know, the waves of COVID that we've been seeing, as a result of which, product trials and, you know, launches and, you know, people in the market, et cetera, was periodically becoming issues. I'm not saying that, you know, whatever we've done has hit the bull's eye. Certainly not. Quite a few of our products are doing quite well, and some of them I had highlighted in my presentation. I would say the jury is still out. It's a mixed bag. It has been unprecedented circumstances, but we are very hopeful that, you know, we are on the right track.
Hopefully in the next year with, you know, normal life coming back, we should be able to make great progress on this front.
Understood. Thanks for that. One quick follow-up on this.
Sir, I'm so sorry to interrupt.
Okay.
We have been requested to join the call.
Yeah. Yeah.
Thank you. The next question is from the line of Sheela Rathi from the Reliance Nippon Life Insurance. Please go ahead.
Yeah. Thank you for taking my question. So just wanted to understand that how much further price increase you need to take, I mean, in excess of 10% to kind of offset the sequential surprise in inflation, which you have seen. To follow up this question, basically how do I read this number versus your other instances that you don't want to kind of shake the market with a very aggressive pricing from your end?
See, it's a very dynamic target that we have. Just to give you an idea, the commodity basket itself is about, you know, 60% of the total inflation that you face. If you were to look at material inflation of 20%, you would require at least a 12% price increase. You know, the fact is that there are other factors as well which come into play. The fuel and, you know, industrial fuels, et cetera, which I had highlighted. To that extent, it's a moving target. However, my feeling is that, you know, this inflation, how long can this inflation last?
If it lasts and if it keeps growing quarter on quarter, then I think we will have to really roll up our sleeves and look at least another 4%-5% price increase before we hit the beginning of next year. I hope that answered your question.
Yeah. I mean, the second part of the question was like, do you feel that market would be ready to absorb another, say, 4% price increase over and above the 10% which you have kind of already.
No, that's what I was talking about with the tightrope walk, because we don't want to get to a situation where the consumer is facing such a high pricing impact that they start to say that these products you know are not as attractive as they used to be. It is a tightrope walk. I don't think I can answer this in you know this forum because it's a very complicated question. You've got to do you know as they say in this situation and that's exactly what we are doing.
Thank you, sir.
Yeah.
Thank you. The next question is from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.
Yeah. Hi, Varun. When I left, I had one question on the Potazos product. We started this journey in the eastern part, and you mentioned that you are looking for a pan-India launch. Is that pan-India launch has already happened? And on the manufacturing front, are we manufacturing in-house or we have outsourced this product?
No, the interesting thing, Shirish, is that, one, to your first question, yes, we have launched a pan-India. While it's very recent, we are just scaling up in various parts of the country. The second interesting thing is that this product is being manufactured on the same lines that we have, right? We've been able to leverage the costs tremendously because with a little bit of modification, we are producing the product on our cracker lines. We are now producing it in-house in two factories, and there's one contract packer that we have. We have the capability of modifying some of our other cracker lines also, if this takes off and we will be able to produce this in our existing lines.
Okay. Just one follow-up on this, since you said that large gates will be getting manufactured in-house. Any color or any ballpark number you would be able to share in terms of profitability, gross margins?
It's accretive to our overall margins. That's what we look at for every innovation.
Okay. Thank you.
Yeah.
Wonderful. All the best to you.
Thanks.
Thank you very much. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments.
Thanks, everyone, for spending time with us on this call. We look forward to interacting with you again. Thanks.
Thank you very much. On behalf of Britannia Industries Limited, we conclude today's conference. Thank you all for joining. You may now disconnect your line.