Q2 20/21

Nov 6, 2020

Ladies and gentlemen, good day, and welcome to Tata Consumer Products Limited Q2 FY 2021 Earnings Conference Call hosted by ICICI Securities Limited. 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. Manoj Menon from ICICI Securities. Thank you, and over to you, sir. Hi, everyone. Good evening, good afternoon, good morning, depending on where you are logging in from. At ICICI, it's our absolute pleasure to host the Tata Consumer Products Limited second quarter fiscal 2021 results conference call. The management is represented by Mr. Sunil D'Souza, Managing Director and CEO, Mr. L. Krishnakumar, Executive Director and Group CFO, Mr. Ajit Krishnakumar, COO, and Mr. Rakesh Soni, Global Head, Strategy and M&A. Over to Rakesh for the further proceedings, please. Yeah. Hi. Thank you. Thank you very much, Manoj. I welcome you all for this call for this second quarter performance of TCPL. Without any further ado, I will now hand over the presentation to Sunil. Over to you, Sunil. Okay. Thank you, Rakesh. Thanks, everyone, for joining us for this call. I'll go to slide number 3, which is the agenda, covering executive summary, a quick integration update, business performance for India, business performance international, financials, and outlook. This is a slide which you've seen earlier. We are Tata Consumer Products, the largest salt brand in India with Tata Salt. The second largest tea brand in India with Tata Tea, fourth largest tea brand in the U.K. and the leader in Canada. Eight O’Clock Coffee, the fourth largest roast and ground brand in the U.S.A. Tata Sampann, which is the leading national brand in pulses in India, also moving into spices and mixes. Himalayan, which is the number one natural mineral water brand in India. We are an integrated food and beverage company with the heritage of Tata's, moving into the FMCG world, the number 2 branded player in tea globally. INR 9,600 crore consolidated revenue in fiscal 20 with a market cap of about INR 45,000 crores, reach of almost 200 million households in India, and distribution up to 2.2 million retail outlets now. Among the top 10 F&B companies in India, with 2,250 plus employees worldwide. If I now move to the executive summary for the quarter ending 30th September 2020, our India business grew strongly while there was demand normalization in international markets. You would remember that in quarter 1, as the COVID pandemic had started off, we had seen a bit of what I would call panic buying, and therefore pantry stocking, especially in the developed markets. That is starting to unwind, and we are starting to see normalization. Consolidated revenue grew 19% to INR 2,781 crores, driven by strong growth in the India business. Consolidated EBITDA of INR 402 crores, up by 26%, despite significant inflation in raw tea prices. Overall, our India business has grown 25%, led by packaged beverages growing at 29%, driven by both volume and pricing. India foods up by 13%. Sequential improvement in NourishCo's performance, with September growing versus last year. The branded international business grew 11%, and consolidated profit before tax for the quarter is up by 31% at INR 345 crores. The critical point that I would like to make here is that while we have gained market share, and I would underline that we have gained market share in tea and salt, moving forward, navigating the unprecedented inflation in raw tea prices will be critical. We have got to balance both margin as well as volume trajectory. We are well-positioned for the future because the integration of the India foods business with India beverage business is progressing ahead, and I would say probably slightly ahead of plan. The reworking of the S&D system, we have finished 2 out of 3 phases, which we had planned, is showing results. We have already seen, even though it is very early stages, we have seen an expansion in outlet reach of about 12% and a significant increase in e-com contribution. In fact, e-com contribution from where it started in the beginning of quarter 1 to where we ended quarter 2, is roughly 2X of where it was. If I move to the next slide, which is a key business snapshot. India beverages, with a revenue of INR 1,120 crores, was up by 11% in volume and 32% in revenue growth. There was a significant impact of tea cost inflation and therefore pricing, and that is why you see the differential between the volume and the revenue. On the foods business, INR 580 crores, 6% volume, 13% revenue. This is with growth in salt and significant growth in value-added salt, which is up almost 100% versus last year, same period, and a significant increase in mix with pulses and spices. On the U.S. coffee business, we have seen pantry destocking, and that is why we have seen volume growth of negative 3, constant currency growth of 4, and revenue growth overall of 11%. Same thing of pantry destocking in the other international tea businesses where we have had, I would say, a very decent performance with volume coming in almost flat. Compared to the huge stock-up that we had last quarter, constant currency growth of 1 and revenue growth of 11. International tea business coming in at INR 444 crores. Food Service International continues to face headwinds. Negative 19% volume growth. This is our businesses in the U.K. and Australia primarily. Sorry, U.S. and Australia primarily. Revenue growth, constant currency of -29% and -23% all in. INR 56 crores was the top line. Tata Coffee, which includes the new Vietnam plant, was up by 8% in volume, 15% in constant currency, and 17% revenue. All in all, consolidated INR 2,781 crores, 16% up in constant currency, and 19% in total. If I look at the group performance at a glance, our revenue was up by 19% at INR 2,781 crores. EBITDA was up 26% at INR 402 crores. PBT, before exceptionals, up by 31% at INR 345. Group net profit up by 31% at INR 273. And we've ended the quarter at INR 1,439 crores in net cash. We've seen margin expansion across 14.4% expansion EBITDA, 12.4% PBT, and 9.8% in group net profit. Expansion of 90, 120, and 100 basis points on EBITDA, PBT, and net profit. EPS up by 2.79, up 33%. But more importantly, our cash EPS, which is all in, is at 4.08, which is up by 30%. Now to talk briefly about the macro and commodity overview. We have seen a decent, sharp recovery in economic activity post the weakness in Q1. All the major markets in which we operate, which is India, U.K., U.S., all of them have started to show recovery, albeit all of them are still in the negative territory. The critical piece is, I would point out to you, the tea prices. If you look at the dark blue line, which is the center, tea prices in India this quarter were roughly INR 120, which is roughly about 80% above where they were in the same quarter last year. That is the North Indian prices. And it had a rub-off effect on the South Indian prices. So North India was impacted by initially the lockdowns, and therefore the pruning that they had to do. And then they had a double whammy in the form of bad weather and flooding, which happened in the months of July and August. As a result of that, we've seen unprecedented tea inflation, which we've had to tackle in our India business. But on the other side, Kenya had a record crop, and we've seen almost flat prices on tea, and that had a favorable impact on our other international businesses. In terms of coffee, while Arabica prices have seen an uptick, Robusta coffee prices have remained almost stable year-on-year. Coming to quarterly category performance. Firstly, the dark blue shades, which you will see, which is regular black tea. After showing a very strong growth in quarter 1, as I mentioned, with pantry stocking, et cetera, happening in the developed markets, has now come to low single-digit figures. That said, we are seeing still positive traction across. Non-black tea, which was always outpacing black tea, we continue to see strong momentum across, albeit again, compared to quarter 1, the growth rates have reduced, but by any stretch of imagination, they're still in healthy territory in the low to mid-teens. The Indian market, which was negative in the first quarter, negative roughly 6%, is now up by 6% with sequential improvement month-on-month. But that said, we are still seeing volatile demand situation, some ups and downs, and we hope to see stability very quickly. U.S. coffee continues to grow with strong promotional activity. I will now move on to the integration update and hand over to Ajit. Thank you. I am on page 12. As you will remember, we had provided a brief high-level overview of the integration activities last time. This time, we wanted to give a little bit more detail and walk you through three or four major points. As you will see on this page, I think want to highlight that the integration activity is fairly extensive. It is not just integration of businesses, it is also transformation, upgradation of businesses as required. This is across many facets of the business, number one. Number two, the other critical message to take away is that most of these activities will be completed by the end of this calendar year, with some extending to Q4 of next year, so that by this fiscal year, the integration of the two businesses will be substantially complete. The third significant point is that the synergies that we had talked about have begun to flow through. We will see some of this in Q3, but it will continue to flow through and build at or slightly above our expectations. However, just to flag that while our plans have been going as we anticipated, there would be in Q3 some one-time costs and some small disruptions caused by, for example, the integration of the S&D system in India. However, by and large, this is going very well. Of the S&D system, this is a separate call-out. Two of the three phases of the consolidation is done. Phase one being the elimination of the consignment agent layer and other layers. Phase two being a single distributor point for most of the country. These two are substantially complete. The third phase, which is essentially the larger rural and other consolidation, is currently underway and will be complete by this year. We are already seeing, I think Sunil made a reference to it, we are already seeing some of the benefits of it, but the substantial benefits will flow through later this year. As you will see on the page, we have already seen some increase in outlet reach, and as we had promised last time, we expect to see a doubling of our direct reach. We are on track to achieve that. With that, I will hand it back to Sunil and L. Krishnakumar to go through. Thanks, Rajeev. I am on slide number 14. I talk about India packaged beverages. We had 12% volume growth and 29% revenue growth. I would say commendable performance, driven both by higher volume as well as price realization. The critical thing that I would want to mention is we have narrowed our gap versus in share of handlers, as well as increased a bit of distribution, and that has resulted in market share gains, both in volume and value terms. Our margins have been stable despite year-on-year inflation, unprecedented inflation, as I would call it, in raw tea prices. This has been possible through dynamic P&L management. The critical thing going forward will be balancing the volume and margin and making sure we walk the tightrope to continue the momentum as we move ahead. Other critical pieces is we have started our activity on upping the ante for our brands. We tied in with Chennai Super Kings for Chakra Gold, leveraging Tamil heritage. We won multiple awards on Tata Tea Premium, Economic Times awards. We have launched affordable Chakra Gold poly packs in Tamil Nadu, activated festivals, and evoked local culture with the Desh ka Kulhad campaign during August. On the foods business, we have seen 6% volume, 13% revenue. Salt grew by 10% along with market share gains. The critical piece, as I had mentioned earlier, in line with premiumization, value-added salt portfolio has grown by 100, and in line with our drive to expand our portfolio, our pulses have continued to deliver robust growth, and they are up by 33%. Our new launches under the Sampann brand name of Poha and Nutri Mixes are showing strong traction and consumer optics. Tata Salt has already won the Most Trusted Brand in India, and we have run various campaigns. The most important being the picture on the left, is we were the co-sponsor for KBC 2020 in our drive to activate our brands. If I move to slide number 16, which is NourishCo. NourishCo has shown sequential recovery in sales, both volume and value. We are now at 86% of pre-COVID revenue levels, improving month on month. Like I said, September, we have seen NourishCo grow over the same period last year. Overall for the quarter, INR 37 crores, but that said, this quarter is normally a slow quarter for the out-of-home beverage business anyway. We do expect that we will see sequential improvement from here on. We have achieved highest ever volume increases for Tata Water Plus in September 2020. In Himalayan, we faced some headwinds, but we are seeing recovery. The critical thing is we focused on the future. Our geographic expansion and our portfolio expansion plans are on track and underway. Most importantly, during this quarter, we have transitioned Himalayan to our own distribution network from being outsourced through Varun Beverages earlier. If I move to slide number 17 for Tata Coffee, 11% extractions growth, 6% plantation, and 17% revenue growth, led primarily by Vietnam. The plantation business has grown by 26% in value. We have seen significant growth in pepper volumes, albeit pepper prices have been a bit soft, and that has impacted the overall profitability. The other piece is that the profits have been impacted by an uncertainty around the MEIS, which is the export incentive of the Indian government. The good news is that the Vietnam plant is now operating at a 90% plus capacity. Starbucks, which was the business which was probably the most impacted because of COVID and lockdowns. If I first point you towards the graph on the left, we moved from almost a total closure in the month of April to about a 71% index to last year in terms of revenue. We are now in 12 cities with 196 stores. Just as a perspective, this was the picture at the end of September quarter. As of now, we have opened our 200th store in Amritsar, and we have entered a new city of Kochi. 86% of our stores are reopened. We have launched a dedicated store for Starbucks merchandise on Flipkart. The critical thing is consumer loyalty is going from strength to strength with Starbucks. My Starbucks Rewards members is up by 20% year-on-year, and roughly 30% of our tender now comes from the loyalty consumers. We have launched the mobile order and pay feature, and we are now present across all home delivery platforms. Starbucks has launched multiple innovations including one liter fresh brew, which has done very well from an index perspective for innovation. We have launched a Gift a Starbucks campaign. Most importantly, we have now been recognized by three different platforms as India's top 100 companies to work for women by Great Place to Work, Working Mother, and Avtar 2020. I now come to the international businesses, starting with U.K. U.K., we have seen 4% revenue growth, and we continue to maintain a very strong 20.4 value market share in Everyday Black. The discounted channel continues to be the biggest growth driver, but as I mentioned, out-of-home and wholesale channel continue to face headwinds. More relevant in the U.K., especially because we have got our super premium brand, Teapigs, which has a very high consumption percentage in out-of-home. Our Good Earth tea and kombucha, which we launched in quarter one, are performing well and share are as per expectations in our limited launch geographies. Cold Infusions, which is the other great innovation, which is there, is under a bit of pressure due to the slowdown in out-of-home consumption. If I move to the U.S., we have seen 4% growth in coffee. We continue to maintain close to a five share in the coffee bag market. Empirical business, which is our out-of-home food service business in the U.S., continues to be under pressure. But despite that, and if I exclude that, we have seen revenue growth of 11% with the volume growth at 8%, which is a pretty good standing for us in the U.S. We have launched Good Earth Sensorial brands. It is seeing good traction, and it is up 63% year on year. Canada. We are now number one in speciality tea in value terms in Canada. We were already leaders in black, so this is a new achievement for the Canada business. That said, Canada, like the other developed markets, has also seen a marginal downtake post the initial pantry stocking. Revenue growth was 1% against volume decline of seven, primarily driven by mix. We have discontinued some of our ethnic brands. That has to be factored into this piece. And we have seen improved profitability because of rationalization of overhead. Pictures on the right show you the strong launches that we are doing and the strong thrust that we are making behind specialties and herbals, which is the growth area for us in Canada. On brand campaigns, we launched a campaign under Tetley Mango, both local promotions as well as digital. We have had activation of Tetley U.K. on this new herbal range with a Need a Me movement. We have activated our Sampann portfolio across media, television, as well as digital and social media. We have activated coffee on social media, and Canada launched infusions with an ad in which we have got an Olympic swimmer who is endorsing the brand. We won several awards and recognitions. I did mention that Tata Salt was recognized as the Most Trusted Brand for 2020. This is the third time in a row. Tata Tea Premium won award in six categories in Economic Times Brand Equity Awards. Starbucks, I mentioned the Great Places to Work for Women. Great Taste Awards, Tetley U.K. won six Great Taste Awards for 2020. Our Tampla and Pullivasal packaging centers in India won award at Silver Prize in the sixth edition of India Green Manufacturing Challenge. In terms of packaging, Himalayan Sparkling and Tata Tea Tulsi Green won the India Star Award for Excellence for Packaging from Indian Institute of Packaging. We continue to be responsible business partners. Our focus on trustea and our partnership with UNICEF continues. We activated campaigns for the Rainforest Alliance with the Tetley Follow the Frog campaign and the Desh ka Kulhad. We supported local artisans during the Independence Day week in India. Planet, we continue to be focused on the planet with climate, water, circular economy for plastics, as well as decoupling emissions from growth. With that, I hand over to Mr. L. Krishnakumar to walk you through the financials. Thanks, Sunil, and good evening to all of you. I will start with highlights on page 58. It has been a strong quarter with good revenue and profit growth. On a standalone basis, our revenues grew from INR 1,427 crores to INR 1,736 crores, a 22% increase. Operating profits, EBITDA, was higher from INR 205 to INR 254, an increase of 24%, in line with increase in revenue. Consolidated revenues grew from INR 2,347 to INR 2,781 crores, an increase of 19%, a 16% growth in underlying currency. Operating profit, INR 317 to INR 402, an increase of 26%. The growth in revenue was driven by all parts of the business. India beverages grew by 32%, of which we had 12% volume growth. India foods higher by 13%. Salt grew by close to 7%. International businesses grew by 11%, 2% in constant currency terms. There was a challenge in out-of-home food service business in the U.S., but barring that, other parts of the business did well, and the key markets of Canada, U.S., and U.K. performed very well. Tata Coffee performance was driven by strong sales in Vietnam, which is operating almost to full capacity. In terms of profitability, overall profit improvement is reflective of the growth in turnover and control over expenditure. However, in the case of India, we have had extraordinary increase in input costs. Tea cost escalation has been in the region of 65%-80%, depending on the type of tea. We have taken up prices. There is some impact on the operating margins in the Indian business as we continue to manage escalating tea costs. Moving on to slide number 29, financials on a standalone basis. I am just going to talk through the current quarter. Revenues grew by 22%. Operating profit, as we saw earlier, went up by 24%. Looking at the line items below, we have exceptional items of INR 19 crores in this quarter, which primarily represents integration costs and redundancies arising out of restructuring of the business. Overall, after allowing for the exceptional items, profit after tax grew by 9% for the quarter. Moving on to slide number 30, which is consolidated results. We have seen revenue growth of 19%, INR 2,347 crores to INR 2,781 crores, and EBITDA growth of 26%. Talking through the other lines, we have exceptional items again of INR 24 crores, representing primarily the items we talked of earlier. Coming to group net profit, you would see that in the SEBI publication, you would see the share of profit from JVs and associates is INR 39 crores and higher than the previous quarter, driven by improved performance in our plantation businesses in North India and also some of our joint ventures outside India. Moving on to slide number 31, segment-wise performance. India Beverages saw 32% growth in revenues with a commensurate growth in profits. India Foods, 13% growth in revenues and a strong profit growth of 36%, driven by cost initiatives and also some amount of rephasing of A&P spend. International Beverages, a 7% top-line growth and a 36% growth in operating profit. A good management of commodity costs and good control over expenditure, apart from revenue growth, helped us to deliver these profits. Non-branded business profitability impacted relative to growth in turnover because of lower prices of Robusta coffee and also an element of lower crop in some of the plantation businesses. If you look at the right-hand side, the breakup of business, 45% of the revenues came from India Beverages, 23% foods. So 67% came from India and about a third came from International Beverages. Moving on to slide number 32, which is the consolidated balance sheet. No major changes except that working capital is slightly higher, and we talked of what higher tea cost, which is driving the working capital increase. Operating cash flow was strong, INR 578 crores compared to INR 300 crores in the same period in the previous year. ROCE, excluding goodwill and grants with indefinite life, is in almost 20%. It was a strong quarter relative to 14.5% ROCE we saw in the same period in the previous year. Over back to Sunil to talk about outlook and priorities for the business. Thanks, Ajit. In terms of the outlook, macros, I think all of you are aware of this. The second wave is hitting in Europe and we are seeing multiple lockdowns across different parts of Europe. Parts of the U.S. are experiencing high case rate, while in India, the case rate is on a decline for now. The Indian economy seems to be on a recovery path, albeit the pace of recovery will depend on further stimulus measures. We are seeing several measures of consumer sentiment having registered a sharp decline, but we are also seeing some green shoots visible in rural consumption. I would say primarily because of three factors. A, agricultural dependent economy having a good monsoon. Second is the migrant movement back to the villages. And the number three is the government stimulus, which seems to be bearing fruit out there in the rural areas. On the business front, I think we talked about it enough. The inflation in India remains a headwind in the short term, and we need to balance our growth ambition with margin delivery. I think we pulled it off quite well in quarter 2. The challenge will be to continue that pace in quarter 3. Distribution expansion is in progress and new product launches are now gathering momentum. I think I had mentioned to you last quarter saying that we have taken a pause on new product launches as we are getting our distribution system in order. Now we will start launching our new products given the fact that, as Ajit mentioned, we finished two out of three phases of the distribution integration. The growth momentum in India Foods is expected to continue. The out-of-home business in India is recovering well. You have seen the month-on-month recovery in Starbucks, and as I mentioned, the same thing holds for the NourishCo business, with the NourishCo business now moving past the 100 index mark to the same period last year. However, the food service business in international markets continues to be a bit under pressure and face headwinds. As Ajit already alluded to this, the integration of the foods and beverage business is on track, and the synergy businesses have started to flow. The most important thing I would highlight is it is ahead of estimates for now. We remained focused on our strategic priorities or strategic pillars, which we had laid out right in the beginning of the year, which is continue to build on our core business, continue to build our brands and our market share in tea, salt, bread and coffee, and our Sampann portfolio of pulses, spices, and mixes. Drive digital and innovation as we seek to transform the company and make it future-ready. With the integration, unlock synergies and deliver the numbers which have been committed. Create a future-ready organization with capabilities and the talent with those capabilities as we move ahead. We will continue to explore new opportunities, both organic as well as inorganic, while making sure that we care for our society and the environment in which we operate. With this, I hand over back to Rakesh. Thanks, Anil. I will go back to Manoj and Aniruddha, and we can now take some questions. Thank you. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question, you may press star and one on your 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. Anyone who wishes to ask a question, you may press star and one. First question is from the line of Arnab Mitra from Credit Suisse. Please go ahead. Yeah, hi. Thanks for taking my question and congratulations on a very strong quarter. Just on the first point on the tea price inflation and your comments on managing volume and margin both. Given that tea prices are now coming off, would you look to focus on market share volumes in this phase, even if it means that margins go down further in the short term? Because we do have visibility of the prices coming off. Or would you continue to try to dynamically manage it quarter to quarter, even if it means a bit of impact on market share? Just wanted to know your priorities on that, especially given the commodity has started correcting already. Let me take that question. A, our focus on market share will continue to be laser-focused. That's number one. Number two, while you did mention that tea prices are coming down, I would just like to highlight that while they were roughly 80% above last year when we exited the quarter, they are now coming down, but they are still significantly higher than where they were last year. We are seeing a trend which is downwards and probably settling down, but we're still not very sure because we've seen that movement up and down. The critical point, exactly like you mentioned, is I think staying close to the ground, making sure that we are in sync with the costs going up and down, and we make sure that we manage pricing and margins dynamically. I wouldn't hazard a guess as to where the prices are going, because overall, we are still seeing a projection of a shortfall in tea production for the full year. Given that, even if I take a marginal decrease in consumption, there is still going to be pressure on inventory. Therefore, given all these factors, I would say playing it by the year while remaining laser-focused on market share will be critical. The one thing I would want to highlight is that we have made a statement, and we remain committed, and we made it last quarter saying that we are aiming to double our direct reach over the next 12 months. Given the fact that our share of handlers is almost equal to, in some places, better than competition, we do believe that as we expand our reach, that will be critical in driving volumes as well as market share. Thanks, Anil. My other question, the second and the last question was on the launch of Poha and the Nutri mixes, which I assume you are talking about the dosa mix, idli mix, and those kind of mixes which you have launched. So any sense of what is the current market size of these three mixes, and would it be a slow initial phase where your go-to market will be more e-commerce and modern trade? Or do you see that this category is ready for a pretty fast expansion if a mainstream player like Tata tries to expand the category? Okay, so let me answer it in two ways. Number one, I would split this into two different pieces. One is the Poha, and one is the Nutri mixes. Poha is a mainstream category, and I do not think it will be restricted to e-commerce alone. It is going to be a mass category, and it is a category of today. It is not a category of tomorrow. Nutri mixes, we are trying to be early on the bandwagon and as consumer trends move more towards convenience, and I think the COVID situation is only accelerating trends out there. We are making sure we are up front and center with the consumer. Now, given where we were in our distribution systems in the past, we were largely focused on e-commerce. As we put our integrated distributors together with our ability to expand direct reach and execute better in every single outlet with significant increase in feet on street, we do believe that we can carry Nutri mixes into mainstream and make a traction out there. That said, Nutri mixes will always be a relatively smaller category today, but we are playing this for the future. Thanks. Just any quantification on the market size? That is the last question from my side. I would have to get back to you. I think Rakesh can get back to you specifically on that. Sure. Thanks. Anand, if you see Nutri Mixes as a category, as we are saying that there is a huge disruption we are seeing. If I have to quantify it, the branded side of the Nutri Mixes will be a couple of thousand crores today, but growing at almost 25%-30% year on year. That is the market that we see currently. Okay, thanks, and all the best. Thank you, Anand. Thank you very much. Next question is from the line of Percy Panthaki from IIFL Securities. Please go ahead. Hi, team. Good evening, and congrats on a good set of numbers. My first question is on the international tea business as we derive it by deducting the consolid minus standalone and stuff like that. I am sure it must be matching with your numbers as well. The EBITDA margins there are quite robust and on the higher side. Any idea what is driving that? I think I will ask LK to jump in here. I think there are two, three critical pieces which are contributing to the EBITDA margins. Number one is an increase in gross margin with both slightly lower commodity costs. I did allude to the fact that Kenya had a record crop, and you are seeing prices which are almost flat versus last year. That is flowing in. Second thing is a better mix as we push towards premiumization of our portfolio, including Cold Infusions, et cetera. And the third piece is a tight control on discretionary and other costs in the middle of the P&L, which has dropped into the bottom line. Most of these are sustainable, assuming that the tea cost remains where it is, right? We do believe that it is sustainable, but that said, Percy, I think the critical piece for us is we have growth ambitions, so we will continue to make sure that we put in the right investments to balance profitability and growth, in India definitely, but also in our key international markets of U.K., Canada, and the U.S. LK, if you want to add anything more. About tea, the only other comment I would make is, we have strong performance in some markets like Canada on our specialty range, which are also higher gross margin. So we are focusing, as we said, always to move out of black to more of non-black. That is also helping in certain markets. We are not there yet, but it is a contributor in some of the key markets. Right. Understood. Secondly, I just wanted to ask you regarding your margins, the synergy benefits. You had mentioned earlier that you're targeting about, I think, 200 to 300 basis points of margins through synergies. Just wanted to know where we are on that journey, how much of that 250 basis points are sort of implicit in the Q2 results, and therefore, how much more we can expect going ahead? Percy, you're absolutely right. We have put out a guidance of about 2% to 3% of total synergies, but that was total including revenue as well as cost synergies. Roughly half of it coming from cost, half of it coming from revenue. The thing is, right now we are focused on the cost synergies and making sure that our systems are structured properly and we make sure that we leverage both the systems to pull out as much of cost as possible. Like Ajit Krishnakumar alluded, A, we have taken out layers in our system, both in terms of our own internal organization as well as in the distribution structure. Second piece is we've created consolidated distributors. We are in the middle of our journey on our consolidated warehousing/logistics roadmap. Next stage, we are moving to a consolidated rural distribution system. On the cost aspects, I think we are more or less in line with what is slated to deliver. There is a small inflow which has happened during the last quarter. As now we move on, I think you will see acceleration on those synergies flowing in. We remain pretty confident that we will be, we said 18 to 24 months, is delivery for the synergies. We remain confident of two aspects. One is, I think we will be ahead of the estimates, and second thing, we will probably deliver them ahead of time also. If I understand correctly, what you're saying is that the cost synergies, whatever was possible to achieve, you have already achieved that, and going ahead, it will be mainly focused on top-line synergies. Is that understanding correct? No, Percy, what I said is we put the structure in place to derive the cost synergies. I don't think the cost synergies have flowed in yet to the bottom line, because remember, this quarter has been a whole bunch of juggling on putting the structures there. Now, the structures that have been put in place will start delivering the cost synergies as we move forward. Whether it is distribution, whether it is network, whether it is logistics, whether it is as simple as leveraging common costs of packaging. As simple as that. Things are being put in place, and therefore, we remain pretty confident that they will start to flow through on the P&L. Have they started to flow through? Yes, a small piece, but that is because of timing, because a lot of the stuff was completed towards the end of the quarter. Going forward, now it should start flowing in full blast at the P&L. Percy, the initiatives are being completed or contracted, so we're sure that they will happen. The run rate will improve progressively. Right, sir. Last question, if I may be permitted. Basically, if I look at your gross margins, it's an interplay between the price increases and the cost increases. The cost increases we see on spot are not indicative because your consumption cost may be different. As we go into Q3, how do these play out? At the gross margin level for the India tea business, Q3 should be worse than Q2 because there would be a delayed cost inflation for you. Is that the right way to look at it? Yeah, I think we will have to manage Q3. I am not going to comment on the specific numbers. Like we said, Sunil made the statement, we managed Q2 well. Q3 is a challenge, and we are focused, like Sunil said, on share. But having said that, we are employing all levers to see how we can manage the cost inflation. Thank you. That is all from me. Thank you very much. Next question is from the line of Manoj Menon. Please go ahead. Hi, team. I have one question on salt business and the other one on Sampann. On salt first, if I heard correctly the commentary, the growth was 7%. Just one comment which I heard Sunil addressing Percy's question earlier was, you are talking about the structures in place, et cetera. So was there some one-off in the salt performance specifically as we speak currently? We didn't fully understand your question. I think- There are no one-offs. 7% is a volume growth. Value growth is 10%. Just to correct the number. What was the next question, Manoj? There is no one-off. There is no one-off. Okay, understood. Secondly, we observed in the market that there is a 5% price increase which you have taken in salt from 1st of October. Just trying to understand if it is feasible to comment on that, the underlying thought behind this price increase. We would take increases in salt depending on our input cost increases. Given the factors that we've seen in Gujarat, especially with the monsoon, COVID lockdowns, labor issues, transportation issues, we've seen cost increases, and we have taken price increases in line with the costs. Okay, got it. It is a cost push, got it. Second question on salt was, when I think about the salt business over the next maybe 5, 10 years, from a 30-odd percent market share, is it correct to think that Tata Salt can be a 60%, 70% market share? Because one template I have in mind is, let us say, Parachute. You are the category creator. Is it realistic to think if, yes, just want your comments on this. Let me leave you with, we have got strong ambitions, and it is not only, like I said, just a simple share and a volume-driven increase. We are also looking at how do we premiumize, how do we expand the portfolio in salt, and how do we give a greater variety to consumers, which is a win-win game, both from a consumer perspective as well as from a margin perspective for us. Understood. Second question on the Sampann part of the business. While I completely understand that these are time which Nielsen and a lot of those scientific methods are not necessarily available, but still, any qualitative color on household penetration increase? We have actually not gone into the detail, because Sampann is right now still, I would say, at a nascent stage. Though it is growing very fast, I would say we have still not gone deep detail into the household penetration. The objective being to continue to increase penetration, and at some point of time, we will get on to the details and start working on household consumption data. Okay, sure. Thank you. All the best. Thank you very much. Next question is from the line of Suman Kumar from Motilal Oswal. Please go ahead. Yeah, my question is related to market share gain. This market share gain, we gain market share in volume term and value term. We have gained market from the unorganized players? I presume the question is on tea market share. If that is- Yes the case, we have gained both volume and value market share, and we have gained share both from organized as well as unorganized. Okay. In the previous call you have discussed you are going to launch a new product in November. Can you discuss more about the new product launches and you are exploring new opportunities? Can you discuss in detail? Yeah. We have product launches lined up across tea. We are doing multiple launches as we speak. We have launches in coffee, which includes a reformulation and a relaunch of our entire Tata Coffee range in the South. We have entire range of new Nutri Mixes, which we are just launching as we speak. As we go into December and January, you will see the tempo of innovation and new launches going up. Like I said, the reason why we had delayed our launches was to make sure that our sales and distribution execution is up to par, to make sure that we get the full benefit of new innovation launches. Now that we are confident that we have it in place, we have started to launch. That said, we are pacing it to make sure that there is enough focus on each and every launch as we go forward. Thank you so much. Thank you very much. Next question is from the line of Tejas Shah from Spark Capital. Please go ahead. Hi, thanks for the opportunity. Sunil, you spoke about direct reach, and as you mentioned that we are on track to achieve our number of doubling the count there. So two questions on that. As an outsider, how should we track the benefits of direct reach in the initial stage of that expansion, let's say one year or two year down the line? And second question is the 10 lakh number an interim target, and you may up the target after a pause in near term, or you would like to consolidate at this number for a while? Let me answer it in two different ways. Number one, first of all, I said our share of handlers is equal to, and in some geographies, higher than our nearest competitor. As we expand our numeric reach and therefore weighted reach, if you multiply that by share of handlers, automatically the total market share should go up. So A, the expansion of direct reach, I think you should see an impact straight on the market share. That's number one. Number two, are we expanding direct reach or not? I think that is crystal clear in Nielsen when they start looking at numeric reach. Like I mentioned, as of September end, we have already seen an increase of 12% in our total reach per se. I would attribute a small portion of that to direct reach. Now, why do we think we can get to the direct reach number? It is because we have mapped out city by city, state by state, the total number of outlets, worked backwards on the number of salesmen required, and therefore worked backwards on the number of distributors required, and profitable distributors. That is the structure that we put in place. Therefore, we remain confident that we are on track to double the direct reach over the next 12 months. Again, like I said, the number of a million outlets we put out for the next 12 months. As and when we reach that, obviously, there are much more outlets beyond that. Once we get to the 1 million number, that is when we will re-index our ambition and start looking at profitable expansion of direct reach beyond the 1 million. Just one follow-up on distribution integration. If we see both the businesses, tea and salt, they had different line of distributors, and they both have handled different volume to value ratio in past. Now when we are integrating, how are they going about it? Because a salt distributor might find it easier to integrate into a tea business, but a tea guy might find it not that lucrative to handle salt. Any insight on that? Let me throw some light on the way we've gone about it. Number one is we've gone about it in a very analytical manner in every city and every place where we have integrated distributors. We've looked at the beverage distributor, we looked at the foods distributor, we looked at ability to invest, ability to bring in infrastructure, commercial acumen, and ambition for the future. There are places where we've gone with the beverage distributor. There are places where we've gone with a salt distributor. There are places where we've gone with neither. We've looked at a completely new distributor because the critical piece is we are looking at feet on street, we are looking at logistics ability, and we are looking at ability to invest for the future. Once that is in place, then we have looked at ability to execute and then selected the best-in-class distributor. It is not going to a beverage distributor or a foods distributor, we've gone in for the best distributor that we think we could have in a place. Very helpful. That is all from my side and all the best. Thank you very much. Can we take a couple of questions on the webcast, please? There is a question from Tanmay, and the question is: With new lockdowns in Europe, do you think that in-house consumption may revive growth back in the tea business in Q3 due to fresh pantry loading? That is one question. We hope that it will give us a fresh bump, but I think consumers are broadly, I think, sort of getting used to this on-off lockdown principle. While there are geographical lockdowns, especially in Western Europe, in specific places, we are seeing an uptick, but I would not say a bump in pantry stocking. Thanks, Sunil. There was one question from Himanshu, from YES Securities, and his question is: Could you give us an idea of the extent of price hikes taken in salt and tea during the H1 and the pricing outlook going forward? As I mentioned, we have taken up prices in line with input costs. As tea prices have gone up, we have taken up pricing going forward. Similar thing with salt. As we have seen our cost escalation, we have taken pricing up. We will continue to walk the fine tightrope between price and volume traction to make sure that we are balancing volume and margin on a constant basis. We will go back to the caller call, and we will basically take last two questions. For all those questions that have been asked on webcast, I think we have more or less answered all the questions because a lot of repetition was there. However, any more questions you can reach out to us, and we will reply that. Over to you, Anindita. Thank you. Next question is from the line of Devika Jain from Ratnabali Investments. Please go ahead. Hi. I basically wanted to know how the shift from loose to packet is happening across all the segments in your Indian business, both in modern as well as in traditional retail. I do not think in the short term I can make a comment, but in the longer term, you will see a trend of people moving from loose to packaged. Roughly half the industry in India, in tea, is still in the loose format. We do see that trend continuing. Right now, as prices are going up, we do see some players coming under pressure, and therefore probably a slightly accelerated shift happening. But your guess is as good as mine as to how long this shift continues to be in the accelerated format. That said, as I mentioned, we remain focused on market share, and market share both from loose and unorganized, as well as organized players. Similar is actually for salt and pulses? It's the same thing. Pulses, it's largely unorganized. We are the only organized player in the country. You've seen growth of 33% happening in Sampann. I'm sure the pulses category is not growing 33%, so we are gaining share. Right now, I don't think we've got Nielsen data to give you that share number. Salt, we are seeing a share gain. We are seeing a significant uptick, and we hope to continue that momentum. Okay. One last question. How do you see the change in your SKU mix because of premiumization that is happening in salt? I have seen that the prices are ranging from INR 17 to approximately INR 35 per kg. So what is the mix like now? Because there is a huge increase in value-added salt. The volume. So, what would be the mix now, if you could throw some numbers on that? Correct. So I give you the thing, while salt grew in high single digits for us last quarter, value-added salt has grown almost at 100% rate. Obviously, value-added salt means there is a benefit for the consumer, whether it is lower sodium, or it is fortified, or it has got some herbal ingredients, et cetera. So we're focused on driving that because both from a value perspective as well as from a margin perspective. From the consumer perspective, it is much more beneficial, but obviously from a company profit and bottom-line perspective, also it is a win-win proposition. Okay. Thank you. Thank you so much. Thank you very much. Next question is from the line of Raj, from Securities Investment Management. Please go ahead. Yeah. Hi. Thanks a lot. I just have one question. On the international business, in the past, we've talked about restructuring some of the smaller markets. If at all, we were also open to looking at exiting some of those markets. Are we by and large through that transition or portfolio rationalization? Or do you think we still have some more room for that? I think we maintain the stand that the portfolio in international is something we will keep looking at from time to time and make the proper decisions. We have exited China, Russia, and January of this year, we've exited Czech. We continue to look at whether the businesses are performing as per plan, as per expectation or not. That said, we also look at opportunities. For example, in Poland, we have just moved from a company direct operation into a distributor operation, which in our mind will be a much more financially beneficial performance. At least in the short term, we've seen good results, and we hope that we will continue this momentum going forward. Each and every business we will evaluate for its merits, keep looking at it. If we find that something is not delivering as per expectation or does not fit into the portfolio for some reason, I maintain that we will take tough decisions, and continue to clean it up. Okay, just one last question. Even the cash position, it keeps on building up. We see a very strong, healthy generation and overall the good solution every quarter, every half year, it keeps on moving up. You also talked about us having a very strong organic product pipeline and a focus, to be launching this product. In the very near to medium term, say over the next 2-3 years at least, focus would largely be on launching the pipeline products which we have and scaling them up, or we will be also open looking at other inorganic opportunities. We've always maintained that when we say explore new growth opportunities, we are looking at both organic as well as inorganic. We do believe that we've got quite a lot of opportunities in the portfolio that we are playing in, whether it is in tea, salt, coffee, or most importantly in Sampann, where it's an in-the-kitchen brand, and therefore there is significant room for us to expand the portfolio. You will see organic growth coming through, and investments happening. I did mention that we were investing on brand, we were investing on innovation, and we were investing on distribution. But apart from that, as and when we find the right opportunities for inorganic, we will make investments. Again, as I said in the past, when we make inorganic investments, very clearly those investments have to pass through two very clear lenses. It has to be a strategic fit in our whole portfolio and for the future. But most importantly, it has to pass the financial metrics and make sure that it is incremental value to stakeholders. It would largely be in the domestic market, right? I would not rule out, or I would not restrict myself to saying domestic or international. If we see opportunities, we will expand wherever we see opportunities. Again, like I said, it has to be a strategic as well as financial fit. You will probably find more opportunities in the domestic versus international, but I would not rule out one or the other. Okay. Thank you very much, and good luck. Thank you very much. Next question is from the line of Arun from Sharekhan. Please go ahead. Yes. I have one question which is, I feel that the competition in salt segment for you is increasing. Even ITC with their Aashirvaad brand has entered into salt business. Whereas the food segment ready-to-eat business, it already has established brands like MTR. Do you feel the heat with the competition or any loss of market share that you expect in the coming future for salt business? I cannot forecast about the future in as much detail as I can tell you about the past. Like I said, in the salt segment, A, we have had competitors for a long time. Competitors that you mentioned, there are other competitors which have been playing. Large multinationals have tried to play. But despite that, last quarter, I specifically said that we have gained share in salt, and we will continue to focus on growing distribution and value addition and make sure that we're continuing to gain momentum. On the ready-to-eat segment, I think Rakesh did allude to it. The ready-to-eat segment is relatively small in India today, but poised for healthy growth. I think it would be wrong for us to calculate shares today and project far into the future because the category is going to evolve in many ways. I think we're positioned very rightly and poised in a category which is slated for growth. With the focus that we have put behind the brand, we remain confident that we will emerge as one of the strong, if not leading players in that category. Okay. That will be all. Thank you. Thank you very much. Ladies and gentlemen, that will be the last question for today. I will now hand the conference over to the management for closing remarks. Yeah, thanks everybody. Thanks, ICICI Securities Limited for hosting us for this quarter results, and everybody who logged into the call. We look forward to interact with you again, with our future results. Thank you very much. Have a great weekend. See you soon. Bye. Thank you very much. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.