Britannia Industries Ltd
NSE:BRITANNIA
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Britannia Industries Ltd
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Ladies and gentlemen, good day, and welcome to Britannia Industries Limited Q2 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Yash from Investor Relations. Thank you, and over to you, sir.
Thanks, Peter. Hello, everyone. This is Yash from the Investor Relations team. I welcome you all to the Britannia earnings call to discuss the quarter 2 FY '21/'22 financial results.Joining us today on this earnings call is our Managing Director, Mr. Varun Berry; Executive Director and CFO, Mr. N. Venkataraman; VP Procurement, Mr. Manoj Balgi; Chief R&D and Quality Officer, Mr. Sudhir Nema; and VP Sales, Vipin Kataria.Before I pass it on to Mr. Varun Berry, I would like to draw your attention to the safe harbor statement in the presentation.Over to Mr. Varun Berry with remarks on the performance.
Good morning, everyone. So let me start with the presentation. If you could just get to Slide #3.So what we have seen this quarter is that the economy seems to be opening up, which is pretty evident from the COVID cases dropping dramatically from where they were during the second wave. And similarly, business, various business resumption indexes are showing that businesses are back beyond where they were pre-COVID. So that's the good part.However, all this is happening in a highly inflationary environment. Two things which are really driving inflation. One is the crude oil prices and second is palm oil prices, which is one of critical ingredients for us. So I'll talk more about this as we go forward.So our approach -- next slide, our approach to the inflationary environment has been 1 -- obviously, if you look at the pressures, the pressures are coming, as I said, from palm and fuel, which is leading to increases in corrugated boxes as well as in laminates. What we have done is we have -- there is no substitute for price increases in an environment like this.So we have actioned price increases, but the point is that when we do a price increase, only 1/3 of that is a direct increase in your MRP, 2/3 of that happens through grammage reduction, which takes a little longer period. So we've actioned those and that -- those will be falling into place as we go forward.We also doubled down on our focus on cost reduction, which is giving us -- and I'll talk about that in a little more detail as we go forward. And we've focused on discretionary spends, which can be eliminated -- to be eliminated because these are very difficult times. So that's the approach that we've taken to the inflationary environment.Now coming to our results. So our performance I would say, has -- in the current circumstances, has been fairly resilient. So if you were to look at the consolidated revenue on a year-on-year basis, it's gone up 6%, on a reasonably high base of last year and sequential growth is also 6%. And if you look at a 24-month growth number, it's 18%.From an operating profit standpoint, while you look at year-on-year, we've dropped 19% versus last year, which was really the peak for us. The first 6 months of last year were the peak for us as far as operating profit was concerned. Sequential growth has been 1% and a 24-month growth has been 14%. However, the positive thing in this whole story is that despite actioning pricing and obviously, this reflects on the pricing power that we have in our brand, we've continued to gain share. And in fact, this has been a period of very high growth as far as share is concerned.Last year, we'd seen a tepid growth in share -- market share. But this year, we've accelerated that. And we are seeing very, very good market share growth in this year.Moving to the next chart, which is Chart #6, which shows the 24-month -- which shows the revenues. And if you look at the 24-month growth for the year, it stood at 21% with a very healthy sequential shift, which I've already spoken about.We continue to focus on our strategic planks. Now we've spoken of these in the past as well. So innovation, well, it is a strategic plank. But this year, because of COVID 2 coming, we had to prioritize some of these for later in the year. Distribution and marketing also during that period took a little bit of a hit, but our rural focus has continued, and we've made great progress as far as rural is concerned.Our cost focus continues, and I'll talk about where we are at on that. Our other businesses, some of the businesses have done really well during this period and our sustainability agenda has gained a lot of momentum during this period.So coming to innovation, while some of the innovation ideas were deprioritized for later in the year, but we launched the Milk Bikis, which is an iconic brand in Tamil Nadu in -- as a Milk Bikis classic as it used to be 40 years ago. And that's done extremely well because it's nostalgia in Tamil Nadu, and it's doing extremely well.We have launched a bridge product between snacks and biscuits, which is called Potazos, and that's doing extremely well. We're extending it to Pan India. We also launched Treat Wafer Stix across the country. We've also commercialized our facility in our Perundurai plant where we can produce these -- produce flat wafers as well as wafer sticks. And we launched Marble Cake starting in the East, and it will be flowing across the country as well.From -- next slide, please, Slide #9. From a marketing activity perspective, while we kept our marketing activities fairly focused, but there were some very interesting campaigns. For Bourbon, we had 3 cricketers which -- and it came out to be -- and it was applauded by our consumers as well.So that's doing quite well. Milk Bikis, Doodh Roti ki Shakti, which is -- the protagonist is, Pankaj Tripathi, also continues to do very well. We've done a NutriChoice Digestive new campaign. We did a Jim Jam campaign, which we exposed this quarter.So there's been a fairly good mix of marketing activities this quarter on biscuits as well as on cake, the Marie Gold, start-up activation for the third year running, it's been very, very successful in the first 2 years, has also been started off.Now getting to our distribution agenda. As I said, we've done some really good work as far as rural distribution is concerned. As you all know, our share in rural is lower than what it is in urban. And hence, we keep doubling down on rural distribution. As you will see, we've reached 25,000 rural distributors, which is giving us a very good growth, which is evident from the other 2 segments in this slide, Slide #10.So on the focus states, the growth is outpacing the country's average. So we are 33% higher in the focus states. And if you remember, the focus states are the ones where you have a bulk of the country's rural space, right? And if you were to look at rural, in rural, we've gained 2.5x the share that we've gained in urban. So both these are pointing towards our agenda working and regaining more momentum in weak states as well as in rural.Moving on to the next slide, which is Slide #11, about channels. So what had happened during the pandemic during COVID 1 as well as the second wave was that we had seen a muted modern trade growth. So it had gone down below what we were seeing in traditional trade, but as we look at what's happening in Q2 of '21, '22, which is the quarter which has gone by, again, modern trade has picked up, and we are seeing almost a 10% higher growth in modern trade than what we are seeing in the other parts of the business.We had lost a little bit of momentum because supervision was not possible, salesmen were not able to go to the market on our direct distribution agenda. From 23.7% that we reached in March '21, we had dropped to 20.8% in June, but we've started to pick that up, and we should be back and beyond the number in the coming months.Now the third plank, which is driving an ecosystem of efficiencies. We continue to double down on this. You know the planks that we work on, obviously, productivity, zero-based budgeting, reducing waste and saving wherever possible and reducing distance to market. On these from -- we've gained strength, and we are 6x what we got when we started this program in '13, '14. So it's approximately INR 250 crores of cost deficiencies that we are getting out of the programs that we are running.On Page 13, we've seen some -- even in our other businesses. So we've seen sequential shifts across out-of-home consumption coming back, which is reflected through the Milk Shakes, et cetera, the Lassi that we launched. So we are seeing that happen. We are seeing a consistent increase in market share on commercialization of our Treat Stix as well as our flat wafers products. We've seen a healthy double-digit growth in dairy basis, the Milk Shakes and the Lassi products that we have.We've also seen -- we've done a huge distribution revamp in our Middle East business, specifically in UAE, which is going to give us -- which is starting to give us very good market share gains. Nepal continues to do really well. In fact, a person who had gone -- someone that I know had gone to Nepal to the base camp of the Everest and they were saying that wherever you go, you get nothing else, but tea and Good Day. So I was delighted to hear that. While I've not seen it myself, but that's what they said.And similarly, our Africa expansion plans are doing well. There are 3 countries that we are looking at seriously. And we've already started manufacturing operations in 2.Moving to the next slide, which is Slide #14, which is about sustainability. Now as you know, that we've issued our first sustainability report in August 2021 and the Dow Jones Sustainability Index scores are awaited. What we've done is we've got the ESG metrics integrated into our management team here. Everyone owns these numbers. Some of the targets that we've taken for ourselves and very important targets.So if you were to look at it from a people perspective, we are looking at 50% women at our facilities by March 2024, which I think is fairly lofty but a very, very good target to take. We have looked at more than 1 lakh beneficiaries to be reached through a Britannia Nutrition Foundation by next year.From a resources standpoint, a 60% renewable electricity by March 2024, which is, again, a lofty target, but we are very, very excited about it. We are looking at removing plastic trays from our products by March 2023, which would mean 20 lakh kgs of plastic being removed from our product.We are looking at water consumption to be reduced by 30% in our factories through recycling and reuse by March 2024 versus what it was in '19, '20. From a growth perspective, we are looking at reduction of sugar by 8% in all our products by March 2024 and a 6% reduction in sodium again, by the same date.From a governance standpoint, we are targeting second or third quartile in S&P Global CSA in food product sector this year. There are 3 ESG policies, which have to be released in the next quarter, the sustainability policy, the human rights policy as well as the vendor code of conduct. So great progress here, and we will keep you updated on how we are doing against these.Now getting to the meat of it. So let's get to Page #16. So as you see, these are the 4 major commodities that we consume. For us -- now these are numbers which are internal to Britannia, flour is a deflation of 7%. However, if you look at the market, it's an inflation. It's a slight inflation, not a large inflation.We've been able to maintain a deflation because we've been buying at the right prices. Sugar is a deflation of 2%. Again, if you look at the market, it's an inflation of about 2%, 3%. But what's happening is that both flour and sugar from India are becoming -- have got export parity. So we've got to watch out and see how this pans out and how much export we see for these 2 commodities from India, which will definitely reflect in the pricing as we go forward. But these 2 have been reasonably good for us.Where we have had the pain is in RPO, where the market inflation is approximately 54%. While through some forward buying, et cetera, our inflation is 46%. And milk, which is at an inflation of 15%. But a bulk of the inflation is coming out of RPO for us, right? And then if you were to get to Slide 17, it shows what are the other components of inflation that we are facing.So industrial fuels, there is an inflation of 35%. Freight, which is basically diesel, is an inflation of 20%. And obviously, the oil prices are leading to an inflation of approximately 20% for our laminates. And there has been some waste paper issues, et cetera, plus shipping. International shipping has become very, very tight and very expensive, which is leading to an inflation of 46% for corrugated boxes. So that's the story on inflation. But if you go to Page 18, that shows how inflation has hit us this year. So if you were to look at the cumulative inflation, which is reflected by the brown bar, the cumulative inflation in the last 6 years is less than what we've seen this year in '22 -- in the full year of '22. So that's the quantum of inflation that we are facing.Now obviously, there are forward covers. There are cost efficiency programs and all of that we are working on. But in a situation like this, there is no substitute for a price increase. So we've gone ahead and we've implemented pricing. And as I've said in the beginning, 1/3 of our pricing is through MRP changes and 2/3 is through grammage reduction, which takes time because you've got to experiment. You've got to get the settings right of the machines, et cetera. So it's taken time.But the entire inflation is going to get covered through either cost efficiency programs or the pricing that we've taken by the end of this year. And as I've said in the beginning, despite being the first movers on pricing, we continue to build our competitive landscape pretty well by gaining market share.Now moving to Slide 19. So despite the inflation that we've seen, our consolidated operating profit is comparable to our pre-COVID levels. So if you were to look at quarter 1 and quarter 2, both put together, they are approximately INR 506 crores to INR 507 crores, which is -- compares reasonably well to what it was pre-COVID.Yes, last year, we've seen herculean task in terms of what we've seen in terms of profit achieved was amazing. Now compared to that, it's a drop. But pre-COVID, we seem to be moving in the right direction.Now getting to the final slide, which shows the story on our quarter performance. So if you were to look at quarter performance, it is -- the numbers are there. So net sales of INR 355 crore, operating profit of INR 508 crores and the PBT and PAT thereafter.If you look at the year-on-year numbers, we've grown 6% on net sales. We are down 19% on operating profit. We are down 22% on profit before tax, and profit after tax is minus 23%. Obviously, there is a reflection of INR 35 crore of income tax benefit pertaining to the quarter 1 of '19, '20 which was taken in quarter 2 last year. So that's why the PAT is looking much lower than the rest.But if you were to look at the 24-month growth, 24 months is a reasonable growth. And if we were to take away that INR 35 crores here, actually, our PAT would be at a growth of 4%, 4.5%. Is that right? 4%, yes. It would be a growth of 4%.Now if you were to look at our year-to-date numbers, similarly, on a 24-month basis, we've grown 21% on net sales, 27% on operating profit, 18% on PBT and 18% on PAT. If you look at our profit from operations and all of these as percentages, yes, in half year, we have seen a decline versus last year, but reasonably comparable to '19, '20 and with all of the pricing initiatives coming into play, we should be coming back to where we would like to be.So that's from me. Over to you for any questions that you have.
[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.
My first question is on the pricing dynamics. If I see tea and soap companies have taken high single-digit to double-digit kind of price growth and they saw inflation. In your case, it seems to be limited. And a related question is, you said you have taken 1/3 of the pricing hike by MRP and 2/3 by the grammage. So if you could tell us 2, 3 years back when Parle's market share was far behind us. Now the gap is lower. Then also, was it a similar thing in terms of 1/3 on MRP?
Yes. So Abneesh, see, this category is a lot price driven. So the price points make a big difference. So INR 5, INR 10 in any case is fixed, right? So if you can't make it INR 6 and INR 11 because consumers just shy away from buying that.So you have to do grammage reduction there. So wherever you have round price points, you have to do grammage reduction. to take a price increase. And yes, things have always been like this. A large part of the portfolio has been on fixed price points. So not much has changed there, right? So if that's your question, then there's not much has changed. What was your first question, Abneesh, sorry?
So essentially, why the grammage cut cannot be a bit more because it's a 2-player industry, you and Parle dominate and volume growth also is not high. So how will the players grow if they don't cut grammage in this kind of scenario? So what is the issue in the grammage cut being slightly more higher?
No. So what we are saying is that we will take as much pricing as is required, right? So if there is -- so the inflation will be completely covered through our pricing initiatives. It's just that why we mentioned that 1/3 and 2/3 was to just give you the pain of grammage reduction. It takes time, right? So 1/3 of it was taken immediately. All you need to do is print the price, right? If it's 26 going to 28 you just have to print the price, it can happen in a day, right? When you're doing grammage reduction, you have to do trials, you have to make sure -- sometimes you have to reduce the size of the biscuit.Sometimes you have to reduce the size of the package. So all of that takes a lot of trials and takes a lot of time. And especially for products like cake, et cetera, it takes a very long time because shelf life and all of that has to be tested. So that was the only reason to tell you that number.
Sure. Varun, one follow-up here. So if I see you're one of the few FMCG companies in which gross margin pressure quarter-on-quarter is at 119 bps. So when I see your raw materials chart, the RPO is down quarter-on-quarter and milk sugar are largely stable, flour has gone up quarter-on-quarter. So has the competitive intensity gone up with Parle? Because Parle last 1.5 years has [ done ] because of COVID. So do you think that could also reverse going ahead? And if you could address quarter-on-quarter [ DM ] pressure?
No. So from a competitive standpoint, we only become stronger, Abneesh, we've only seen a stronger show from us, right? So we are not facing a competitive pressure. I think everyone is doing what is required. Yes, we have taken the first mover because we are market leaders. So we have to be first movers on pricing. But despite that, we've seen no pressure on market share.
Sure. My second and last question is on this news article Britannia to create post of CEO reporting to MD Varun Berry, in succession planning. Could you clarify on that? What exactly it means? Because I think half of your second tenure is still left, so I wanted to understand the ramifications for that.
No, Abneesh. There is no ramification for that. So we'll talk about that when it comes to it. So there was no official announcement or anything like that. And we will talk about that as we come closer to time. And I'm here, don't worry.
The next question is from the line of Avi Mehta from Macquarie Group.
I just wanted to clarify 1 bit. Is the understanding correct that our margins should become better, should improve from 2Q levels in 3Q and reach normality by 4Q? That's what you're highlighting because the price increased, especially the grammage pass-through takes time. Is that understanding correct, sir?
No, that's absolutely correct. The other thing is there's 1 joker in the pack, which is the inflation itself. So every quarter, we've been thinking of inflation, at some stage, stabilizing, but that hasn't happened.So I guess we'll have to be nimble. And if there is a requirement, we will have to make sure that we do whatever is necessary under those circumstances if inflation goes up from where we are at we might have to take a little more pricing. So we'll be absolutely nimble on that.
Perfect. And just a follow-up on that. By normality, is this supposed to mean the 15%, 16% EBITDA margin seen in the earlier years? Or would it be closer to the 19%? Because you did highlight last quarter also that 19% is one-off, but should we kind of assume something between the 2, between the 15%, 16% seen earlier and the 19%? Is that the right way to look at normality?
The right way to look at it is that last year was something which probably will take us some time to reach. So I would say normalcy would be from where we were pre-COVID and beyond, not where we were during COVID and beyond.
Okay. So somewhere closer to the pre-COVID level is what we should -- okay. Got it. And sir, the second question was just a bookkeeping on the ICDs. It seems to be an increase from 1Q level. Is that understanding correct? And if yes, where is that primary cost?
So ICD as of 30th September stands at INR 505 crores, which is...
It was INR 460 crores, sir, last -- yes.
INR 470 crores in the last quarter. Marginally high.
Okay. And is this -- any specific entity you would like to call out or is it just broad based across the group?
It is 2 entities, which is Bombay Dyeing and Bombay Burmah only. It depends on the timing of repayment and timing of placement of ICD space.
The next question is from the line of Shirish Pardeshi from Centrum Capital.
Just a question from my side. Could you spend a minute that you said in the press release that your weighted inflation is about 14%? So far whatever measures we have taken in the quarter, how much we have covered from this? And what is going now in the market?
So Shirish, the total annualized inflation is going to be approximately INR 1,300 crores on an annualized basis, right? And we will cover that entire inflation by the end of this year, on an annualized basis.
So is it fair to say that 1/3 would have been already taken -- the price increases and cost measures that you've taken is covered?
So in fact, everything is actioned, right? It just takes a little more time to implement it. And that's why it's going to go towards quarter 4, the completion of that, but everything has been actioned.
Okay. Just 1 follow-up on this cost control what you mentioned that I just wanted to understand. Somewhere in the past, you mentioned a number of INR 200-odd crores. Is that number is different, higher or lower for FY '22?
What is INR 200 crores?
The cost containment or the efforts, what you have taken in terms of cutting the cost?
Yes, yes, yes. So cost efficiency programs, I just said, it's approximately about INR 250 crores now.
Okay. INR 250 crores. Okay. My second and last question on the distribution front in the domestic and also in the international. So part one is that in domestic, you said that you are pre-COVID level.But then you have also mentioned that your rural distribution, distributor points have gone up to 25,000. So this is the direct distribution, which you are undertaking? Or it is a redirect distribution which you have accounted?
No, this is direct distribution. So what we do is that we have these rural distributors who cover small villages, they cover anywhere from 20 to 50 outlets per distributor. We provide them the IT infrastructure through a handheld, et cetera, so that we have control over where they go and what they service.And so that's as far as our rural distribution is concerned. In urban areas because of the COVID impact, we did lose a little bit of steam in terms of our supervision, and which we've spoken about. But we are confident that we'll be very close to where we were pre-COVID and beyond in the next 6 months or so.
Okay. And could you spend a minute or 2 on the international business, what's happening in Africa, any status? And you said Nepal last two quarters has done well. So what is it that we can expect as a contribution from Nepal for FY '22, maybe '23?
So Nepal is a small business. It's about -- it's just crossed INR 100 crores, which is good because in a country where we were exporting product. Now with a plant there, we have become market leaders, and we are seeing very good traction for all of our products.And we haven't even launched some of our products there. So we are looking at expansion plans as well. But finally, it's a INR 100 crore business. But then that's how we build our international business by building these small businesses across. As far as the Middle East business is concerned, we had to take a step back to leap forward. And the step back was that we had a master distributor in the UAE, who was not able to give us the kind of distribution and the performance that we were looking at.They got more involved with their logistics business and their distribution business was taking a back seat. So we have now gone ahead and changed our distributor. We've got a very, very aggressive and a very good distributor there. And in the last 3 or 4 months, we've seen -- we've made some very good headway there. We have been losing share bit by bit in UAE. And now in the last 3, 4 months, we've seen share gains. And we've gone to the level that we were at our highest share there. So that's the good news there.As far as Africa is concerned, we are not doing -- taking the high CapEx route. We are not investing in our own factories. But we are looking at contract manufacturing facilities. We've already got 2 contract manufacturing facilities, 1 in Egypt and 1 in Uganda. Now we look at how we scale that up and how we can use those facilities to even export to other African countries. So that's as far as our Africa business is concerned. Does that answer your question?
Yes, yes.
The next question is from the line of Mangalam Maloo from CNBC.
From the conversations that you've had with everyone else this far and conversations that you've spoken on the presentation, et cetera, it sounds like the worst of margins are behind the company and the best of demand is yet to come. Is that thesis correct?If yes, then what are the factors that can accelerate or decelerate this thesis?
So Mangalam, see, in today's environment, I can't comment on the demand. I think the demand for most businesses seems to be coming back, right? But it's month-to-month, quarter-to-quarter change that we are seeing. However, I think there seems to be momentum as far as we can see currently.Yes. Your understanding is correct. As far as margins are concerned, we've taken all of the measures and all of the actions that will get us back to where we would like to be. And if the demand scenario continues the way it has been in the last 3 months, then we should be in a very good place.
Ahead of festive season, did you not see any sort of momentum coming by in terms of demand as well? And the new launches that you've done, we see a lot more Britannia products in stores right now and most of them on the premium end as well. So how much does that account for as a percentage of your sales right now and going ahead?
So our premium products actually have been doing really well. Frankly, Mangalam, we don't do the bottom of the pyramid products with the very little that we do of Glucose, et cetera.So to that extent, I think we've seen momentum on our premium products in the last 3 or 4 quarters. And we are hoping that, that momentum will continue. What we are doing as a strategy is to look at some of our premium products to even fight with the value products.So -- with the right margins. So Good Day, and now Milk Bikis North, which is the rest of India Milk Bikis. There are 2 products which are -- while they are premium products, they are fighting all of the value products at the right price points. So that's our strategy. And hopefully, we'll keep seeing traction on those as we move forward.
I meant new products as a percentage of sales. And how are they likely to be going ahead? The innovation.
Innovation, what we target every year is about 5% of our revenue. But innovation for us is products which are launched in the last 24 months. Products which have been launched, let's say, 3 years ago, fall off the innovation bucket. So we look at about 5% of new products coming in every year.
Another word on the margin itself in terms of inflation. You said that you have gone ahead and taken forward cover, et cetera. What if the prices normalize because these are unprecedented times? And do you stand to lose that benefit by having bought forward contracts?
It doesn't seem like that, Mangalam. It's very clear that there doesn't seem to be -- we've seen very positive results till now. And it doesn't seem that the prices are going to fall. We've only got coverage for another 3, 4 months till the end of the year. So I think we'll only benefit from that.When you do that, there is a chance that you could -- because you're using your judgment to do it. But this time, I think our judgment is right. Venkat, do you want to comment on that?
Yes. No, I think you said that right. I mean, the first 3 quarters, Mangalam, think between the market inflation and our inflation, I think we have been able to save almost about INR 200 crores.
The next question is from the line of Percy Panthaki from IIFL.
My first question again is on cost. Just wanted to understand. So first of all, very surprised that for the first time, you have given some guidance on what price increases could happen in the next 2 quarters. And I think you're the first FMCG company to do so.But if I take your guidance, 10% kind of price increase going through in Q4. Do you think the market construct enables you to take that kind of a price increase in the sense that earlier, let's say, 3, 4 years ago or whenever you had a cost inflation. At that time, your margins were not sitting at such a high base. And therefore, the entire industry was okay to sort of pass on this benefit.But with such high margins in the industry, do you think that the competition might take a call saying that, no, we don't want to pass on a 10% kind of a price increase? And instead, let me try and focus on gaining market share or sort of -- I mean, something of that sort, which would make you uncompetitive if you really go ahead with your planned 10% price increase?
No. So, Percy, the thing is that, first of all, it's not a guidance. We've spoken about it because it has been actioned already, right? So in this quarter, we've actioned all of this. So we thought that if we've actioned something, then all of you need to know about that. So that was the first thing.Second, I think what has happened over the years is that the margin table for the entire sector, entire industry has gone up and people have gotten used to making a certain amount of profit. And once that happens, then people are not bickering for a small piece here and a small piece there.And I think we meet that stage of maturity as an industry. So I don't think we'll get back to a dog-eat-dog kind of a scenario as far as pricing is concerned. What we've seen -- we have taken pricing. And in certain cases, competition is followed certain competitors haven't followed. But over a period of time, I think the market leaders actions hold important for the entire industry and what we've seen even in the past -- while you're right, for the last 5, 6 years, we haven't seen too much inflation.But what we have seen in the past is that if there is inflation and if we take the right price increases, competition usually follows. So I think it's -- the industry is at a very different level of maturity currently. And hence, I am not a soothsayer, so I don't know how this is going to work out. But I personally think that this will pan out well for the entire industry.
Sure. Secondly, I just wanted to understand the mechanics of this price increase on the margin. So this quarter, with a 4% price increase, you've clocked a 15.7% EBITDA margin. Now with another 6% this 4% going to 10%, mathematically, unless the cost inflates further you should be at a 20% margin with a 10% price increase. So where am I going wrong in this calculation? Because you clearly would not sort of be comfortable with the 20%, right?
No, no. So see, the quarter-on-quarter inflation is also there, right? So if you were to look at the kind of inflation that we've seen quarter-on-quarter, it's quite a bit. Venkat, do you want to comment on that?
No, absolutely right. The inflation that's going to happen in quarter 3 and quarter 4 have been factored. Because some of these are covered through forward contracts. So we are reasonably clear about the Q3 numbers. So those have been factored. And therefore, like Varun mentioned earlier, the joker in the pack is really the inflation that's going to be there in quarter 3.
So can you just give me 1 number as to what is the inflation between what you have actually experienced in the Q2 P&L versus what the spot prices are today?
So I give you the numbers, let's take RPO. The inflation was 54%. But because of our forward buys, we've -- our inflation was 46%. So that's the kind of delta.It's between, let's say, on each commodity, 5% to 8%, right, the difference. And once that cover goes off, then obviously, prices will go up. So we've taken all that into account as we've looked at what kind of price increases that will be required. See, when we started off, we did not realize that this inflation is going to be there for a very, very long time. As we realized that this is more of the norm for the future, that's the time we decided to take a very clear call on what is required and then we took action on this.
Okay. And last question, if I may be permitted. Have you seen or do you expect to see any kind of down-trading in the biscuit industry?
See, down-trading happened a lot last year, right? If you remember, last year, during COVID, there was a huge amount of down-trading, which happened. Will down-trading happen again? Very difficult to say, I personally think that with the economy opening out, with things looking brighter, there's a sense of fulfillment as far as people are concerned, consumers are concerned. So in these kind of times, when things are looking a little brighter usually down trading doesn't happen.So my personal feeling is that this is not the time where we will see down trading. But yes, we'll see as we move through this time. We haven't seen it in the last 6 months. And we are hoping that we don't see it in the future as well.
The next question is from the line of Arnab Mitra from Credit Suisse.
My question was that this kind of a 10% price increase happening after a very long time in the industry. As you cut grammage, do you expect the volume consumption in the category to go down as consumers may consume lesser given that it has happened to a grammage cut? Or do you expect that dynamic to be laid up to higher volume?And the second thing is if the volume growth does remain very prepared, let's say, almost a flat number. Will it be something which worries you or given that your market shares are doing fine, it's okay to have this kind of a low volume growth for this period of time?
No. So you're absolutely right. We are going to see a period of low volume growth, not just for us but for the industry as a whole. But -- and it's not a great place to be, but considering the kind of inflation that we are seeing in the marketplace, there is no other alternative.So I think we'll have to take it in our stride. We will probably see a scenario of low volume growth for a year or so and then things will start to come back to normal.
Sure. And Varun, my second question was on the non-biscuit portfolio. So during the COVID period, you had taken a bit of a step back there because of obvious reasons. Now given the very high inflation, do those things remain a little bit on the back burner? Or do you see next 3, 4 quarters, you're going a lot more aggressive on the new products -- nonbiscuit portfolio, we are talking about.
No. So we will go very aggressive on that. So what we are doing even in the nonbiscuit portfolio is we are actioning price increases there as well for most of our products. And with that done, we will make sure that we put in all the right initiatives, whether it's advertising or sales promotion, activation, et cetera, and we go aggressive behind our nonbiscuit portfolio as well.But just to let you know, even in our nonbiscuit portfolio, we've seen a very good momentum on market share.
The next question is from the line of Harit Kapoor from Investec.
So my first question was on the non-biscuit innovation agenda. So over the last 18 months or so, that agenda has been partially derailed because of COVID and you've had the ambition to be total food.I just wanted to get a sense of the next 6 months, do we see, given the high inflation in biscuit and non-biscuit, some of this innovation agenda to get postponed to maybe fiscal year '23 or the category-led innovations that you were looking at prior to COVID and the intent in some of these categories, these new categories, all that innovation starts to come back? So just wanted to know the time line on when we can see a higher push there.
No. So we will start to see a higher push in the next quarter or so. See, the innovation was not put on the back burner because of inflation, right? Innovation was put on the back burner because of COVID. Most of the innovation products are on-the-go products. And hence, because on-the-go was out of fashion, that's the reason why we put that on a back burner.But now with price increases all taken and the margin table moving back to normal, I think we will be looking at going aggressive on the nonbiscuit portfolio and innovation portfolio.
Right. Second question on the distribution side, just the -- have a significant penetration gains on rural distribution. I just wanted to understand what can be the universe for this for you? Already at 25,000, do you see yourself now getting close to a steady state there were further expansion is unlikely? Will the focus be more on throughputs rather than addition? And this question is more from a maybe 2, 3 year perspective.
No. So that always is a balancing point. Throughput is important. But as I've said in the past as well, our share in the rural markets is 70% of what it is in overall, right? So we've got a much lower share in rural markets. So the first target for me is to make sure that we equalize the share in rural and urban, right? The difference between rural and urban share is huge for us, right?So for that to happen, there are -- and there is no reason besides the distribution for our rural share to be lower than urban. It's our own inability to get to all of these villages and all of these areas where we have lower share.So the target is really to equalize this. And I would say it's not going to happen in a hurry, but the way -- the rate at which we are going, maybe in the next 3 years, we'll have the same share in rural as we have in urban. So I think with that objective in mind, our rural push will continue for a lot more time.
Ladies and gentlemen, we'll take the last question from the line of Vivek Maheshwari from Jefferies.
First a very basic question on Slide 18, where you have shown the price increases. So just to get it right, what you have essentially done is 10% price hike, of which 3% is explicit and let's say, 7% is grammage.That 3% price hike is getting reflected in second quarter already. 1% is grammage, which will move up to 7% by exit. Is that understanding correct?
That's a very complicated equation. But yes, I would say more or less.
So explicit price hikes, whatever you have had to pick up, that you have done already, which is why the 4% number jumps up to 10%, right?
Yes, yes. So the rest of all the grammage reduction numbers that will come in Q3 and Q4.
Got it. Got it. Second, on a few of your -- at least the personal care peers have sounded a word of caution on rural with either AC Nielsen showing a deceleration or their own numbers by the exit showing some kind of deceleration. What is your experience and outlook on rural. I know...
Our outlook is very positive. We've seen very good growth in rural. And I think it's not so much about economy. It's more about our ability to get reach to those villages and distribute our products. So we continue to be bullish as far as rural is concerned.
Okay. Got it. And lastly, I mean, if I draw parallels with Marico's Parachute, we have generally seen high inflationary environment, Marico ends up passing on the hikes to the customers. And there is an unorganized to organized shift which is in favor of typically Marico.Now in case of biscuits, there are more than -- there is more than 1 player, so, let's say, 3, 4 organized, but the unorganized field is also quite large. Do you think this -- I mean, if Britannia is facing this headwind, the unorganized will be far more impacted.Do you think this will be -- the next 12, 18 months could see actually the larger guys benefiting from a share gain standpoint?
See, I can only talk about what's happened in the last 6 months since the inflation became rampant. So what you're saying has played out, right? So the larger players have been gaining and the smaller players have been losing, right?So you're right, with our scale, we can get a lot better bang for our buck in terms of countering inflation while the smaller players have a difficult time. So in the past that happened, I don't know how it plays out in the future as well. But we will make sure that we bring in all that's required to give us the upper hand as we go forward. And as you know, 35% of the biscuit market is unorganized. So we will try and see what we can get out of it.
I now hand the conference over to Mr. Yash for closing comments.
Thank you, everyone, for spending time with us on the call. We look forward to interacting with you again.
Thank you very much. On behalf of Britannia Industries Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.