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 Q3 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Mayank Mundra. Thank you, and over to you, sir.
Thank you. Hello, everyone. This is Mayank from the Investor Relations team. I welcome you all to the Britannia earnings call to discuss the financial results of Q3 '21/'22. Joining us today on this earnings call is our Managing Director, Mr. Varun Berry; Executive Director and CFO, Mr. N. Venkataraman; Head of Procurement Mr. Manoj Balgi; and Chief Marketing Officer, Amit Doshi. The analyst deck is uploaded on the BSE website for your reference. Before I pass it on to Mr. Varun Berry, I would like to draw your attention to the safe harbor statement in the presentation. Over to Mr. Varun Berry with remarks on the performance. Thank you.
Hello. Good morning, everybody. I hope all of you are keeping safe in these completely unprecedented circumstances. Now getting to the deck. Now let me take you straight to Page #3, which gives the highlights of our performance for the quarter. So our consolidated revenues on a year-on-year basis grew by 14% and a 24-month growth was at 20%. Operating profit, however, dropped by 13%. On a 24-month basis, this was positive 7%. We continue to make progress on our market share. In fact, the delta between us and the #2 player widened this year and this quarter. So moving on to the next slide, which again shows you the strategic planks that we work on. These have been consistent, so we'll not drain the slide because you're aware of what we are doing. So getting on to the first plank, which is distribution and marketing. Some very exciting stuff here. So the first one, if you see on the left-hand side, is a product called 50-50 Potazos. We've done a national scale up of this. It's a bridge product between a biscuit and a salty snack. And we have -- we are now running at a run rate of INR 70 crores on this product. We've got a very interesting advertising as well for this, and that seems to be giving us not just quarter-on-quarter but a month-on-month growth as well on this product. The second one on this page is the Milk Bikis Atta, which has also been doing extremely well. We are now at a run rate of approximately INR 400 crores on this. We used to be predominantly a South Indian brand with most of our revenues coming out of Tamil Nadu and Kerala. So this run rate that I'm talking about is not the 2 states that I just mentioned, but outside of these states. So it's becoming a pan-India brand, and it's giving us a great response from all of these states. Then we have certain other products which we've advertised this quarter. So the layer cake, the Cream Cracker. Cream Cracker, by the way, is doing extremely well. Tiger Krunch, which we sell in a very few states, about 7 states. But again, all of these high double-digit growth. The Tiger Krunch is at a run rate of INR 300 crores today. And similarly, other products which are on this slide, the Chocolush, the start-up program on Marie, and we had some key promotions on biscuits as well as cakes. And now moving on to the next slide, which is about our second plank, which is driving efficiencies in distribution. Every company which has reported results has spoken about a slowdown in rural especially for the FMCG products. However, we've seen no slowdown as far as rural is concerned. We continue to build on our distribution in FMCG. And our -- in fact, our market share growth in rural is 2x what it is in urban. So we continue to make progress. We continue to grow our business in rural areas. Our direct reach agenda did take a little bit of a setback during COVID, but September onwards, we are once again on this program to build direct reach. And we've reached -- in December, we've reached almost 22 lakh outlets. The next slide, which is on cost efficiencies across functions. So on manufacturing, in the last 7, 8 years, we built this 7.5x. The plants are the same. Energy efficiency, where we have both power and fuel. And as far as fuel is concerned, we are now looking more and more at sustainable fuels. So we are looking at solar, we're looking at wind, and that agenda is moving very well and giving us efficiencies as well. Second is on automation, which reduces our labor costs. And the third agenda really is on the productivity and efficiencies within our plants. So all of these have moved well. And as a result of that, we've seen the kind of efficiencies that I'm reflecting on this chart. The second one is on material. The material efficiencies have also gone 5x what they used to be in 2013/'14. The various planks here are also pretty familiar to you. So there is a reverse option process. There are some forward covers, localization of procurement near our factories and packing material efficiencies, tray removals and also corrugated boxes and bringing some efficiencies and standardization to those. So those are the kind of efficiencies that we are looking at as far as material is concerned. And then finally, moving on to distribution, which has also gone 4x from where we were in '13/'14, and the pillars there really are distance reduction, truck utilization and a reverse option for transportation rates. As a result of that, the total efficiencies that we have seen are 5.6x what they used to be in the year '13/'14. Moving on to the next slide, which is on Good Day. And we've recently relaunched Good Day, where we've got -- every pack carries 4 different types of biscuits which have 4 different smiles on them. So there are multiple smiles in every pack, which is a very, very exciting proposition. And we've taken this with an approach of 360 degrees. We are looking at a print campaign, we've got digital, we've got outdoor, and we've got a new TVC, which is doing well. So we are very excited with the position that we've taken on Good Day. On the adjacency businesses. Again, we've seen very healthy growth with consistent margin delivery on bread and rusk cake because it's on the go. It's not done as well, but it's a matter of time as we move forward to normal life. Our dairy drinks has grown 2x this year. Our local operations in the international business in Uganda and Egypt have started and are scaling up. We've seen a strong growth in Croissant in the present markets. And I'm happy to say that we are almost there with the new product. The design has been finalized for all-India launch, which should happen in a quarter or so. And we've attained product superiority at a very high level of confidence against competition. So this national launch should probably happen in the next financial year. Milk collection for our dairy factory has gone up almost 2x from 35,000 to 60,000 liters per day. And we've also increased the number of farmers around 1,500 to 2,500 who are providing us the milk. Nepal continues to grow handsomely with very healthy margins. So moving on to the next slide, which is Slide #10, which is our sustainability agenda. So as you know that we are working on 4 pillars: people, resources, growth and governance, and we've taken targets for ourselves in each one of these pillars. So the first one on people. We have taken a target of taking 50% women in our facilities, which are 15 factories that we have. We employ over 17,000 workers in these factories. And as of date, 42% of these workers are women. Our target is to take this to 50%, and this 42% also we achieved of late. So we are tracking very well versus this target. The second agenda there is about our Britannia Nutrition Foundation and the beneficiaries. We have achieved our target there. We have 1 lakh 15,000 beneficiaries of the products that we provide for -- to malnourished children and women. So we will keep scaling this up as we go forward. The second agenda is on resources. As I was talking to you about energy, 60% renewable energy by March 2024. We seem to be on track on that, eliminating 20 lakh kilos of plastic trays by March 2023. We are on track on that as well. Water consumption to be reduced by 30% through recycling and reuse by March 2024. Again, we are on track on that. On the growth agenda, 6% reduction in sodium, again, on track. 8% reduction in sugar by March 2024, clearly on track on all of these targets that we've taken. On the governance front, we are targeting second or third quartile in the S&P Global Corporate Sustainability Assessment index in the food products category this year. We've made great progress there. As you can see from the comments on the right-hand side, current year, Dow Jones Sustainability index rating has gone up to 37, which is 3x what it was earlier. So we're making good progress there as well. We've rolled out 3 ESG policies, which is the sustainability policy, the human rights policy as well as the vendor code of conduct. We've also got the ESG metrics integrated into our -- the top teams' key performance indicators. So -- and just going back to the comments on this slide. We are looking at -- we're already at a third position amongst FMCG peers in India from a sustainability index perspective. Moving on to Page #12, which shows our revenues. So our revenues are at INR 3,531 crores, which is a 14% growth versus last year. And if you were to look at the 24-month growth, it's at 20%. Now if you look at what happened to commodities on page -- on Slide #14, you'll see that every commodity has moved up. So if you look at wheat prices, they are on an uptick. Sugar prices also from where they were in the second quarter of '21 are on an uptick. Crude prices, you all are aware of where it's going, and palm is on a complete boil. This is the international picture. Now coming to our own story. So if you were to look at where we are at, we've had a quarter-on-quarter inflation, which is third quarter compared to second quarter of 4% and a year-on-year inflation of 20%, right? So inflation has been the highest that we've seen in a very long time. Flour, quarter-on-quarter, has been a 6% inflation. Sugar, quarter-on-quarter, has been a 5% inflation. RPO, quarter-on-quarter, has been 3%, and year-on-year has been 45%. And similarly, milk, a quarter-on-quarter inflation of 5%. So basically, why are we showing you the quarter-on-quarter number? Because -- just to make you understand that we did not estimate each quarter to move up so sharply. And our entire agenda was based on what we had estimated inflation to be, but that has surpassed our expectations by a fair margin. Now moving on to the next slide, which is Slide #16. If you look at industrial fuel, there's a quarter-on-quarter inflation of 18% on industrial fuel and a year-on-year inflation of 57%, right? Freight and diesel, again, on a year-on-year basis is 24%, while it's flat on quarter-on-quarter. Laminates, again, there's an inflation of 21% year-on-year. And even on a quarter-on-quarter basis, it's moved up by 1%. And similarly, corrugated boxes, while there's been a slight correction, but year-on-year inflation is at 39%. So what is our response to these inflationary pressures that we are facing? Clearly, 3: so one is in the area of value creation for consumers, which is controlled discretionary spends; cost efficiency programs that we run very successfully for almost 9 years now; and third is, obviously, there is -- we have to take price increases because there's no way that, with this kind of inflation, the first 2 pillars will be able to help us meet the inflation equivalent numbers. So on the controlled discretionary spend. We've done -- we've really focused our A&P spends. We've controlled -- rigorously controlled our overheads, and we've leveraged our fixed costs in every which way we could. The cost efficiency programs are doing extremely well. We will beat our target for the year by a reasonable margin. It's in the area of accelerated programs in every function that we are running as well as the IT transformation project that we are -- which we've taken up last year. Price increases. We have taken judicious price increases, and we have taken them ahead of competition because we are the market leaders, onus is on us to lead the market. Getting to the next slide, which shows the material inflation quarter-on-quarter. So on a cost base, the material inflation was 4% quarter 1; 14% in quarter 2; and in quarter 3, it was 20%, right? So the price increases that we've already taken, we took a 1% price increase in Q1. We took a 4% in Q2. In Q3, we've taken an 8% price increase, and we plan to take a 10% price increase in Q4. Now the issue is that what -- the price increases that we've taken in Q3 are only taking care of the inflation in Q2, right? Because if you look at the commodity base, it's about 60% of the total cost. So 8% price increase does take care of 14% inflation. But in Q3, we've seen further inflation happening, and that's what we've got to address. No one could have estimated that the quarter-on-quarter inflation would be so high. Now coming to the next slide, which is on the key financial lines. This is our consolidated report. So if you want to look at Q3, our net sales, as I've already said, 14% growth on a year-on-year basis and a 20% growth, 24-month basis. Similarly, operating profit, minus 13% and 7% profit before tax, minus 18% and 2% and profit after tax at minus 19% and flat versus 24 months, right? And similarly, on the right-hand side, these are the numbers for YTD, for the 3 quarters of this year, right? If you look at the table at the bottom, which gives profit from operations. So YTD, we are at the pre-COVID levels of 14.4%, and similarly, on profit after tax as well. So that is the presentation for me. Very happy to open the house for questions.
[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.
My first question is on 2 of your adjacencies. So when I see the milk drink, that has become double and also sourcing of milk also almost has doubled. So is this more of a sourcing capability which is required? Or sharper pricing? And second is on cakes. So cake, you have said, because of travel it has got impacted in Q3. Most of the travel was fairly normal. The other companies have called that out. So cakes, is there any other issue? The [ first ] category, I understand. But what will make cake come back to good growth?
Yes. No, so Abneesh, the point is that the milk drinks, there's no connection with the milk that we [ collected ] because as of now, it's all about sales and distribution and marketing on the brand, and that's what's given us the results that we've seen. The milk that we are collecting is being given to our contract packers as of now. It's not being used because we are not producing our milk drinks in our factory yet. That will happen only 2 quarters later. So that's the first question for you. The second is on cake. Cake, it's not that we've done badly on cake. We've grown on cake. We've done -- our growths have been reasonably good in the third quarter. However, I was just comparing it to the other 2 products, which is rusk, which is just on a complete boil. It's growing very high double digits, et cetera. So -- and cake, you've got to remember that there is a little bit of tiffin for kids and there's a lot of out-of-home consumption, which has suffered. While yes, it did come to, at least in the first 2 months of Q3, it did start to become a little normal, but still not gone back to the fully normal state.
So that's helpful. My second question is on the market share differences with the #2 player. So what is seen There because downtrading is a clear trend currently, and you have taken pricing growth ahead of the competition. So maybe your grammage cut would have been higher than the competition which also has an impact on the grammage. So could you explain, in FY '21, when Parle was closing the gap and now you are again increasing the gap, what has changed?
See, we -- our agenda remains the same. So we -- what we've done is -- so I -- in the marketing slide, we have spoken about those 2 or 3 big ticket initiatives, Milk Bikis, for instance. Marie continues to do really well. Our Hindi belt agenda. All of that is giving us the kind of momentum that we need. In fact, in the first 4, 5 months of this year, we've seen a very, very high market share growth because all of our brands were really, really doing well. It became a little flattish towards the end of the 6 months because of all the price increases, et cetera. But I think we have the capability to charge a premium, and that's what this reflects. Our brands have the power to charge a premium when necessary. It might not be for very large periods of time. You can't do it forever. But if it comes to crunch time and we have to take a price, we can hold on to a premium and still gain share.
Sir, last quick question. So when I see, Varun, Potazos and Croissants, so if you could give us some number for Croissants. You mentioned that Potazos INR 70 crores. So my question are essentially, is the success of Potazos giving more confidence on scaling up the salty snacks? And when you say Croissants is strong growth in existing markets, so does it mean that this is largely a top 20 city or top 40 city kind of a potential, because you have been trying a lot. You have been aggressive on pricing. But you still say that it is strong growth in existing markets. So what is the pan-India potential here?
No. So yes, that's true, Abneesh, so we are only in our -- we've started this in South and East, and we continue to be only in Calcutta and Chennai right now, and of course, model trade. So these are the 3 areas that we are in. And those are the 2 towns and model trade where we are doing really well, right? So we haven't opened this because you see it's -- you've got to realize that it's a very new product. And we have to -- so we had -- what we've set for ourselves was we will not expand this until we find that perfect product which the consumers are really, really liking. And I think we are almost there. So with this, we will be launching in pan-India. But yes, it's not going to be a product which is going to get to the hinterland in a hurry. So we will look at launching it in the big towns to start with, establish the habit and then start to take it to the rural markets and the small towns as well.
And salty snacks. More [ confident ]?
So yes. So on Potazos, now that's a very interesting one. The idea, as you know, is not ours. The idea was a Bangladeshi brand called Pran. But I think we perfected that. We had a great product. Our product wins against everyone else in the market. And it's showing us the way because we are seeing month-on-month growth and huge growth month-on-month. And the point is that if you have a product like that, you have a lot of efficiency in the system because salty snacks, there's a lot of air in the bags. Here, you are able to give a lot more product to the consumers because we are not transporting just air, right? So that's -- I think it's a great product. It's a good brand. We've got very good -- very interesting advertising. And we've also got the efficiencies related to that. So this will make us get into -- with a bridge product, get into the salty snack territory.
[Operator Instructions] The next question is from the line of Avi Mehta from Macquarie.
I just wanted to first kind of go into the Slide #18, which you have mentioned. Now if I go back to second quarter, you had clearly indicated that EBITDA margin will normalize sometime by fourth quarter. Now obviously, because of the inflation, that seems to -- that would be pushed out. Would it be fair to expect EBITDA margin to remain flattish now in fourth quarter on a sequential basis and with movement to normal more in the first quarter? How should we look at that?
Yes. I would say so. I would say that, that's where it's going to pan out, because while -- see the thing is that when you have such a rampant inflation, it's also -- it's a little bit of a tightrope walk, because it's not about competition. It's about the consumer itself, right? We don't want the consumer to feel a pricing shock immediately, while there can be a huge increase that you can do. But that can lead to one, the consumer feeling the shock; second, it could lead to inefficiencies in our plants with the volumes not growing, because despite all our pricing, we've been growing volumes fairly well, right? So that's what we are trying to do. We are trying to make sure that we normalize. Obviously, we want to normalize and get back to where we were. But in the interim, in this dramatic inflation period, we would like to make sure that we do not shock any stakeholder in this entire market, which is including the consumers, the producers. All of the stakeholders need to move in unison.
But then Varun, should we not look at unit, even first quarter would be difficult because typically, I remember in the last conference call also you have highlighted that it takes time for us to flow through these -- for these price increases to flow through, which is why in your chart also, you're seeing the 10% flow-through in fourth quarter, while it was taken in third quarter. So in that essence, then normalization is more first quarter? Second quarter? Or how should I -- what is your internal kind of thought process right now? If you could help us understand this better, please.
No. Usually, we don't give any future view to where the business is going. But because these are very, very uncertain circumstances, I would think that because now we know the picture, right? We understand. We've never estimated that the quarter-on-quarter inflation is going to be so high. But now that we know the picture, the time that you are talking about is starting now. It's not like we are going to be waiting for quarter 1, 2 or quarter 4 to look at what we want to do as a price increase in quarter 1. So it all starts now. So I think we should be in a good place reasonably quickly.
Okay. Perfect. Perfect. The second bit I just wanted to -- you have done almost a 5% kind of volume growth this time. Now as we go forward, despite the price hike, would it be fair paradigm to say that rural distribution expansion should offset these pressures? And hence, we are kind of looking at a volume growth sustaining, and that is what is the focus? Because I sensed that from your earlier comments, so I just wanted to reaffirm that.
Ideally, yes. We would -- see, the most important thing is to get your number of packs to keep growing and also your tonnages to keep growing, and we would like to keep it that way as we go forward.
[Operator Instructions] The next question is from the Percy Panthaki from IIFL.
My first question is on the distribution front. I see that versus March '21, your direct distribution in September and December has sort of reduced. So what is the reason for this? And connected question to this is that 21, 22 million -- sorry, lakh outlets, is a fairly decent distribution number. I think you would be in the top 2 or 3 as far as FMCG is concerned. Even I think HUL is somewhere in the region of 2.5, 2.7 with such a wide basket of offering. So do you think there is much more leeway in terms of expanding the direct distribution? And if not, does that sort of take away 1 lever of growth from your story?
No. So let me answer your last question first. So I do think that there is enough potential for us to increase our direct distribution to about 30 lakh outlets or so. Because what we've seen is that it's not -- if we are already in the market, getting to these outlets which are within that purview, is not too much additional cost. Second, if we get to those outlets, the kind of execution that we can provide and the kind of market share that we can gain in those outlets is tremendous. So we will continue to go on that front. What was your first question, Percy?
Versus March '21, there's a drop in September, December '21.
No. So Percy, I will let Vipin answer that. But in short, basically, it's the COVID factor. So as we keep coming against waves of this, what happens is that supervision drops a bit. Our distributors are stymied. They're not able to get to the market. They're not able to -- so those kind of things happen. And then the human factor comes in and you have to really think of what is best for all the people in the team. It's better that they do not -- even if we have to take a step back from distribution, at least our people remain safe. So that is really the reason. But Vipin, are you on the call? Vipin? Is he there?
No problem, sir. I'll just ask my next question. Next question is on the price increases. Last quarter also, you had mentioned that by Q4, the price increase would be 10%. In this presentation also, it is 10% only. Now given that the Q-o-Q inflation has been more than expected, haven't you taken any more price increases so that the 10% number can go up actually?
No. Actually, we did do that Percy. But there were a few places where we had to hold our price increases because there were some areas where we thought that these were probably a little premature, because we've seen some early signs. So depending on whether it's rural markets or Hindi belt, et cetera. So we've regained it a bit. But now we've had the time. So even if you look at -- so first of all, even if you look at Q4 versus Q3 now, we are still seeing inflation of 2% to 3% quarter-on-quarter. So now we are -- what we are doing is we are looking at -- making sure that we take all these into consideration and then plan our price increases accordingly so that we are able to match up to whatever inflation the business has seen.
We proceed to the next question from the line of Shirish Pardeshi from Centrum Capital.
I am still stressing on the volume growth. Your press release says that we have reported a very strong high single-digit growth. So I just wanted to understand what is the domestic volume growth? And maybe if you can share in terms of the 40 -- INR 400 crores run rate in Milk Bikis, what is the volume growth which we have seen? And what was the number that INR 400 crores last year?
Sure. The total volume growth is 5%. Domestic volume growth would be slightly more than that, right? Because our international business has been not -- it's not on a growth trajectory this year. So it will be slightly more than that, but it's a very small business. The international business is a very small business. It doesn't impact overall growth to that extent.
And on Milk Bikis?
Milk Bikis has been seeing very, very large, so the non-South Milk Bikis has been growing somewhere in the region of -- revenue growth are 40% plus and volume would be in the same vicinity, I would say, maybe slightly lower.
Okay. Okay. My second question is on the dairy business. Though it is good that we are ramping up our collection, but at what point we will start the manufacturing in-house? And maybe a follow up on that, what is the CapEx we are incurring, I mean, maybe next 1 year? And how much has already gone into?
So a lot of the CapEx has already gone in. It's only the process fees CapEx, which has not yet hit the ground. So if you happen to be anywhere in the vicinity of Pune, we would be very happy to show you our plant. We are very proud of the way it's turning out. It's looking really good, and we are hoping that we will be commercializing parts of the plant. It's not going to all come together. But parts of the plant, we'll be commercializing towards the second quarter of next financial year.
So what is the total overall CapEx we are going to incur on this?
About INR 650 crores is the total CapEx, a bulk of which has already gone in.
The next question is from the line of [ Nitin Jain ] from [ Fairview Advisory ].
So I just wanted to know where we are on the intercorporate deposits. Where is the number this quarter?
Venkat, do you want to comment?
Yes. So the group ICDs, yes. Group LCDs, as of 31st of December, is at INR 580 crores.
And as of last quarter, you were at what numbers?
505, I think, INR 505 crores.
Okay. So quarter-on-quarter, it has moved from INR 505 crores to INR 580 crores?
Yes.
The next question is from the line of Harit Kapoor from Investec Capital.
I just had 2 questions. Firstly, you spoke about rural [ not ] being slower for you. I just wanted to understand, is it a function of some of these new initiatives on the biscuit side that you've taken? Specifically on Milk Bikis, because the growth there is significant. Or is it just a demand trend that you're seeing at the end of [ this level ]?
So it's certainly market share. As I had mentioned, our share gains in rural are 2x what they are in urban. So it's our distribution initiatives which are giving us the upper hand in terms of growth. If you've seen some of the Nielsen numbers, which are being published for FMCG, it seems that the growth for rural is half of what it is in urban in the last quarter. So to that extent, I think we've been able to buck the trend and keep our rural agenda moving forward.
Right. And is there a -- some level of concern at your end also as we pass on these price increases, what would be the impact there, because as we have passed the price increases on, initial sense that you're getting over the last, say, 30, 45 days in terms of the market acceptance. Are you seeing their impact in -- there? Or you're seeing that the share gain or even the overall growth has been fairly robust?
Well, the market -- the price increases, as they have been this year, will certainly going to have some kind of impact. So what we are trying to do is we are trying to overcome that through market share gains and our distribution agenda. So we are hoping that, that momentum will continue. I will let Vipin comment on that. Vipin?
So if you see Chart 6, we have gone more deeper into rural. In fact, we've been able to appoint about 3,000 [ more indiscernible] dealers, which basically means that we have opened up 3,000 more down. And that is what is happening to that. This growth impetus in rural is distribution-driven. So therefore, the agenda here is that we keep going to the hinterland, and direct gives us a lot of wind in terms of carrying those brands. And that is what is giving us the growth. The second part of that growth story is all these focus states, which are the Hindi states, namely UP, Rajasthan, [ NP ] just as well. So these states also are showing pretty good response, and I think that the price increase that we had started right in August and September has been well taken by the market. And like Varun has been mentioning, we have not given a root shock to the market. We took it piece by piece, month by month. And therefore, we've been able to hold on to our growth momentum.
Got it. Got it. And the last thing is on the clarification on Potazos. So if I heard you correctly, so Potazos is going to be your brand for the savory extension. And you're compared to, maybe pre-COVID where you were also looking at time [ pass ], et cetera. Would this be the key player? Or you will also look at the extruded space in that business?
No, we will continue to look at the extruded space. But again, as I had spoken about Croissant, the extruded space also, it's in test market. And in test market, obviously, there are lots of things which are coming to the fore. So we are making sure that we get our act right with whatever feedback that's coming from the consumers. And as and when we are ready, we will start to look at the next phase of launch for extruded products and the like.
The next question is from the line of Jaykumar Doshi from Kotak Securities.
Varun, I would like to know your thoughts on build versus buy when it comes to expanding in adjacencies. Are you looking at brands from an inorganic perspective? And does your balance sheet in any way constrain you from potentially acquiring some good brands in adjacencies that you would otherwise have done, given the cash generation that the company has?
No, so that's a good question. I don't think we are averse to one versus the other. Obviously, as of now, we are looking at the build model. But if there is an opportunity of buy, we would look at that as well. But I think we -- what we do is we are very, very stringent about acquisitions because -- see, most of these acquisitions, in terms of paybacks, et cetera, are very, very weak. So we have a very clear screen through which this has to pass. And we've done quite a few valuations and acquisitions, but if the paybacks are not there, we don't move forward with that. So we will continue to do that. If there's the right opportunity, we are happy to look at buy as well.
Right. Second bookkeeping question. On the development of Chipita at a global level. Does it change anything for you in India in terms of the JV that you have?
No, it doesn't. And so the business which has been bought out excludes the India JV.
Understood. And a very small bookkeeping. Is there any way you can quantify what is the impact on volumes from grammage cuts that you would have done on the price point pack?
Well, it would be in the region -- as I said last time, we do about 65% of our price increase is from grammage cuts, right? So taking that into consideration, it would be anywhere in the region of 4% to 5%. But it's very difficult to quantify that impact.
The next question is from the line of Manoj Menon from ICICI Securities.
One question on the quarter. When I look at the per price increase volume and all those interplays which you just mentioned versus the gross margin, is there a mix angle also been a headwind for you? Whether it is the channel mix, category mix, product mix, SKU mix? And what I'm getting at is here also an angle of, let's say, one of your most profitable brands like a Good Day, need to catch up to the overall growth or something like that?
No, I don't think it's product mix. But channel mix is certainly there, because what we've seen is during these COVID waves, there are certain channels which completely gave in, [ DND ], [ model trade ] which reduces considerably on e-commerce gains considerably. And those kind of things do happen. So I would think that more of a channel mix impact, not so much of a product mix impact.
Not a brand mix impact, right?
No.
Understood. Understood. And secondly, Varun, a philosophical question actually. When I look at the NPD journey, which you had embarked upon, as I recall, post, let's say, from an articulation point of view in 2015/2016. Now where are you currently? I mean in the sense for some part just it would be very helpful to understand if you could help us understand, let's say, how do you define NPD in terms of the company, anything [indiscernible] or NPD? Or what are the structures you have? So what I'm trying to understand is where are you in the journey in terms of structures, learnings or even the readiness, et cetera? Is it that, let's say, you have done a lot of investments or you still need, let's say, a new structure, people revamp, et cetera? So how do we think about NPDs over the next, let's say, 2 to 3 years?
So from a structure standpoint, we've had evolution within the organization. We've got very clear and very strong leadership in these areas. And I'm actually fairly happy with the way that has panned out. We've also got -- we've given the power to the teams to take decisions and move forward and make a few mistakes and step back and look at their mistakes and correct, et cetera, in certain new categories which are completely new to the system. From a progress standpoint, I would say it has been average. And I would say, it's been average because, one, it's been a very unprecedented situation with the waves of COVID that we've been seeing as a result of which, product trials and launches and people in the market, et cetera, was periodically becoming issues. And I'm not saying that whatever we've done has hit the bull's eye, certainly not. But quite a few of our products are doing quite well, and some of them I had highlighted in my presentation. So I would say the jury is still out. It's a mixed bag. It has been unprecedented circumstances, but we are very hopeful that we are on the right track. And hopefully, in the next year with normal life coming back, we should be able to make great progress on -- in this front.
[Operator Instructions] The next question is from the line of [indiscernible] from Reliance Nippon Life Insurance.
Sir, I wanted to understand how much further price increase we need to take? I mean in excess of 10%, you kind of offset the sequential surprise in inflation, which you are -- which you have seen.And to follow up this question. Basically, how do I read this number versus your other intent, is that you don't want to kind of treat the market with a very aggressive pricing from your end?
See, it's -- so it's a very dynamic target that we have. So just to give you an idea, the commodity basket itself is about 60% of the total inflation that you face. So if you were to look at material inflation of 20%, you would require at least a 12% price increase. But the fact is that there are other factors as well which come into play. So fuel and industrial fuels, et cetera, which I had highlighted. So to that extent, it's a moving target. However, my feeling is that this inflation, how long can this inflation last. If it lasts, and it -- if it keeps growing quarter-on-quarter, then I think we will have to really roll up our sleeves and look at, at least another 4% or 5% price increase before we hit the beginning of next year. I hope that answers your question.
Yes. But I mean the second part of the question was like, do you feel that market would be ready to absorb [indiscernible] percent of price increase over and above the 10%, which you have kind of already...
No, so that's what I was talking about. It's a tightrope walk, because we don't want to get to a situation where the consumer is facing such a high pricing impact that they start to say that these products are not as attractive as they used to be. So it is a tightrope walk. I don't think I can answer this in this forum because it's a very complicated question. So you've got to do, as they say, [Foreign Language] in this situation. And that's exactly what we are doing.
The next question is from the line of Shirish Pardeshi from Centrum Broking.
Where I left, I had 1 question on the Potazos product. We started this journey in the Eastern part, and you mentioned that you are looking for a pan-India launch. So is that pan-India launch has already happened? And on the manufacturing front, are we manufacturing in-house or we have outsourced this product?
No. So the interesting thing, Shirish, is that, one, to your first question, yes, we have launched a pan-India. While it's very recent, we are just scaling up in various parts of the country. The second interesting thing is that this product is being manufactured on the same lines that we have, right? So we've been able to leverage the costs tremendously, because with a little bit of modification, we are producing the product on our cracker lines. And we are now producing it in-house in 2 factories and there's 1 contract packer that we have. But we have the capability of modifying some of our other cracker lines also if this takes off, and we will be able to produce this in our existing lines.
Okay. Just one follow up on this, I think you said that largely it will be getting manufactured in-house. So any color or any ballpark number you would be able to share in terms of profitability, gross margin?
So it's accretive to our overall margins, and that's what we look at for every innovation.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments.
Thanks, everyone, for spending time with us on this call. We look forward to interacting with you again. Thanks.
Thank you very much. On behalf of Britannia Industries Limited, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.