Prataap Snacks Ltd
NSE:DIAMONDYD
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Prataap Snacks Ltd
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Ladies and gentlemen, good day, and welcome to the Prataap Snacks Limited Earnings Conference Call.
[Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Mit Shah, from CDR India. Thank you, and over to you, Mr. Shah.
Thank you, Sundra. Hello, everyone. Welcome to the Prataap Snacks Limited's Q2 and H1 FY '25 Earnings Conference Call. We have with us Mr. Amit Kumat, Managing Director; and CEO; Mr. Sumit Sharma, CFO; and Mr. Amrit Choudhary, National Sales Head of Prataap Snacks.
Before we begin this call, I'd like to point out that certain statements made in today's call could be forward-looking in nature and a disclaimer to this effect has been included in the earnings presentation shared with you earlier.
I'd like to hand over the call to Mr. Amit Kumat for his opening remarks. Thank you, and over to you, sir.
Thank you, Mit. Good afternoon, everyone, and thank you for being here today. I trust you have had a chance to review the earnings document that we shared earlier. I'm pleased to report that Prataap Snacks has delivered a resilient performance in Q2 FY '25. Revenue from operations was INR 441 crores, an increase of 2% year-on-year compared to INR 434 crores in Q2 last year. This was achieved in spite of the challenging macroeconomic environment marked by persistently high inflation, which has influenced consumer behavior across key markets.
As a consequence of deep inflationary pressure, there has been industry-wide stress on volumes of MRP INR 5 packs in Q2. Interestingly, Prataap has managed to beat the trend as we have reported higher volumes at this price point, which represents a significant proportion of overall volumes for us. Over 80% of total volumes for us is from packs priced at INR 5.
We are encouraged by the strong performance in our pellet snacks category this quarter, demonstrating the strength and appeal of our product offerings. As you know, pellet snacks were a flagship offering of our business, and we have now extended this popular product nationwide under the Yellow Diamond brand. The positive reception across markets reaffirms the strong consumer demand for this category. In addition, we continue to advance the sales force automation and range selling initiatives within our distribution network by extending deep strategies into incremental territories each quarter, we are progressively achieving gains and operational efficiencies.
Having said that, our long-term strategy is to gradually shift towards higher price points by enhancing the contribution of large packs. This move is intended to drive sustainable structural growth and strengthen our business model over time. To achieve this, we are focusing on 4 key initiatives: Premiumization; new product development; exports, and expansion into quick commerce.
As part of our premiumization efforts, we introduced the brand 7 Diamond. This line will feature Better For You premium snacks such as protein puff and peanut butter puff. Initially, these products will be offered in large packs priced at INR 30, targeting quick commerce and modern trade. We plan to introduce these snacks to the general trade in due course with additional smaller pack options at INR 20 and possibly INR 10 but not at the INR 5 price point.
We have initiated exports this quarter and the initial shipments has been dispatched in Q3. Our terms have actively -- our teams have actively participated in several international trade fairs, including SIAL in Paris, ISM in Dubai and BSM in Saudi Arabia, receiving an encouraging response across all events. This initiative is aligned with our long-term growth objectives.
In Q2, we successfully launched our products on a quick commerce platform and have already observed positive initial sales. We are currently in discussion with additional quick commerce platforms to further expand our reach within the high-growth channel. We recognize that premiumization, new product categories and leveraging channels like quick commerce and exports are closely interlinked. Together, these strategies will allow us to enhance our revenue mix and increase both the average pack size and price points, resulting in improved margins.
Coming to profitability. There were steep inflationary pressures from key input costs, including potatoes, wheat and gram. As a result, EBITDA has reduced from INR 38 crores in Q2 last year to INR 19.2 crores this quarter. The EBITDA margin has compressed to 4.3% this quarter from 8.8% in Q2 last year. To mitigate these challenges, we have implemented measures such as grammage reduction and trade margin adjustments.
The decline in EBITDA has also impacted our PBT and PAT. Our -- Q2 FY '25, our profit after tax stood at INR 6.2 crores compared to the PAT of INR 16.5 crores in Q2 '24. Trends in input prices are indicating further firming up in Q3, especially with regard to price of palm oil. We are working on further cost reduction and process optimization initiatives to offset the impact and we evaluate further reduction of grammages if necessary.
On the operational front, we have made slight rationalization of facilities. We closed our 3P operations in Bangalore and integrated the manufacturing lines into our own facility to ensure seamless service to key markets while reducing overhead costs. Additionally, we established operations at a new facility in Jharkhand to strengthen our production capabilities and to serve nearby markets.
Lastly, I want to highlight that in September '24 of our private equity partner, Peak XV Partners partner, formerly Sequoia Capital, exited their 47% in stake in Prataap Snacks, achieving a meaningful return on investment. We deeply appreciate their support and the significant role they've played in the scaling our business, enhancing corporate practices and shaping our company culture over the last 13 years since their entry in 2011.
The stake have now been acquired by Authum Group and Ms. Mahi Madhusudhan Kela, who have also initiated an open offer as per regulatory requirements. We look forward to collaboratively working with the new shareholders to further enhance the strategic direction of the company and elevate value creation for all stakeholders.
With that, I conclude my remarks, and we can now take questions. Thank you.
[Operator Instructions] The first question is from the line of [ Tuisha Seksaria ] from [indiscernible] Enterprises.
I wanted to understand a little bit more about the Better For You segment. If you could share some color on that.
Yes. These are basically the healthy segment, mainly the protein concept is catching on throughout the world right now. So we have used pea protein to make protein puff and launch the peanut butter variety. So I think people can eat that without guilt. We are further working on a few more products in this category.
Yes, please.
Would you be...
You're asking something, ma'am. She was asking something.
I was just wondering if you could share how, you might see this segment growing in the future? And if you could share some color on the kind of new products you might introduce?
So, this is Amrit, and I'll take this question. So we have seen recent trends towards moving in guilt-free packing space, where people want to favor the traditional taste or kind of do not compromise on the taste at the same time, want to kind of reduce their guilt question. So this is our understanding of that market. We have now developed a product, which we believe is suitable for the deserving consumer of ours and will also help us drive our premiumization portfolio.
We see that in next 18 to 24 months, this category should start contributing a significant number for us, specifically in the premium channels wherein we have just started dialing up our effort in. So going forward, this has been a growth plan. This is a strategy that we will be adopting to kind of premiumize our portfolio by enhancing and introducing the healthy range across these things.
The next question is from the line of Shrinjana Mittal from RatnaTraya.
I have 2 questions. One is on the seasonality part, like if see for last 2 years, the September quarter has been a little bit on the higher side compared to the rest of the year. So firstly, is that true that if the Q2 is bigger for us? And if yes, can you explain the reason for the same?
During the summer season, the ethnic food consumption reduces to some extent. So that's why Q2 has always been very good for us. And lastly, in the Q3 season, when the potato availability reduces, so sales goes on a little bit. As the raw material cycle for potatoes is very difficult to source potato in the month of November. This has been the trend for last many years. So that's why Q2 is always...
Understood. So Q2 is bigger for us, there is seasonality, right. And just one more question. On the gross margin impact, you mentioned that it's because of higher potato prices and also other input prices. Can you quantify that for us? Like what the net-net impact that we see in the gross margin, that would be about 2% from the last quarter. So entirely, is it attributable to rise in potato prices? Can you help give some more color on that.
Shrinjana, this is Sumit. That is because of potato prices. I would say out of this 2%, about 70%, 75% is because of potato. So potato, we have seen historic high price this year. Potato prices are higher by about 60%, 65% over the previous year. And there is some kind of exceptional inflation. We have not seen this kind of inflation, especially in potato earlier.
The next question is from the line of [ Yash Tiwani ] from Aamara Capital.
So I have 2 questions. So first is regarding, I was looking at our numbers over the years. And the question first, I had is regarding the freight cost. So over the last couple of years, we have been seeing that trade costs have been in control and has been going down. But currently also it stands at 6.5 percentage of our top line. And compared to our competitor has been about 200 to 250 basis points higher. Is there any specific reason? Or how much can we get it down? That is one.
And secondly, regarding our current maintenance CapEx that we have that's still going on. So these 2 other things. Yes, sure.
Yes, sure, [ Yash. ] I will take freight question first. You rightly mentioned that over the period, the freight cost has reduced. There is a decreasing trend in spite of having some spike in the fuel prices. And that is primarily because of our distributed manufacturing footprint. 2 years back, we used to supply from 3, 4 manufacturing locations. And over the period, we have decentralized our manufacturing facilities, and that is really helping us to optimize our freight cost.
However, if you compare with some of the competitors, so every competitor has a different dynamics. For example, the freight cost depends on the size of the packet. Even in our case, if I split my freight cost between Namkeen segment and other than Namkeen segment, my Namkeen freight cost would be about 4%. And for rest of the product categories, the blended cost would be about 8%. That is primarily because of size of the packet. My INR 5 pack size is pretty smaller than INR 5 potato chips or INR 5 pallet pack size. So that's the primary reason.
Another reason is the average distance. If your large amount of supply is in close radius, then certainly the freight cost goes down. In our case, since we are a national player and catering to pan-India, that's another reason to have slightly higher freight costs. So these are 2 primary reasons. Still, we see some saving potential in our freight cost, and we are working for that because after having these multiple locations, now as a next step, we are mapping the target market with the respective production facility. And with the correct mating, we'll be able to save somewhere between 0.5% to 1% kind of freight cost.
Okay. Okay. So you're saying that, let's say, for the further on expansion, let's say, any of the manufacturing that we do on an onshore basis in a targeted market belt. If you do that, then we can get it down. But let's say, if we don't do that, then just because we have excluded snacks getting -- taking around 8% of the freight, so that will remain the same. There's no possibility of getting it down from here on. Is that?
No, there is a possibility. There is a possibility by mapping the right source of supply to the right market. But still there is some overlapping because of some products are not available at respective manufacturing facility. So we are in the process of fixing those things. I think once that is fixed, we may see another saving of say, 0.5% to 1%. So that scope is still available for which we are working. But structurally, Namkeen would have a lower freight cost and other products having slightly larger size of packets will have slightly higher freight cost.
That makes sense. And sir, about the current CapEx -- the current maintenance CapEx, what is the rate that we're running at?
So as you have seen last year, we commissioned 2 new facilities, one is in Rajkot, second is in Jammu. I think with these 2 CapEx, we are largely done with the CapEx requirement. We don't foresee any significant CapEx in near term. The current utilization level would be about 60%. So it's only the maintenance CapEx required and some addition in our fleet because we have our own fleet of about 200 vehicles. The overall maintenance CapEx, including some new CapEx for the vehicles and some CapEx to make the production capacity vis-a-vis packing capacity. The overall CapEx would be somewhere in the range of, say, INR 20 crores, INR 25 crores.
This year, we are investing for a solar plant, for which we are investing about INR 8 crores to INR 9 crores. That is in process. I think by March the solar plant will get commissioned. That will give us operational savings for power cost. But barring that, there is no significant CapEx we are planning.
Okay. Correct, sir. And sir, just last question. So in the last couple of years, we were quite aggressive on our A&P. We used to do around 3% to 4% from -- around these numbers. But in the last couple of years, we have reduced and now we are making a savings just because cutting down one channel in our distribution. So any kind of strategies or what we are looking -- how we are looking at this thing that how to go about the A&P as we're -- as we'll be making a lot of savings, let's say, once the inflation, which is just because of the food which just got in, will come down in somewhat a couple of quarters. So how do we see this? How we are looking at this thing in terms of A&P to go about?
So we have never spent around 3% to 4% on A&P in last many years. We did a little bit more probably 2% when we had Salman Khan as a brand ambassador in 2017. Unfortunately, after that, we couldn't do much about advertisement because of a lot of many reasons, including inflation prices and COVID. But definitely, if the cycle cools down next year, we are definitely looking to increase our expenses in A&P.
The next question is from the line of Gaurang Kakkad from Haitong Securities.
So I have a couple of questions. Firstly, regarding growth for this quarter, like can you indicate what will be the industry growth because largely, if you look at our growth, it looks a bit modest versus, say, a couple of listed players who have come out with their Q2 numbers. So is there any specific pressure in terms of any categories that we are seeing or any geography that is seeing some pressure and some indication on market share, if you can give?
So I'll take this. Thanks for the question, Gaurang. With respect to the industry growth, we have seen that the inflationary pressures have hit the INR 5 segment a little higher wherein our major play lies. So therefore, our growth, so to say, have been a little modest than a couple of competitors that we have been kind of talking about. In addition to that, I would also kind of want to know that we have seen a sort of differential growth in Western salty space as compared to the traditional Namkeen side. And therefore, we -- while overall pressure was being felt, it was largely felt a little higher on the INR 5 segment.
But as our CEO has already mentioned that even in that segment, we have done relatively well vis-a-vis competitors. So industry in the Western salty space over the last quarter have been largely in the tune of 5-odd percent and INR 5 should be. The Nielsen numbers are yet to be kind of closely reported. But on the market share side, we would be holding in the price pack segment, we would be holding our market share. And if the movement has been there, it would be in the range of 0.1% kind of thing.
Okay. And sir, even in the INR 5 price point, are there any category specific trends that we are seeing that some categories are outpacing growth where some of them are laggards, if you can give some color on that?
Yes. For us, rings as a product, as a category has seen a declining trend on this. Potato chips have been largely flat. It has been driven by our ability to innovate on the flavors. And if you see, we have been able to kind of hold on to our potato chips share and numbers despite the core flavors not doing well, our ability to innovate on the new flavors point has helped us kind of hold on to our numbers. Pellet has been growing significantly now in our portfolio. So at an overall level, within INR 5 portfolio, we have seen certain category movements across these 3 categories.
Okay. Got it. Secondly, you mentioned gross margin pressure largely because of potato prices in Q2. And I think that the palm oil duty also would largely now start hitting us from Q3 onwards. So largely, how are we looking to mitigate this impact in terms of further inflation that would hit us in Q3. And any margin guidance that you would want to share largely, say, for the year or the medium term? That would be helpful.
Gaurang, this is Sumit. You rightly mentioned Q3 will have some negative impact of palm oil because of increasing duty somewhere in the month of September. And there is a significant inflation in palm oil. We are just trying to mitigate most of its negative impact by rationalizing the grammages, by reducing the trade margin by increasing the price to retailer, what we call PGR, these kind of initiatives we are taking.
In addition to this, we are also working on multiple initiatives to optimize our operational cost to improve the efficiency. I think all these things will certainly help us to mitigate some of the impact of this price inflation, particularly for oil. But again, oil being highly volatile in the last 1 month. So there was some impact of custom duty increase. And even thereafter, there was some increasing trend in the palm oil. Considering this volatility, it's a bit difficult to give some guidance on the quarter 3 or FY '24 -- '25, sorry. But yes, we are trying multiple initiatives to offset or negate the negative impact of this inflation.
Sure. And potato price inflation will continue into Q3 as well, right? So when is the fresh crop pricing expected for potato?
So potato crop, fresh crop comes somewhere -- start somewhere by mid of December. So we are hoping the price to cool off by mid of December. Till then, I think there will be a similar kind of pressure will remain for potato.
Okay. And apart from potato and palm oil, there are no other pockets of inflation, right? So most of the other commodities largely are range from?
Unfortunately, no. I think this is the exceptional time where we are experiencing inflation in most of the commodities. See, we are pretty hedged in terms of diversifying in our raw material. Like potato is required only for potato chips, pulses are required only Namkeen. Corn is required only for extruded and wheat is required only for pellet. So in that sense, we are pretty hedged because there is no significant dependency on any of the single raw material, barring palm oil, which is a common raw material for every product.
But unfortunately, this time, we are experiencing severe inflation in most of the commodities, including wheat, corn, pulses, gram flour, et cetera. So yes, inflation is there even for other commodities as well.
I meant increasing from Q2 to Q3. Like Q2 to Q3 also, there will be inflation for most of the commodities, Is it -- is it Y-o-Y?
I think this is Y-o-Y. This is Y-o-Y but Q2 versus Q3 should largely remain same, say except the palm oil.
Okay. Got it. And just one thing, finally, Sumit, you mentioned quick commerce as a focus area. So some numbers, if you can share in terms of the contribution of quick commerce business for us? And largely, what will be the terms for this business? So is it that the margins will be inferior to company margins or similar? If some color you can give on this. That would be it from my end?
So Gaurang, the contribution at this -- while it's a focus area, and we have had our first listing of our products for our customers in -- on one of the quick commerce platform. It's too early to kind of comment on the kind of numbers that the channel will start delivering for us because it's only been a month or so that we have -- and we are kind of -- the growth opportunity here is definitely significant. At this point of time, there are 5 large players and the discussions are on -- final discussions are on with a couple of them to kind of get us onboarded.
We want not only to improve sales, but also to kind of establish ourselves as a very firm player in larger pack points, high-margin products. We are also in the process of kind of discussing certain exclusive product development for this channel. Going forward, we are hoping that this channel will become a significant contributor for our revenues as well as for our bottom line contribution. So if that answers your question.
And margin will be similar to general trade or inferior to start with?
To begin with, it will have some -- because we will have to kind of invest a little more in terms of the on-platform marketing initiatives, et cetera. But going forward, we think it will be margin accretive only because we want to dial up our large pack and high-margin portfolio in this segment.
The next question is from the line of Abhishek Mathur from Systematix.
Just wanted to check with you, what is our current contribution of large packs. I think it was highlighted at about 12% to 13% a couple of quarters back. So has that increased in the past -- in the recent past? And where do you see it going in the medium term? And also in terms of our Namkeen penetration, I think this was at about 25% the last we heard. Has that also improved over the near term, if you can answer those questions?
Abhishek, this is Sumit. So there is no significant movement over the last couple of quarters. On an average for the entire company, 20% -- 18% to 20% is the number for large pack, large, I mean, INR 10 and above. However, that's very different for different product categories. When we talk about potato chips, so INR 5 contribution for chips is about 70% and INR 30, 30% is INR 10 and more. For, which is a subcategory of Extruded, again, the INR 5 contribution is about 72% and 28% is INR 10 and above.
In case of Extruded, large amount of market lies is INR 5. So 10 and above the market itself is pretty small. Like for pellet, it's a largely INR 5 product category. For rings, it's a largely INR 5 product category. So in those categories, our contribution of INR 5 is also pretty high, which is almost 97%, 98%. For Namkeen, our contribution to INR 5 is about 85%. So INR 10 and above is 15%. Here, we see significant opportunity towards the ladder for bigger pack, which we are driving. And certainly, these premium products, what Amitji has also mentioned, will help us to drive a bigger price points because these products have been launched in INR 30 price points.
For quick commerce, we will have -- going forward, we will have INR 20, INR 10 kind of version for general trade as well. And export is also going to help us to drive sale of the higher price points, where we are now pretty aggressive. As Amit has mentioned in the opening remarks that the team has participated in multiple food expos, and we have received a very encouraging response. We have started dispatching to some of the newer countries in quarter 3.
Right. And I also wanted to check with you. You mentioned that you had rationalized trade margins as well as cut the grammage. So just wanted to check, have competitors also followed these moves in terms of trade margin rationalization? And if not, is there a concern in terms of us maintaining competitiveness in the channel?
So to answer this question, we also need to kind of consider where we with respect to trade margin that we had offered to our trade partners. As you rightly mentioned, we didn't want it to have any adverse effect on the overall earning capability of our trade partners also. They are being a very, very important lever with which -- through which we kind of serve all our consumers. So we have been very, very, I would say we have sharpshooted our trade margin optimization wherever we have seen that we were sort of overpaying than our competitors. And so we have kind of gone ahead and kind of rationalized our trade margins specifically in those areas. So it has been a very surgical kind of a thing on a wide spectrum, every one size fits all kind of an approach. We have taken very close consideration that we should not be highly adversely impact any sort of an ROI for our trade partners. We have been cognizant of their well-being also. So to answer your question, no, we do not see any impact as such of reduced trade margins -- negative impact as such of the reduced trade margins so far as our ability to serve our customer is concerned.
Understood, sir. And just one final one for me. So we had commissioned our Jammu and Rajkot facilities sometime back, if I'm not sure, I think you had mentioned on the 4Q call that they have been commissioned. And I think the indicative of quarterly sales from them were of the order of about -- sorry the indicative sales from the markets of -- nearby markets of Punjab, HP and J&K, were about INR 10 crores INR 11-odd crores. Any increase that we are seeing from those markets because of the commissioning of Jammu plant and supplies from there increasing?
So Gaurang (sic) [ Abhishek ], after commissioning of any plant, we would also kind of it takes some time for plant operations to kind of settle. And so we have taken this duration to kind of settle our operations. We have had certain disruptions in the initial few months so far as the optimal run of the plant was being concerned. At this point of time, as we speak, the things have now settled and we have started seeing much more better utility of the plant capacity as well as dispatches commissioning -- commencing from our Jammu plant.
So going forward, we see that in a quarter or 2, we'll see our Jammu plant contributing significantly to kind of improve our market standing in those regions, which has been so far underserved. So we think that we will be able to fully start utilizing the potential of the plant and thereby market shares in those regions or any kind of savings that should accrue to us in a quarter or 2 from here .
The next question is from the line of Deepali Kumari from Arihant Capital Market.
Deepali Kumari, please go ahead with your question, your line in unmuted.
Yes. Am I audible?
You're sounding little low.
Yes.
Okay. Okay. So I just ask your question. So like with your current capacity utilization at only 55% to 60%, so what is the plan to increase this? Are you looking at expanding production or focusing on better utilization of existing...
I am sorry to interrupt you, we are unable to hear you clearly, ma'am. You're sounding very muffling.
Ma'am, we're unable to hear you, can you speak from the handset mode.
Okay. Yes. So like with the current capacity utilization at only 55% to 60%, so what are your plans to increase this? Are you looking at expanding production or focusing on better utilization of the existing facilities?
So Deepali, I'll take this question. So there is no very straightforward answer to this question. If you listen to the commentary so far that has been made by our CFO, our freight cost or even your fellow analysts who have been kind of kind enough to ask certain questions. We see that different markets have got different preference for customers. When we commissioned a few plants, some assumptions were being made in terms of the demand that will get nearby those plants. So probably that -- in a few of the cases, we have not seen those assumptions coming to fructify.
But having said that, we -- so we will have to go both ways. In a few of our existing plants, we'll have to kind of improve our production capacity or production volumes so that we start better utilizing. But at the same time, since freight cost is very, very high, if the market demands that we need to kind of commission another line in one of the plants -- existing plants, et cetera. So the new CapEx may also be required.
At this point of time, we see we are adequately covered so far as expansion plans are concerned. And therefore, it will be a mix of both, more utilization of our capacity in the existing plant because different plants -- different products will have a different -- at a different life cycle stage in different markets so far as our brands are concerned. And therefore, it will be a mix of both utilizing of -- better utilization of existing capacity as well as if the need arises to kind of go ahead and deploy newer plants.
Clear sir. Got it. So sir, I also have one more question, like I noticed you moved away from the traditional distribution model to the direct one. How has the change helped in reducing costs and rating products market faster? Has this been game changer for your profitability?
Deepali, this is Sumit. So certainly, that has helped us to reduce the overall distribution cost. Earlier, we were following a 3-tier distribution model and the overall channel cost, excluding retailer was about 14%. Now with this direct distribution, the overall distribution cost has come down to about 10%. So that kind of savings we have accrued over the period. So that has really helped.
In certain markets, there was some disruption because of the direct distribution considering the size of distributor. The markets where the distributors were smaller in size, there was some consolidation in those markets. But by and large, it went well. There was no significant disruption in the market. And that has also helped us to reduce the overall time to reach to the retailer point or to the consumer point.
The next question is from the line of Resha Mehta from GreenEdge Wealth.
I have a couple of questions. So the first one is on the INR 10 SKU right? So can you just help me with the EBITDA margins of INR 10 SKU versus INR 5 SKU on a like-to-like basis. So let's say, if we're talking about INR 10 wafer versus INR 5 wafer. The reason I'm asking this is because while certainly, there will be savings on the logistics cost for the INR 10 SKU but I think the gross margins are lower on the INR 10 SKU, and also the margins that we offer to our channel partners are slightly higher. So just wanted to understand at an EBITDA level, how does INR 5 SKU versus a INR 10 SKU compared for the same category?
Resha, this is Sumit. I'll take this question. So you rightly mentioned that in case of INR 5, you need to offer slightly more value to the consumer and -- sorry, in case of INR 10, we need to have slightly more value to the consumer and also slightly higher margin to the retailer. But again, it varies at a different life cycle of the products. For example, in our case, we are very strong in INR 5, as I mentioned, more than 80%, 85% is contributed by INR 5. So INR 10 is relatively very small for us. So in our case, certainly, we need to offer slightly higher margin to our retailer because that's more push as of now.
But over the period, once we grow in that particular price segment, then we can command price in even INR 10 price point. And eventually, INR 10 becomes more profitable than INR 5 because there is a significant reduction in the primary packaging cost, laminate, I mean. And that's a very significant cost for the overall product.
Also, the logistic cost, which is another significant cost, is pretty low in case of INR 10 as compared to INR 5. Even the overall operational cost, the factory overhead, et cetera, the cost for INR 10 is pretty low as compared to INR 5. So these are the reasons. Finally, we ended up having better margin in case of INR 10 as compared to INR 5. But again, at a slightly higher volume of INR 10, not in the initial stage. Initially, one need to invest to build that category of INR 10 and above.
Understood. Very clear. And second one1 is we announced a couple of measures to kind of contain the margin compression. So we know one is on the grammage reduction. So I believe even in our Q1 commentary, you spoke about grammage reduction. So have we taken further grammage reduction in Q2?
Yes. In certain SKUs in certain product categories, there were further reduction. So even in Q1, the reduction was in certain categories, not in the entire portfolio. So we again revisited for rest of the product categories where we didn't change the grammage in the quarter 1. So we made some changes in some of the SKUs and product categories.
Right. And we've been talking about the recalibrating trade margins, right? So would you say that, that has also kind of impacted our revenue growth in the regions that we would have reduced the trade margin?
So, overall, no. But in certain -- as Sumitji had recently mentioned a little while ago that in certain geographies wherein the size of our distributors were really small. So we have had some negative impact in those regions. But most of the regions, we have been able to kind of grow our business despite the fact that we moved from a 3-tier system of a very high trade margin to a 2-tier system of direct distribution model, so to say. To answer your question, in very selected few where our salience of the brand was not very high, we have seen some impact. But at an overall level where our salience of the brand were significant, we have not seen any adverse impact because of this reason.
Got it. And we hired a consulting. So any specific findings, recommendations that you would like to share at this point?
So they just started working in last quarter. So I think it's a bit early. But yes, there is a clear defined agenda what we want to achieve with their help and both from a sales side and from operational side. I think in the next 1 or 2 quarters, we'll be able to see the positive results both in sales and operations side.
Got it. And on this SFA implementation, right, which has benefited in terms of range selling. So can you just maybe quantitatively or if quantitative is not possible, then qualitatively kind of talk about in some regions where you have implemented SFA, how has it actually led to increase the range selling? Or just a few examples that would help.
So I'll kind of -- see, without the help of SFA, my frontline sales force was not -- look, they had to kind of remember or write down everything in a piece of paper to kind of to know what exactly is happening, even to kind of analyze and to kind of sharpshoot their sales effort, it wasn't available. So as we speak, the SFA has now been implemented across most of our geography. And so we are kind of -- we have taken an incremental approach in -- we have been in the business for a decade plus but our sales team was not used to kind of use those kind of IT infrastructure. It was a bit of a behavior change also that we had to drive in ground.
But now since they have started seeing the importance of -- and the utility of certain data, which will help them take more informed decisions, which has started kind of helping us drive -- identify which of the outlets, which is kind of dropping off and not kind of repeating and even the supervisory cadre is now able to ask relevant question and visit and sharpshoot or solve the problems of any of the retailers that may be having to answer. Just at the very surface level, if I need to kind of answer about this. We have started -- Sumitji was kind of telling we have got consultants now on board. So a lot more meaningful analysis are now being done and shared with the sales force for them to kind of align their actions with that of what the data is suggesting rather than going and executing only on the basis of hunch or the remembrance that they were carrying.
Probably a similar question 2 quarters down the line, we will be in a much better position to kind of tell you with exact numbers, how our efficiency parameters for that matter, effectiveness parameters at the trade level has improved. This is the -- this is an implementation, which has been -- which we have been a little late to implement as -- with respect to the FMCG industry overall. But we have started now leveraging this IT tool that we have to drive and better direct our effort while executing in the market. So if you park this question once again or we can ask this question once again after 2 to 3 quarters, we will be in a much better position to kind of tell you what exactly has been the benefit of such wide-scale adoption of the IT tools.
Fair enough. And lastly, even DMS, I think, was rolled out on a private basis in FY '24. So even now has that been implemented pan-India or we are still in a gradual expansion stage there?
So it is back to drawing board as we speak. DMS, we have -- as you have rightly mentioned, we rolled out in a couple of territories. We had some learnings, and we had to kind of -- because of certain feedback that has come, we had to kind of go back to the drawing board once again so far as our overall structure of the DMS and the rollout plan is concerned. Further update will be given to you as and when we kind of go ahead and implement the DMS.
The next question is from the line of Alisha Mahawla from Envision Capital.
So my first question is on margins. We've been mentioning that raw material prices, especially in Q3 will also be hit because of the duty on palm oil. So that can continue to act as a drag to margin. And as we continue to invest in growing our quick commerce, e-commerce segment and large packs also as we introduce them, we'll probably have to invest a little bit by sharing trade margins. So in the near term, will margins continue to stay under pressure?
Alisha, this is Sumit. The investment in quick commerce and large pack is not going to be significant, considering the scale of our company. However, there will be pressure because of the inflation in the commodity pricing, especially the palm oil. I think it's prudent to invest in quick commerce and big packet from a long-term vision perspective. There may be some pressure, some stress in short term, maybe in a quarter or so. That should not derail the overall long-term objective of the company. And that's the philosophy we are following and we are just trying to invest in this new channel to drive the sales and especially the higher price point sales and the premium product sales.
Understood. And with the change in distribution network that we had initiated almost 2 years ago, have the benefits of that now all come in?
The benefit in terms of better realization, I think that is already accrued and that -- even that was reflected in our previous year financials. The savings from the direct distribution was roughly about 3%, 3.25-odd percentage. So that is completely accrued.
So our aspiration of double-digit margins, where does that stand now? Because again, we're investing in growing new segments for our business?
So that is intact, Alisha. Still we are going in that direction, though there is some commodity pressure, and we don't see this kind of pressure as permanent because again, the agro commodity has a cycle. As I mentioned in my earlier comments, the potato fresh crop generally comes by mid of December. So in most likelihood the prices will come down because that's the cycle. In 1 year, the price goes up and following year, generally, the price gets corrected.
All said and done, we are not dependent on the commodity pricing. We are making a lot of other initiatives to structurally improve the margin. And to name a few, on the sales side, we mentioned earlier that we are in process of optimizing the trade margins, and we have reduced in certain geographies. Earlier when we were following a 3-tier distribution model, as I mentioned in my previous answer that the trade margin was about 14%, which has now come down to 10%, 10.25% and when we were following a 3-tier distribution model, we were giving 8% margin to the distributor. So compared to that 8%, still the overall offered margin is about 10%.
So the clear cut scope of 2% is available. However, we are not in hurry and we will pull down that margin after doing a first study, what Amritji has also mentioned considering the ROI and net profit of what the distributor is making on his overall business. So thoughtfully, we will get that margin. But yes, the clear cut scope of about 2% lies in the distribution channel, barring from price to retailers where also there is some scope.
On the operations side, as I mentioned earlier, there is a saving potential of about 0.5% to 1% in our logistic costs since we have multiple geographies, multiple manufacturing locations and after having a right mapping from a source of supplier to the destination, there will be a potential saving of 0.5% to 1%. We are also taking advantage of technology, which we have not been using, especially in the logistics function because that's a bit complex. So we see saving potential in logistics.
Apart from logistics and sales, there are a few line items in the overhead cost, cost of production, especially the stores and consumables, the manpower cost, which is a significant cost. In our case, the overall manpower cost is about 9.5%. So there is a saving potential of about 1%, 1.5%, especially in the manpower cost. And 1% kind of saving potential we are foreseeing in the rest of the overhead line item.
So on an overall basis, there is a saving potential of about 4% to 5% for which we are also taking external help. We have hired a consultant, and they are helping us to drive all these initiatives to improve the efficiencies to reduce the cost for various line items. And that gives us comfort that structurally we can improve our margin from here by 4% to 5% in, say, 1, 1.5 years' time frame. That will allow us to reach to somewhere around 10% plus EBITDA margin level.
So how long do we think it will take for us now to implement or initiate some of these initiatives that we're talking about?
I think most of it we should be able to get in next 1, 1.5 years' time because we already initiated most of the things. So I think it will take some time to accrue the results. So the results will start accruing in a phased manner like maybe in a quarter or so, we'll start getting some advantage, some benefit from certain line items. Some will take slightly longer time, some will take slightly shorter time. But in the next 1, 1.5 years' time, I think most of this we should be able to get.
So maybe by '26, we can hit the aspiration of double-digit?
Yes, yes, yes. It will start reflecting in the bottom line.
In the current quarter, we reported about 4.3% margins, and you're saying 2% is because of RM inflation. After that also, it seems significantly lower than where we were historically, say, same time last year or even in the previous quarter. So what else has led to the sharp decline in net margins?
I think that was the primary reason, and there is some incremental cost on account of hiring the consultant. So that has also been part of the overhead. So there is some impact of that. Barring that, it's a product mix change because, again, every product has a different margin profile. So the change in the product mix, there is some impact on the bottom line. So -- but nothing significant. There are some line items with a small, small percentage accumulating to this number. But large part of it was the material price, which is about 2 point-something percentage.
Understood. Just one bookkeeping question. What is the amount that for the consultant you said, which is leading to bump-up in our expenses? Can you quantify it?
So it is in the combination of fixed and variable fee. Some amount of their fee is fixed, which is accrued every month and some amount of fee is linked to the success with certain milestone. So fixed fees accrued on monthly basis. Variable will accrue once they achieve -- they hit the milestones.
Okay. The next question is from the line of Shubh Shah of RatnaTraya Capital.
Sir, Does the other income this quarter also reflect the incentives from the J&K? And if not, by when will this start coming in?
J&K incentive is not yet accrued. As a policy, we accrue incentives generally at the end of the financial year. If the benefit is linked to the sales threshold or something like this. So on a quarterly basis, we are not accruing any income on account of this J&K incentive. So that is not there in the financials what we reported for quarter 2.
Understood. By when would this start coming in?
So that is -- it starts from the first sales invoice. As per the policy, whatever GST is being in the invoice that will be refunded by the government as a part of incentive. So technically, [Audio Gap] so those conditions are being complied. Once those conditions are fulfilled, we will start accruing these incentive income in the other operating income. Hopefully, by March, we should be able to comply with the rest of the conditions.
The next question is from the line of [ Yash Tiwani ] from Aamara Capital.
So my question is regarding the ethnic segment, in our ethnic snacks for the Namkeen. So what is the growth or how much percentage on a Y-o-Y basis we are looking out for this thing -- or let's say -- and the second is how we are looking to take this to what percentage of top line in, let's say, the coming year, 2, 3 years, what is the target for the Namkeen as we are focusing on Namkeen pretty much. So how we are looking at it?
So yes, you are right that Namkeen has been one of the main space. It is not as significant as our Western salty space but owing to the nature of the industry and the structure of the industry today, we need to be kind of a significant player in the Namkeen subsegment of the overall salty space. As we speak, it is less than 1/5 of our overall contribution. We are -- as we speak, we are in the process of kind of identifying a few -- identifying and kind of nurturing a few killer products in that space. If you see even the Namkeen is subsegmented into a lot many other -- segmenting into the further subsegments of it, be it mixture, nuts, Punjabi Tadkas of the world. So we have got a significant play or a reasonable amount of play in terms of product offering that we offer in Punjabi Tadkas, in the peanut space or in Gujarat tasting. But we are still kind of in the process of customizing our mixture offerings, et cetera, which forms a significant portion of Namkeen -- overall Namkeen -- traditional Namkeen portfolio.
So to answer your question, what is it in terms of percentage contribution that we are targeting in 3 months, 3 years' time in the overall traditional Namkeen space, it will be a little difficult to kind of say, but it certainly would increase because the industry is heading towards that. And with addition of new products, which contribute significantly to the subsegment, we believe that the journey from here on, on an overall contribution level -- sales contribution level will be northwards only for traditional Namkeen.
Okay. So in this is FY '25 year closing, are we looking at any kind of growth in it? Or is it on a, let's say, somewhat flattish number for the Namkeens what we did in FY '24? How are looking at for the remaining H2 to close the FY '25?
So FY' 25, though the Namkeen is growing. So far, Namkeen, FY '25, we are growing and the growth trajectory will continue and further accelerate with the introduction of new products and price points that we have mentioned. It's already on the path of growth from FY '24.
As this was the last question for today. I now hand the conference over to the management for closing comments.
Thank you, everyone, for joining us on this call today. We look forward to interacting with you again. Thank you.
Thank you. On behalf of Prataap Snacks Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.