Britannia Industries Limited analyst Q&A

Thank you very much. We'll now begin the question -and-answer session. The first question is from the line of Abneesh Roy from Nuvama. Please go ahead.

Yes, thanks, and congrats on the volume growth. My first question is on the cheese business. So I noticed that you have mentioned on profitable growth. My specific question is, do you need to work further on the pricing aspect? Because I remember few quart ers back you had said the pricing premium is high for Britannia in cheese and you would like to reduce that. Where are we in terms of that? Second is, would you have a market share in cheese, because really that opportunity is very high given the kind of technology you bring to the table, the huge facility you have now, any numbers you can share with us directionally, how you see market share next year in cheese?

So, Abneesh, yes, pricing, we've taken a few actions as far as pricing is concerned. Now we are -- our premium is slightly lower, but we are working on seeing if there's any further possibility of us becoming more competitive. So that quest for pricing equality continues and that will also come with the efficiencies building in our lines because we've just commercialized our lines, we are still building the efficiencies. So, hopefully, over the n ext three months, four months, we'll be able to bring something more to the table. What was the other question, Abneesh? I missed it.

Share.

Share.

Market share on cheese?

The market share on cheese, we are very small, Abneesh. We -- it's predominantly -- we are number two in the industry, but we are in -- just in about double-digit numbers while -- so there's a lot of bunching at the bottom with low 2%, 3% share. So a lot of players are at 2%, 3% share. We are just about in double digits. And Amul is 6 times of our share. So that's the story as far as cheese share is concerned. So, yes, you are right, there is opportunity there. And we've got to look at now that with our tie- up with Bel and Laughing Cow, having an interesting brand to talk about, the product categories that we are in, the new innovation that we can bring to the table, our own factory with efficiencies and all of that put together, if we get everything right in the next three months to six months, there could be a lot of potential as far as the cheese market is concerned.

Sure. Thanks. My second question is on the demand side. So in the B2C in Q1, there were two headwinds and one tailwind for biscuit consumption. One was -- one headwind was the hot beverages consumption, which went down. A lot of Indians consume biscuits along with the tea and coffee. So did that suffer? Second one was hot out -of-home travel was severely impacted. So was your INR5 pack or INR10 packs impacted in any of the brands There was one tailwind also. Lot of election rallies. Of course, in election rallies, there is a good consumption of biscuits and snacks. So would you like to call out any of these either in terms of negative or positive, because 8% volume growth was a goo d number. And similarly on B2B demand, Varun, any insights, because that was a key focus area a few quarters back, QSR, restaurant, etc.?

Well, B2B demand, I didn't -- did I speak about that? Not for biscuits, Abneesh, but you're right. Yes, non-biscuits, yes, we're making great progress there. But biscuits, it's not a big part of our overall agenda, but still has been going up. You're right about hot beverages. Our products are consumed with hot beverages. And if -- it's a good point that you bring to the table, we've got to evaluate this and understand if there is any correlation there. Out-of-home, we didn't see any negative impact, although the growths are what they are, they're not where we would want to be. We would have wanted the growths to be at least 2.5 times what they are currently. And we are hoping that we'll get back to those numbers. Election rallies don't -- do not impact us that much, Abneesh. We've seen it in the past as well. It doesn't give us up or down in any way, and we sailed through those this year as well.

Thanks. That's all from my side. Thank you.

Okay.

Thank you very much. Next question is from the line of Avi Mehta from Macquarie. Please go ahead.

Hi, sir. Sir, with the marginal inflation that you have seen in commodity costs, how do you think -- could you share your thoughts on the FY '25 pricing growth? How do you see that?

Look, we might have to take a little bit of pricing, but it will not be what we saw in the past. If you remember in the -- for about 20 months or 18 months, we saw inflation of 22%. And that's what sort of gets us off track because those are the kind of nu mbers which impact consumer consumption, etc. So I don't see that happening. Even if there is inflation, it will probably be in the range of 4%, 5%. And to that extent, we will have to figure out which are the brands, which are the categories where we go ahead and take some pricing, if required.

Got it, sir. So, okay, so some pricing, but depending on how it kind of pans out, but it looks benign in that sense. Got it. Sir, on the adjacent businesses, I just wanted to check, would it be possible to share where do we stand at the EBITDA margin level now? And whether that is the focus, when you highlighted that there's a focus on consolidation in this category or that margin trajectory, something that we would -- I mean, your thoughts on that one, please?

We do not do a separate consolidation on an adjacency business level, but if you look at our overall margins, and I frankly haven't looked at EBITDA margins, but if you look at your net margins, they are reasonable. Cake and Rusk are in the double -digit te rritory. Rusk would probably be accretive to our overall margins. And bread, as you know, we used to be negative margins. We brought it to a stage where they are almost touching a double-digit margin. So that's a great achievement in a category like bread. And croissant, the gross margins are fantastic. We continue to invest the gross margins. The y are probably 25% more than what they are on our base category. Obviously, we are investing in that category and that's necessary at this stage because it's a fledgling category. And dairy is the one where we've made some investments. So there is need to look at EBITDA margins because there is depreciation there. But dairy is again in investment mode. We really want to make sure that we invest in this category and we start to see gains as far as our top line and our overall business is concerned.

Got it, sir. No, thanks a lot for this, sir. That's all from my side. Thank you.

Yes.

Thank you. Next question is from the line of Arnab Mitra from Goldman Sachs. Please go ahead.

Yes. Hi, team. My first question again was actually on pricing. So the deflation in pricing this quarter seems to be slightly more than last quarter. Correct me if I am wrong. And do you see that, any incremental changes here going ahead? Does this anniversarize very quickly? Or do you expect some more deflation in the coming quarters to continue?

No, there is no deflation really. What -- I think what you are alluding to is the fact that we have taken price rollbacks. So, basically, if you look at it, our rollbacks have been on for some time now, but now is the time to start to consolidate. We've do ne what we had to. There might be a few promotions here and there, but as far as rollbacks are concerned, we've done what we have to. As we were saying, we expect 4% to 5% inflation in the coming months on the back of flour and sugar and cocoa. So -- and if that happens, we will start to take slight price increases in the future.

Understood. Just a follow -up on this. So the carry forward effect of the year -on-year price decline that then you're saying should -- could continue even though there's no incremental price cut that you are taking or rollback price you are taking?

Yes. Yes, because of the base, because it's probably not in the base, you might have a slight difference in our volume growths and our revenue growths, but it will even out. The good news is that the volume growths are now coming close to double digits, and that's what's going to keep us instead as we go forward.

And one last question is the other operating income, there is a very sharp spike Y -o-Y, is there any bunching of PLI here and any sense of what could be the steady-state run rate here?

This is Ranjangaon, no?

Ranjangaon.

Yes. So in -- this is for our factory in Ranjangaon. So, as you know, that we are qualified as an ultra mega plant, but that was subject to us reaching a certain investment. And as we reach that investment, we got some benefits from the past -- past year. So that's what's coming there.

Thank you. Arnab, I'll request to come back for a follow-up question.

Sure.

Next question is from the line of Percy Panthaki from IIFL Securities. Please go ahead.

Hi, Varun. Recently, I saw your back snacks extruded Time Pass in shop in Bombay. So is this something recent because till now, I think it was a South India kind of launch? And any kind of views you have on how you want to take this forward?

This is in experimental stage, Percy. So we are doing some market tests, etc. So it's in that stage to figure out if we have a solid right to succeed. So, it's -- at this point in time, it's not like a rollout across the country or anything like that. As y ou know, we've put up two lines, one in Ranjangaon and one in the South in Bangalore. And both of these lines have very small capacity. We can do about 200 tons a month. And we are using these lines to do some experimentation, figure out what works, what doesn't work.

Varun, hasn't it been really too long for it to be in test phase, because it's been like five years plus since we first launched this product? So what is really holding us back here? The market opportunity is huge, and it works on distribution, and we are the kings of distribution. Whatever little contribution is required of a brand, that also we have. And I understand margins are lower, but it's incremental, absolute profit opportunity. So what is really holding us back here?

No, there are two or three things, Percy. One is obviously the outside opportunity. See, if you look at the outside opportunity, yes, the total market is large, but you look at the number of operators in this category. There are about 2,600 salty snack operators, right? And what I hear from the market is that all of the organized players have not been really gaining. It's the small operators who've been gaining because they are giving more grams in bag. And obviously, when you give grams in bag, you have no profitability. And so all those things need to be tested. The second is internal. The second is that internally, we've got different products, right. One is a product that sits in the shelf, which is biscuits and cake and rusk and croissant and all of that. And this is a product category which is hung outside, right. So it's an impulse category. And so our internal ability to do justice to that also has to be tested. I agree with you. It's taken longer than what it should have, but we don't want to do anything without really being 100% sure of success. So I do not worry about a little more time, but we have to be sure-footed. And if we are not sure-footed, believe me, I will not launch it. That also, I am very clear about.

My second question is on the margins. So, for the last several quarters, we have been clocking margins of about 19% plus. This quarter, we have come to about 18.2%, and that too, with some bunched-up one-off of Ranjangaon. So going ahead, what is the sort of margin, roughly, that we are targeting? Is it going to be a 19% plus number? Or are we at this 18% to 18.5% kind of number for the next four quarters to eight quarters now?

That's a very pointed question, and I can't give you a pointed answer, but let me give you what I feel. I think it's the time to drive top line right now. We, as a FMCG industry in India, have suffered the top line growths that are required. And I would not mind if my margin stays at 16% rather than going to 18%. But it's important that we drive top line, and I'm not saying that we will compromise on margins. We will do whatever is necessary to get margins as well. But the time is to drive top line.

Okay, sir. That's all from me. Thanks and all the best.

Yes.

Thank you. Next question is from the line of Mihir Shah from Nomura. Please go ahead.

Hi, sir. Congratulations on good volume performance. Thank you for taking my question. Sir, on the pickup on volumes, I wanted to check if there is any element of higher -- higher than usual in-home consumption that you are seeing due to extreme heat wave? And also with the price rollbacks that you have initiated, do you think these volumes can sustain an inch up further as we were thinking about, or these numbers can probably go down from here?

No, I wish I had the ability to predict this, but in a country like India, getting to high single-digit volume growths should not be a big issue at all. And we've been seeing it for years and years. It's just that we've had a lull for about two years, thre e years, but -- and that's because we've taken a lot of pricing because of the high inflation. So the objective will be to continue to see volume growths in our business and we will do whatever is necessary to be able to get there.

Perfect, sir. Got it. Sir, secondly, I wanted to check on the other expenses bit. It seems that the costs have gone up. Is this largely due to higher ad spends or are there any other elements to it? And historically, other expenses in 1Q are usually lower as an absolute basis versus the remaining part of the year, which indicates that if other expenses inch up for the remaining part of the year, then the margins can come under pressure. So how should one think about this line in the margins on operating level?

No, we will -- see, it's not -- we don't balance out our ad spends by quarter. So, there are -- this is our high quarter, right? So we did spend a little more than what was budgeted and that will get evened out as we go forward. But yes, essentially, it was ad spends that we spent on and I think we were able to get a bang for our buck during this quarter with good volume growths.

Perfect, sir. Understood. Sir, if I can ask one bookkeeping question on the other operating income side, should we expect INR120 crores to sustain or INR60 crores to -- roll back to INR60 crores of the PLI benefit? Maybe Venkat can give some indication.

Yes. So let me answer it this way. Like Varun mentioned, Ranjangaon facility will start being counted as an ultra mega facility starting April this year. So which means the incentive that we will be eligible for will be higher. And also the units in UP and Bihar will start getting the benefits. So I'm not answering you the question directly, but these are the two -- three things that are going to help the -- help improve the operating income going forward.

Thank you very much. Mihir, I'll request you to come back for a follow -up question. Next question is from the line of Binay Shukla from PhillipCapital. Please go ahead.

Thanks for the opportunity. Question is on focus market. Things you have been emphasizing a lot in your focus market and which is growing much faster than the company's overall growth. And I also do understand that the growth is mainly driven by the distri bution, expansion or investment behind the brand building. So my question is how much there is a still gap between you and number one player in the focus market in terms of market share now versus three years back? Second, what was the key learning for you from your focus market and those success you wanted to replicate in your weak market? So when I say weak market, I mean where you are number two or number three player. And third and last question is what percentage of revenue is coming from your focus market, because that will give us some little direction from the future growth perspectives, given the rural recoveries on the track and the ongoing RTM 0.2 initiative is going on? Happy. Yes, that's all.

It's a very loaded question with many sub-questions in it. I'll try and answer it as much as I can. So our focus market performance has not been great. Let me put it straight across. I had expected a much better performance there. And the reason for that is that the rural markets are still coming out of that phase where rural was lagging urban. And there's a little bit of downtrading happening in some of the markets as well, where people are going to the lowest common denominator and the cheapest product in the markets. So, our performance this quarter, as far as the Hindi belt is concerned, has been average, I would say, and the endeavor will be to take it to above average as we move forward. What do the Hindi belt markets contribute to our business? Vipin, do you know?

Yes. So, it will be 15 -odd percent. The other clarification I just want to also put on the table is that, see, there are shades of these focus markets. So in some focus markets, we are doing fairly well, whereas wherever there is a large value resurgence, that's where the struggle is and that's making the performance average. So our average contribution is about 15-odd percent. Over the last three years, five years, we've been growing at 1.5x. So the salience of these focus markets are going up every year.

Yes, going up every year and -- but the resurgence that we expect has not happened this year, which we are working towards getting. And 15% Vipin and what is the industry contribution?

Industry contribution will be almost a third because these are large markets like UP, MP, Rajasthan. So, it will be...

Yes. So that's the point. The point is, for us internally, it's 15%. For the market, it's about 35%. So we have a lot of ground to cover.

Sir, how much -- there is a still gap between you and number two player in terms of market share now and when I look at three years back?

No, very big. See, we are not doing a big bang strategy where we are saying that we'll go from a 10% share to a 40% share. That's not going to happen. It's a slow and steady gain. As you've seen, we've been gaining about one share point a year for the past eight years, 10 years. So we are now at about, let's say, close to 18% share. And the number one player is still at about 50% share, am I right? Or 40% share?

Yes, yes. So the number one player is 3x our RMS. And we would be at that 17%, 18% share, but I think that's the headspace. So that's the opportunity that we've got a very large headspace between us and the large competitor. And like you said that there are a lot of these markets where we are number one and number two. So we are picking up learnings from these markets and trying to improve our distribution, our assortment, our marketing effort to go up. The other thing which Venkat also spoke about is the investment in these states, which is, let's say, Barabanki factory. And that will help us giving more competitive assortment to the market. So I think it's a long -term gain. I think last five years, seven years, we have done well. I think this is a phase like Varun is saying where we have stagnated a bit. But I think we are fully on and focused on that agenda. And I think next three years, five years, we will certainly narrow the gap.

Understood. Last question on biscuits side. Recently a north district -based biscuit company highlighted that they are experiencing a higher competition from the market leader through the aggressive consumer promotion. So my question is that the aggression was restricted to north and west market only or is it also -- we have done consumer promotion in eastern market? Because what I have observed that two strong regional brands called Anmol Industries and Bisk Farm, who are around INR1,700 crores to INR1,800 crores revenue size and they are also expanding their food field in eastern belts. So I am just little keen to understand about market share in eastern belts. So have we witnessed any marginal market share loss or is it more or less given the biscuit industry is growing at the same pace in eastern market?

No. So, see, the growths are about the same across. I would say the growths have been anemic for some time now. What our strategy is, our strategy is to become -- act like a nimble regional player. So if there is something that's required in a certain region in terms of br and, flavor, whatever else, pricing, recipe, we are ready to do all of that to make sure that we cater to that region and that's holding us in really good stead. Now, the companies that you are talking about, some of these regional companies have been exte nding their footprint across the country, and hence their growths might look big at this point in time, but overall, the regional -- in the regions that they had started, the growths are pretty much the same as what you've seen for us.

Thank you. Binay, I'll request you to come back for a follow-up question. Next question is from the line of Kunal Vora from BNP Paribas. Please go ahead.

Yes. Thanks for the opportunity. First question is, if I look at the pace of distribution expansion, it seems to have slowed down. Earlier, you were expanding your direct reach rural distributors by double-digit every year. Now, that number has come down t o like mid to high single -digit. So is the low-hanging fruit behind? And like how should we think about the volume growth in that context over the next three years to five years, that is what we've seen in the recent past?

No. So, as we just said, there is still a lot of opportunity as far as distribution is concerned, especially in the Hindi belt, where obviously, we are lagging our competitor big time and especially in rural. So while you're right, it has come down and the focus -- so we -- as we've always said, strategy is depth in urban markets, width in rural markets, right. We will continue on that strategy. We will -- now, what we are doing with Bain is to make sure that we build that depth in our urban markets. However, having said that, width in the rural markets strategy will continue to make sure that we become more and more salient in our weak areas. And also in some of our strong areas where we have opportunities in rural, in small towns, etc., that strategy will continue. Vipin, do you want to comment?

Yes, sure. Okay. Vipin again this side. So, like Varun said, see, so, while numeric distribution is important, I just want to also apprise everyone on our weighted distribution. So in our urban markets, our weighted distribution is almost 95%. So we reach all close to 95% of the weighted outlets. At an overall company level, we are at about 90% weighted distribution. And therefore, going forward, it's going to be more about extraction from the right type of outlets. And therefore, this entire project that we are doing with Bain & Co., which is about identifying the ultra high potential outlets and how do we sell the relevant range, how do we sell more or diverse categories. On the rural, while the width expansion will keep going on, especially on the focus market because like we have a large gap in our market share, there is also an immense opportunity on distribution. And therefore from a distribution perspective those focus markets are very critical. On the non-focus markets, what we are doing is we are going and populating and extracting a lot of priority markets in rural because that is where a lot of categories sits. So I think today it's more about horses for courses and not about just keep increasing the distribution and therefore the relevant set of geographies, you will see width increase in metro, in the large markets. Even in rural, there is an extraction opportunity and that's what we are planning to do going forward. Thanks.

Understood. Second and last question is last quarter, you had mentioned that you'll target double- digit volume growth in second half and there could be 3%, 4% pricing contribution. Going by the discussion on this call today, it looks like pricing could eve n be slightly negative and you are aspiring for high single -digit volume growth. Have I understood this right? And if you can please clarify how you're thinking about second half?

See, the revenue growth depends on how we are cycling because last -- from last year onwards, we've taken quite a bit of price decreases. But having said that, we have come to a stage where we are now getting double-digit volume growths. Towards the end of the last quarter, we were almost at -- we were at actually double-digit growths. So we are in a position for that to happen. It's just that last year's base will put us below our revenues of last year. But as we start to get to the next quarter, we will have to also evaluate some pricing actions because of the inflation that we are see ing. So very difficult to say at this stage how the volume price equation will work. But I would say a quarter from today, it will probably even out and we will start to see volumes almost be equal to the revenues.

Understood. That's it from me. Thank you.

Yes.

Thank you. Next question is from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.

Yes. Hi, Varun, good morning and thanks for the opportunity. I have a bigger question. On Slide 9, you have given the DMS application and you did some -- mention that some pilot which you are doing. So, quantitatively, after implementation of this Bain project, what is the materialistic change we have seen? Is the SKUs per order has gone up? Is the p acket growth -- some indication, if you can help us to understand?

Yes. So SKUs have gone up. Also, the -- and that's because the salesman is spending more time with the customer in the market. And that's our biggest objective. And I'll hand over to Vipin in a second. But the biggest objective that we have is to have dept h and that means having more SKUs in the outlet. And that's what we've worked on as a part of this. Go ahead.

Yes. So, Shirish, there are two parts to the slide. The left side is done internally. For the last five years, we've been building this backbone, which is right from our distributor management system to handheld, which is today AI -driven, then we've got a continuous replenishment system, which connects to the depot. And then there is geo-tag and geo-fence. And then even in Rural, what we have done is that more than 60% of orders are today captured through the digital app, right. So this is what we have done internally. Eight months, nine months back, the feeling was that we have done this internally, but we need to get this outside in perspective. And that is where Bain & Co. was onboarded, right. So, we -- so like Varun mentioned, previously it's only been two months, we have started slicing the data. We are discovering that there is a lot of scope, especially in the top end of the book, and the pilots have just started. So, today, no shift attribu table to this new project has come. What we are saying is that in this quarter, next two months, three months, we are piloting different concepts and probably the tangible gains will start coming in quarter four of this year or quarter one of FY '26. So right now this is -- because this is a very large project, there is a lot of data, there's a lot of market types. So the next two months, three months is when we are doing a lot of pilots, testing out what's the concept and then blueprinting, and then we'll be the phase of scale up and getting the tangible benefits.

Vipin, his question is on tech -enabled sales transformation. His question was on that, that ever since you've done that, what are the -- what is the impact that you've seen on the business?

Yes. So on the left -hand side, like I said, Shirish, so there are tangible gains. One is what you can see is that close to two-hour of market working has gone up and that impacts the extraction from the outlet as well as increase in the number of lines or number of categories. What it also does is that it basically takes out any kind of corruption in the system. So a salesman cannot be a ghost salesman. He has to go to the market to pick orders. The entire distributor management system basica lly makes sure that we have got the right stock and therefore the out -of-stock instances are reduced. And all of these are fairly quantifiable, and we have got robust dashboards and tracking mechanism to make sure that all these sales and distribution effi ciencies or KPIs move northwards every month.

Sorry?

There was some announcement that we have made some further acquisition in the Ranjangaon. So...

Acquisition? No, no, no, that's solar power. That's nothing to do with dairy.

I'm only saying that there is a lot of effort which we have put in, in dairy business. So in INR4,100 crores, what could be the contribution of dairy because you said you wanted to achieve around 10%. So where we are in that journey? And maybe specifically on the drinks portfolio, what would be the contribution and cheese, if you can split?

So, drinks, we will end at over INR200 crores, maybe INR220 -odd crores this year, which is, I would say, reasonable. Cheese growth and cheese business, what is the total cheese business, Venkat, this year?

This coming year?

Coming year.

It will be an upward of INR250 crores.

So cheese will be about INR250 crores, which is very small for that category, although that category is also not very large. But we can certainly do better there. Drinks is also crossing INR200 crores, INR220 crores now. So both these categories would be a bulk of our dairy business today, which will be about what, INR700 crores. So our total business -- dairy business would be over INR700 crores, out of which cheese and dairy put together would be about INR460 crores, INR470 crores.

This is your aim to deliver in '25 or this already has happened?

No, that's the run rate that we have currently.

Okay. Okay. That's really helpful. And maybe if you can say that, what is the gross margin we are at this time because you mentioned that milk prices are up. So maybe if you have a ready number, what milk price procurement we are doing now?

Gross margins are pretty much in line with our overall gross margins. It's just that the investments and the depreciation, which is looking at a lower net for us. But our gross margins are pretty much the same. Slightly higher, in fact, slightly higher than our core business.

Thank you, Shirish. Ladies and gentlemen, we'll take that as the last question. I will now hand the conference over to Mr. Mayank Mundra for closing comments.

Thank you, everyone, for spending time with us on this call today. 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 and you may now disconnect your lines. Thank you.