Britannia Industries Ltd (BRITANNIA) Q2 FY22 Earnings Concall Transcript

Britannia Industries Limited (NSE:BRITANNIA) Q2 FY22 Earnings Call dated Nov. 08, 2021

Corporate Participants:

Yash Bagri — Investor Relations

Varun Berry — Managing Director

N. Venkataraman — Executive Director & Chief Financial Officer

Analysts:

Abneesh Roy — Edelweiss Securities Ltd — Analyst

Avi Mehta — Macquarie Group — Analyst

Shirish Pardeshi — Centrum Capital — Analyst

Mangalam Maloo — CNBC — Analyst

Percy Panthaki — IIFL Securities — Analyst

Arnab Mitra — Credit Suisse — Analyst

Harit Kapoor — Investec — Analyst

Vivek Maheshwari — Jefferies — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Britannia Industries Limited Q2 FY ’22 Earnings Conference call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Yash, from Investor Relations. Thank you, and over to you, sir.

Yash Bagri — Investor Relations

Thanks, Peter. Hello, everyone. This is Yash from the Investor Relations team. I welcome you all to the Britannia earnings call to discuss the quarter two FY’21-’22 financial results. Joining us today on this earnings call is our Managing Director, Mr. Varun Berry; Executive Director and CFO, Mr. N. Venkataraman; VP of Procurement, Mr. Manoj Balgi; Chief R&D and Quality Officer, Mr. Sudhir Nema; and VP of Sales, Vipin Kataria.

Before I pass it on to Mr. Varun Berry, I would like to draw your attention to the safe harbor statement in the presentation. Over to Mr. Varun Berry with remarks on the performance.

Varun Berry — Managing Director

Good morning, everyone. So, let me start with the presentation, if you could just get to Slide number 3. So what we have seen this quarter is that the economy seems to be opening up, which is pretty evident from the COVID cases dropping dramatically from where they were during the second wave, and similarly business — various businesses resumption indexes are showing that businesses are back beyond where they were pre-COVID, so that’s the good part. However, all this is happening in a highly inflationary environment. Two things which are really driving inflation, one is the crude oil prices and second is palm oil prices, which is one of the critical ingredients for us. So, I’ll talk more about this as we go forward.

So our approach — next slide, our approach to the inflationary environment has been; one, obviously, if you look at the pressures, the pressures are coming as I said from palm and fuel, which is leading to increases in corrugated boxes as well as in laminates. What we have done is, we’ve — there is no substitute for price increases in an environment like this. So, we have actioned price increases, but the point is that when we do a price increase only a third of that is a direct increase in your MRP, two-thirds of that happens through grammage reduction, which takes a little longer period. So, we’ve actioned those and that — those will be falling into place as we go forward.

We will also double down on our focus on cost reduction, which is giving us, and I’ll talk about that in a little more detail as we go forward. And we’ve focused on discretionary spends which can be eliminated — to be eliminated because these are very difficult times. So that’s the approach that we’ve taken to the inflationary environment.

Now, coming to our results. So our performance, I would say has in the current circumstances has been fairly resilient. So if you were to look at the consolidated revenue on a year-on-year basis, it’s gone up 6% on a reasonably high base of last year and sequential growth is also 6%. And if you look at a 24-month growth number, it’s 18%. From a operating profit standpoint while you look at year-on-year, we’ve dropped 19% versus last year, which was really the peak for us. The first six months of last year were the peak for us as far as operating profit was concerned. Sequential growth has been 1% and at 24-month growth has been 14%. However, the positive thing in this whole story is that despite actioning pricing and obviously this reflects on the pricing power that we have in our brands, we continue to gain share and in fact this has been a period of very high growth as far as share is concerned. Last year, we’d seen tepid growth in share — market share, but this year we’ve accelerated that and we are seeing very, very good market share growth in this year.

Moving to the next chart, which is Chart number 6, which shows the 24-month — which shows the revenues. And if you look at the 24-month growth for the year, it stood at 21% with a very healthy sequential shift, which I’ve already spoken about. We continue to focus on our strategic planks. Now, we’ve spoken about these in the past as well. So innovation, well, it is a strategic plank, but this year because of COVID two coming, we had to prioritize some of these for later in the year.

Distribution and marketing also during that period took a little bit of a hit, but our rural focus has continued and we’ve made great progress as far as rural is concerned. Our cost focus continues and I’ll talk about where we are at on that. Other businesses, now the businesses who have done really well during this period and our sustainability agenda has gained a lot of momentum during this period. So coming to innovation, while some of the — some of the innovation ideas were deprioritized for later in the year, but we had launched the Milk Bikis, which is a iconic brand in Tamil Nadu in — as Milk Bikis Classic as it used to be 40 years ago, and that’s done extremely well because it’s nostalgia in Tamil Nadu and it’s doing extremely well.

We have launched a bridge product between snacks and biscuits, which is called Potazos and that’s doing extremely well. We are extending it Pan India. We also launched Treat Wafers Stix across the country. We also commercialized our facility in our Perundurai plant where we can produce these — produce flat wafers, as well as Wafers Stix, and we launched Marble Cake starting in the East and it will be flowing across the country as well.

From — next slide, please, 9 — Slide number 9. From a marketing activity perspective, while we kept our marketing activities fairly focused, but there were some very interesting campaigns. For Bourbon, we had three cricketers and it came out to be — and it was applauded by our consumers as well. So that’s doing quite well. Milk Bikis doodh roti ki shakti, which is — the protagonist is Pankaj — Pankaj, what’s his name, Tripathi, also continues to do very well. We’ve done a NutriChoice Digestive new campaign. We did a Jim Jam campaign which we exposed this quarter. So, there’s been a fairly good mix of marketing activities this quarter on biscuits as well as on cake. The Marie Gold startup activation for the third year running, it’s been very, very successful in the first two years, has also been started off.

Now, getting to our distribution agenda. As I said, we’ve done some really good work as far as rural distribution is concerned. As you all know, our share in rural is lower than what it is in urban and hence we keep doubling down on rural distribution. As you’ll see, we’ve reached 25,000 rural distributors, which is giving us a very good growth, which is evident from the other two segments in this slide, Slide number 10. So, what — on the focus states, the growth is outpacing the country’s average. So, we are 33% higher in the focus states. And if you remember, the focus states are the ones where you have a bulk of the country’s rural space, right. And if you were to look at rural, in rural we’ve gained 2.5 times the share that we’ve gained in urban. So both these are pointing towards our agenda working and we gaining more momentum in weak state as well as in rural.

Moving on to the next slide, which is Slide number 11. About channels, so what had happened during the pandemic, during COVID one as well as the second wave, was that we had seen a muted modern trade growth, so it had gone down below what we were seeing in traditional trade, but as we look at what’s happening in Q2 of ’21, ’22, which is the quarter which has gone by, again a modern trade has picked up and we are seeing almost a 10% higher growth in modern trade than what we are seeing in the other parts of the business.

We had lost a little bit of momentum because supervision will not possible, sales men were not able to go to the market. On our direct distribution agenda from 23.7 that we reached in March ’21., we had dropped to 20.8 in June, but we’ve started to pick that up and we should be back and beyond the number in the coming months.

Now the third plant which is driving an ecosystem of efficiencies. We continue to double down on this. You know the plants that we work on. Obviously, productivity, zero-based budgeting, reducing waste, and saving wherever possible and reducing distance to market. On these from — we have gained strength and we are six-times what we got when we started this program in ’13, ’14. So, it’s approximately INR250 crores of cost efficiencies that we are getting out of the programs that we are running.

On Page 13, we have seen some — even in our other businesses. So, we’ve seen sequential shifts across out of home consumption coming back, which is reflected through the milk shakes, etc., the lassi that we had launched. So, we are seeing that happen. We are seeing consistent increase in market share on commercialization of our Treat Stix’s as well as our flat wafers products. We’ve seen healthy double-digit growth in dairy basis, the milk shakes and the lassi products that we have. We have also seen — we’ve done a huge distribution revamp in our Middle East business, specifically in UAE, which is going to give us — which is starting to give us very good market share gains.

Nepal continues to do really well. In fact, a person who’d gone — someone that I know had gone to Nepal to the base camp off the Everest and they were saying that wherever you go you get nothing else, but tea and Good Day, so I was delighted to hear that. While I have not seen it myself, but that’s what they said. And similarly, Africa expansion plans are doing well. There are three countries that we are looking at seriously and we have already started manufacturing operations in two.

Moving to the next slide, which is Slide number 14, which is about sustainability. Now, as you know that we have issued our first sustainability report in August 2021 and the Dow Jones Sustainability Index scores are awaited. What we’ve done is, we’ve got the ESC metrics integrated into our management team here. Everyone owns these numbers. Some of the targets that we’ve taken for ourselves and very, very important targets. So, if you were to look at from a people perspective, we are looking at 50% women at our facilities by March 2024, which I think is fairly lofty, but a very, very good target to take. We have looked at more than one lakh beneficiaries to be reached through our Britannia Nutrition Foundation by next year.

From a resources standpoint, a 60% renewable electricity by March 2024, which is again a lofty target, but we are very, very excited about it. We are looking at removing plastic trays from our products by March 2023, which would mean 20 lakh Kgs of plastic being removed from our product. We are looking at water consumption to be reduced by 30% in our factories through recycling and reuse by March 2024 versus what it was in 1920. From a growth perspective, we are looking at reduction of sugar by 8% in all our products by March 2024 and 6% reduction in sodium, again by the same date.

From a governance standpoint, we are targeting second or third quarter in S&P Global CSA in food product sector this year. The three ESG policies which are to be released in the next quarter [Indecipherable] the human rights policy as well as the vendor code of conduct. So great progress here and we will keep you updated on how we are doing against these.

Now getting to the meat of it. So, let’s get to Page number 16. So, as you see these are the four major commodities that we consume. For us, now these are numbers which are internal to Britannia, flour is a deflation of 7%. However, if you look at the market, it’s a inflation. It’s a slight inflation is not a large inflation. We’ve been able to maintain our deflation because we’ve been buying at the right prices. Sugar is a deflation of 2%. Again, if you look at the market, it’s a inflation of about 2%, 3%. But what’s happening is that both flour and sugar from India are becoming — have got export parity. So, we’ve got to watch out and see how this stands out and how much export we see for these two commodities from India, which will definitely reflect in the pricing as we go forward. But these two have been reasonably good for us, where we had the pain is in RPO, where the market inflation is approximately 54%. While through some forward buying, etc., our inflation is 46%. And milk, which is at a inflation of 15%, but a bulk of the inflation is coming out of RPO for us, right.

And then, if you to get to Slide 17, it shows what are the other components of inflation that we are facing. So in that industrial fuels there is a inflation of 35%, freight which is basically diesel is an inflation of 20%. And obviously, the oil prices are leading to an inflation of approximately 20% for our laminate’s and there has been some waste paper issues, etc., plus shipping, international shipping has become very, very tight and very expensive, which is leading to an inflation of 46% for corrugated boxes.

So, that’s the story on inflation. But if you go to Page 18, that shows how inflation has hit this year. So, if you would look at the cumulative inflation which is reflected by the brown bar, the cumulative inflation in the last six-years is less than what we’ve seen this year in ’22 — in the full-year of ’22. So, that’s the quantum of inflation that we are facing. Now, obviously there are forward covers, there our cost efficiency programs and all of that we are working on. But in — in a situation like this, there is — there is no substitute for a price increase. So, we’ve gone ahead and we’ve implemented pricing. And as I’ve said in the beginning, one-third of our pricing is through MRP changes and two-third is through grammage reduction, which takes time because you’ve got to experiment, you’ve got to get the settings right of the machines, etc. So, it’s taken time, but the entire inflation is going to get covered through either cost efficiency programs or the pricing that we’ve taken by the end of this year.

And as I had said in the beginning, despite being the first movers on pricing, we continue to build our competitive landscape pretty well by gaining market share.

Now moving to Slide 19. So despite the inflation that we’ve seen, our consolidated operating profit is comparable to our pre-COVID levels. So, if you were to look at quarter one and quarter two, both put together they are approximately INR506 crore and INR507 crores, which is compared reasonably well to what it was pre-COVID. Yes, last year we had seen herculean task in terms of what we — what we’ve seen in terms of profit achieved was amazing. Now compared to that, it’s a drop, but pre-COVID we seem to be moving in the right direction.

Now getting to the final Slide, which shows the story on our quarter performance. So, if you were to look at quarter performance, it is — the numbers are there. So, net sales of INR3,554, operating profit of INR508, and the PBT and PAT thereafter. If you look at the year-on-year numbers, we’ve grown 6% on net sales, we are down 19% on operating profit, we are down 22% on profit before tax and profit after tax is minus 23%.

Obviously, there is a reflection of INR35 crore of income tax benefit pertaining to the quarter one of ’19, ’20, which was taken in quarter two last year. So, that’s why the PAT is looking much lower than the rest. But, if you were to look at the 24-month growth — 24 month is a reasonable growth and if you were to take away that INR35 crores here, actually PAT would be at a growth of 4% 4.5%. Is that right, 4%? It would be a growth of 4%. Now if you were to look at our year-to-date numbers similarly. On a 24-month basis, we’ve grown 21% on net sales, 27% on operating profit, 18% on PBT and [Technical Issues] PAT.

If you look at our profit from operations and all of these as percentages. Yes, in half year, we — we have seen a decline versus last year, but reasonably comparable to ’19, ’20 and with all of the pricing initiatives coming into play, we should be coming back to where we would like to be.

So that’s from me. Over to you for any questions that you may have.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss. Please go ahead.

Abneesh Roy — Edelweiss Securities Ltd — Analyst

Yeah, thanks, Varun. My first question is on the pricing dynamics. If I see [Phonetic] companies have taken high-single digit to double-digit kind of price growth and they saw inflation. In your case, it seems to be limited, and a related question is so you said you have taken one-third of the pricing hike by MRI and two-third by the [Indecipherable] If you could tell us two-years, three-years back when Parle’s market share are behind us. Now the gap is lower. Then also was it a similar thing in terms of one-third on MRT?

Varun Berry — Managing Director

Yeah. So, Abneesh. See this category is a lot price-driven. So, the price point to make a big difference. So, INR5 rupee, INR10 rupees in any case is is fixed, right. So, if you can make it INR6 rupees and INR11 rupees because consumers is shy away from buying that. So you have to do grammage reduction there. So, wherever you have around price point you have to do grammage reduction to take a price increase.

And yeah, things have always been like this. A large part of the portfolio has been on fixed price points. So not much has changed there, right. So, if that’s your question. There is not much has changed. What was your first question? I mean, sorry.

Abneesh Roy — Edelweiss Securities Ltd — Analyst

Essentially, why the grammage but cannot be a bit more because it’s a two-player industry. You and Parle dominate and volume growth also is not high. How will the players grow if so they don’t cut grammage in these kind of scenario. So, what is the issue in the grammage cut being slightly more higher?

Varun Berry — Managing Director

No. So, what we are saying is that we really take as much pricing as is required, right. So, if there is — so the inflation will be completely covered through our pricing initiatives, its just that why we mentioned that one-third and two-third was to just give you the pain of grammage reduction, it takes time, right.

So one-third of it was taken immediately. All you need to do is bring the price of 26 to 28, you just have to print the price it can happen in a [Phonetic] right. When you’re doing grammage reduction you have to do trials, you have to make sure, sometimes you have to reduce the size of the biscuit, sometimes you have to reduce the size of the package.

So all of that takes a lot of trials and takes a lot of time. And especially for products like cake etc., it takes a very long time because shelf life and bread has to be tested. So that was the only reason to tell you that number.

Abneesh Roy — Edelweiss Securities Ltd — Analyst

Sure. Varun, one follow-up here. So if I see you are one of the few FMCG Company in which gross margin pressure quarter-on-quarter, is there 119 bps. So, when I see your raw material chart RPO is down quarter-on-quarter and milk sugar are largely stable. Florida has gone up quarter-on-quarter. How is the competitive intensity gone up with Parle? Because Parle last one-off years has done because of COVID or do you think that could also reverse going? And if you could address quarter-on-quarter DM pressure?

Varun Berry — Managing Director

No. So from a competitive standpoint, we’ve only become stronger Abneesh. We’ve only seen a stronger show from us, right. So, we are not facing competitive pressure, I think, everyone’s doing what is required. Yes, we have taken the first mover, because we are market leaders.

So we have to be first movers on pricing. But despite that we have seen no pressures on market share.

Abneesh Roy — Edelweiss Securities Ltd — Analyst

Sure. My second and last question is on this news article Britannia to create post of your reporting to MD [Phonetic] and succession planning. Could you clarify on that? What exactly it means, because I think, half of your second tenure is still left, I wanted to understand that.

Varun Berry — Managing Director

Abneesh, there is — there is no ramifications of that. So that’s — that we will build talk about that when it comes to it. So, there was no — there was no official announcement or anything like that. And we will talk about that as we come closer to time. And I’m here, I don’t worry.

Abneesh Roy — Edelweiss Securities Ltd — Analyst

Yeah. Okay, Varun. And that’s all from me. Thanks a lot and all the best.

Varun Berry — Managing Director

Thank you

Operator

The next question is from the line of Avi Mehta from Macquarie Group. Please go ahead.

Avi Mehta — Macquarie Group — Analyst

Thanks for taking my question. I just wanted to clarify one bit. What is the understanding correct there margins should become better should improve from 2Q levels in 3Q and reached normality by 4Q? That’s what you’re highlighting because the price increased especially the grammage to extent is that understanding, correct? Sir.

Varun Berry — Managing Director

No, that’s absolutely correct. The other thing is, there is one joker in this pack, which is the inflation itself. So every quarter, we’ve been thinking of inflation at some stage stabilizing, but that hasn’t happened. So I guess, we’ll have to be nimble, and if there is a requirement. We will have to make sure that, we do whatever is necessary under those circumstances, if inflation goes up from where we are at, we might have to take a little more pricing. So, we’ll be absolutely nimble on that.

Avi Mehta — Macquarie Group — Analyst

Perfect. And just a follow-up on that, by normality, is this supposed to mean, the 15%, 16% EBITDA margin seen in the earlier years or would it be closer to the 19%, because you did highlight last quarter also that 19% is one-off. But should we kind of assume something in between the two, between the 15%, 16% seen earlier, and the 19%, is that the right way to look at normality?

Varun Berry — Managing Director

Well, the right way to look at it is that last year was something which probably will take us some time to reach. So, I would say, normalcy would be from where we were pre-COVID and beyond. Not where we were during COVID and beyond.

Avi Mehta — Macquarie Group — Analyst

Okay, sir. Somewhere closer to the pre-COVID levels is what you should attend [Phonetic]. Okay. Got it. And sir, the second question was just a bookkeeping on the ICDs. There is — it seems to be an increase from 1Q levels, is that understanding correct? And if yes, where is that primary source?

N. Venkataraman — Executive Director & Chief Financial Officer

So, ICD as of 30th September stands at INR505 crores which is…

Avi Mehta — Macquarie Group — Analyst

It was INR460 crores earlier.

N. Venkataraman — Executive Director & Chief Financial Officer

[Speech Overlap] INR470 crores in the last quarter, marginally higher.

Avi Mehta — Macquarie Group — Analyst

Okay. And is this in specific entity you would like to call out or is it just broad-based across the Group?

N. Venkataraman — Executive Director & Chief Financial Officer

No, it is two entities, which is Bombay Dyeing and Bombay Burmah only. It depends on the timing of repayment and timing of placement of ICDs buyers.

Avi Mehta — Macquarie Group — Analyst

Okay, sir. That’s all from my side. Thank you very much.

Operator

Thank you. The next question is from the line of Shirish Pardeshi from Centrum Capital. Please go ahead.

Shirish Pardeshi — Centrum Capital — Analyst

Yeah. Hi, Varun and Venkat. Good morning and Happy Diwali. Just two questions from my side. Could you spend a minute that you said in the press release that your weighted inflation is about 14%. So far whatever measures we have taken in the quarter, how much we have covered from this and what is growing now in the market?

Varun Berry — Managing Director

So, Shirish, the total annualized inflation is going to be approximately INR1,300 crores on annualized basis, right. And we will cover that entire inflation by the end of this year.

Shirish Pardeshi — Centrum Capital — Analyst

Okay.

Varun Berry — Managing Director

On an annualized basis.

Shirish Pardeshi — Centrum Capital — Analyst

So, is it fair to say that one-third would have been already taken — the price increases and cost measures, what you’ve taken is covered?

Varun Berry — Managing Director

So, in fact, everything is actioned, right. It just takes a little more time to implement it and that’s why it’s going to go towards quarter four, the completion of that. But everything has been actioned.

Shirish Pardeshi — Centrum Capital — Analyst

Okay. Just one follow-up on this cost control, what you’ve mentioned, that it has gone up by 6 times. Somewhere in the past, you mentioned a number of INR200-odd crore. Is that number is different, higher or lower for FY ’22?

Varun Berry — Managing Director

What is INR200 crores?

Shirish Pardeshi — Centrum Capital — Analyst

The cost containment or the efforts what you have taken in terms of cutting the cost?

Varun Berry — Managing Director

Yeah, yeah, yeah. So, cost efficiency programs, I just said, it’s approximately about INR250 crores now.

Shirish Pardeshi — Centrum Capital — Analyst

Okay. INR250 crore. Okay. My second and last question on the distribution front, in the domestic and also in the international. So, part one is that in domestic, you said that you’re pre-COVID level, but then you’ve also mentioned that your rural distribution — distributor points has gone up to 25,000. So, this is the direct distribution which you are undertaking or it is a re-direct distribution which you have counted?

Varun Berry — Managing Director

No, this is direct distribution. So what we do is that we have these rural distributors who cover small villages. they cover anywhere from 20 to 50 outlets per distributor. We provide them the IT infrastructure through a handheld, etc., so that we have control over where they go and what they service, and so that’s as far as our rural distribution is concerned. In urban areas, because of the COVID impact, we did lose a little bit of steam in terms of supervision and which we’ve spoken about, but we are confident that we’ll be very close to where we were pre-COVID and beyond in the next six months or so.

Shirish Pardeshi — Centrum Capital — Analyst

Okay. And could you spend a minute or two on the international business, what’s happening in Africa, any status? And you said Nepal last two quarters has done well. So what is it that we can expect as the contribution from Nepal for FY ’22 maybe ’23?

Varun Berry — Managing Director

So Nepal is a small business, it’s about — it’s just crossed INR100 crores, which is good because in a country where we were exporting product, now with a plant there, we have become market leaders and we are seeing very good traction for all of our products. And we haven’t even launched some of our products there. So we are looking at expansion plans as well. But finally it’s a INR100 crore business, but then that’s how we build our international business by building these small businesses across.

As far as the Middle East business is concerned, we had to take a step back to leap forward and the step back was that we had a master distributor in the UAE who was not able to give us the kind of distribution and the performance that we were looking at. They had got more involved with their logistics business and their distribution business was taking a backseat. So we have now gone ahead and changed our distributor. We’ve got a very, very aggressive and a very good distributor there. And in the last three or four months, we’ve seen we made some very good headway there. We had been losing share bit by bit in UAE, and now in the last three, four months we’ve seen share gains and we’ve gone to the level that we were at our highest share there. So that’s the good news there.

As far as Africa is concerned, we are not doing — taking the high capex route. We are not investing in our own factories. But we are looking at contract manufacturing facilities. We’ve already got two contract manufacturing facilities, one in Egypt and one in Uganda. And now we’ll look at how we scale that up and how we can use those facilities to even export to other African countries. So that’s as far as our Africa business is concerned. Does that answer your question?

Shirish Pardeshi — Centrum Capital — Analyst

Yes. Thank you. Thank you Varun and the team. All the best.

Operator

Thank you. The next question is from the line of Mangalam Maloo from CNBC. Please go ahead.

Mangalam Maloo — CNBC — Analyst

Hey, Varun. Thank you for the opportunity. From the conversation that you’ve had with everyone else this far and the conversation that you’ve spoken on the presentation, etc., it sounds like the worst of margins are behind the company and the best of demand is yet to come. Is that thesis correct? If yes, then what are the factors that can accelerate or decelerate this thesis?

Varun Berry — Managing Director

So, Mangalam, see, in today’s environment, I can’t comment on the demand. I think the demand for most businesses seems to be coming back. Right? But it’s a month-to-month, quarter-to-quarter change that we are seeing. However, I think there seems to be momentum as far as we can see currently. Yes, your understanding is correct. As far as margins are concerned, we’ve taken all of the measures and all of the actions that will get us back to where we would like to be. And if the demand scenario continues the way it has been in the last three months, then we should be in a very good place.

Mangalam Maloo — CNBC — Analyst

Ahead of festive season, did you not see any sort of momentum coming back in terms of demand as well and the new launches that you’ve done this year, a lot more Britannia product in stores right now and most of them on the premium end as well. So, how much does that account for as a percentage of your sales right now and going ahead?

Varun Berry — Managing Director

So our premium products actually have been doing really well. Frankly, Mangalam, we don’t do the bottom of the pyramid products. We have very little that we do of Glucose, etc. So to that extent, I think we’ve seen momentum on our premium products in the last three or four quarters and we are hoping that, that momentum will continue. What we are doing as a strategy is to look at some of our premium products to even fight with the value products, so with the right margins. So, Good Day and now Milk Bikis which is rest of India Milk Bikis. They are two products which are, while they are premium products, they are fighting all of the value products at the right price points. So, that’s our strategy. And hopefully, we’ll keep seeing traction on those as we move forward.

Mangalam Maloo — CNBC — Analyst

I mean, new products as a percentage of sales and how are they likely to be going ahead — the innovation?

Varun Berry — Managing Director

Innovation, what we target every year is about 5% of our revenue and but innovation for us is products, which has launched in the last 24 months. Products which have been launched, let’s say, three years ago fall off the innovation bucket. So, we look at about 5% of new products coming in every year.

Mangalam Maloo — CNBC — Analyst

Another word on the margin itself in terms of inflation, you said that you have gone ahead and taken a forward cover etc. What if the prices normalize because these are unprecedented times, then do you stand to lose that benefit by having bought forward contracts?

Varun Berry — Managing Director

It doesn’t seem like that one, Mangalam, it’s very clear that there doesn’t seem to be — we have seen very positive results till now, and it doesn’t seem that the prices are going to fall. We only got covers for another three, four-months till the end of the year. So I think, we will only benefit from that.

Mangalam Maloo — CNBC — Analyst

And I guess perhaps…

Varun Berry — Managing Director

When you do that, there is a chance that you could — because you’re using your judgement to do it. But this time, I think, our judgement is right. Venkat, do you want to comment on that?

N. Venkataraman — Executive Director & Chief Financial Officer

Yeah, no. I think, you said that right. And in the first three quarters, Mangalam, I think between the market inflation and our inflation, I think, we have been able to save almost about INR200 crores so…

Operator

Thank you very much. We’ll move to the next participant. The next question is from the line of Percy Panthaki from IIFL. Please go ahead.

Percy Panthaki — IIFL Securities — Analyst

Hi, Varun and team. Good morning. My first question again is on cost. Just wanted to understand, so first of all, very surprised that for the first time you have given some guidance on what price increases could happen in the next two quarters. And I think you are the first FMCG company to do so. But if I take your guidance, 10% kind of price increase going through in Q4, do you think the market construct enables you to take that kind of a price increase in the sense that earlier, let’s say, three, four years ago or whenever you had a cost inflation, at that time your margins were not sitting at such a high base and therefore the entire industry was okay to sort of pass on this benefit. But with such high margins in the industry, do you think that the competition might take a call saying that, no, we don’t want to pass on 10% kind of a price increase, and instead, let me try and focus on gaining market share or sort of — I mean something of that sort, which would make you uncompetitive if you really go ahead with your planned 10% price increase?

Varun Berry — Managing Director

No. So, Percy, the thing is that first of all, it’s not a guidance. We’ve spoken about it because it has been actioned already. Right? So in this quarter, we’ve actioned all of this. So we thought that, if we’ve actioned something then all of you need to know about that. So that was the first thing. Second, I think, what has happened over the years is that the margin table for the entire sector, entire industry has gone up and people have gotten used to making a certain amount of profit. And once that happens, then people are not bickering for a small piece here and a small piece there and I think we reached that stage of maturity as an industry.

So I don’t think, we will get back to a dog eat dog kind of a scenario as far as pricing is concerned. What we have seen, we have taken pricing, and in certain cases, competition has followed, certain competitors haven’t followed, but over a period of time, I think, the market leaders actions hold important for the entire industry. And what we’ve seen even in the past, while you’re right, for the last five, six years we haven’t seen too much inflation, but what we have seen in the past is that, if there is inflation and if we take the right price increases, competition usually follows. So I think it’s — the industry is at a very different level of maturity currently. And hence — I’m not a soothsayer so I don’t know how this is going to work out, but I personally think that this will pan out well for the entire industry.

Percy Panthaki — IIFL Securities — Analyst

Sure. Secondly, I just wanted to understand the mechanics of this price increase on the margin. So, this quarter with a 4% price increase, you clocked a 15.7% EBITDA margin. Now, with another 6%, this 4% going to 10%, mathematically, unless the cost inflates further, you should be at a 20% margin, with a 10% price increase. So where am I going wrong in this calculation, because you clearly would not sort of be comfortable with a 20%, right?

Varun Berry — Managing Director

No, no. So, see the quarter-on-quarter inflation is also there, right? So if you were to look at the kind of inflation that we’ve seen quarter-on-quarter, it’s quite a bit. Venkat, do you want to comment on that?

N. Venkataraman — Executive Director & Chief Financial Officer

No, absolutely, right. The inflation that’s going to happen in quarter three and quarter four have been factored, while — because some of these are covered through forward contracts. So we are reasonably clear about the Q3 numbers. So those have been factored and therefore like Varun mentioned earlier, the joker in the pack is really the inflation that’s going to be there in quarter three.

Percy Panthaki — IIFL Securities — Analyst

So, can you just give me one number as to what is the inflation between what you have actually experienced in the Q2 P&L versus what the spot prices are today?

Varun Berry — Managing Director

So I gave you the number. Let’s take RPO, the inflation was 54% but because of our forward buys our inflation was 46%. So that’s the kind of delta. It’s between, let’s say, on each commodity 5% to 8%, right, the difference. So, and once that cover goes off, then obviously prices will go up. So we’ve taken all that into account as we’ve looked at what kind of price increases that will be required. See, we were — when we started off, we did not realize that this inflation is going to be there for a very, very long time. As we realized that this is more of the norm for the future, that’s the time we decided to take a very clear call on what is required and then we took action on this.

Percy Panthaki — IIFL Securities — Analyst

Okay. Last question, if I may be permitted. Have you seen or do you expect to see any kind of down-trading in the biscuit industry?

Varun Berry — Managing Director

See, down-trading happened a lot last year, right? If you remember, last year during COVID, there was a huge amount of down-trading which happened. Will down-trading happen again? Very difficult to say. I personally think that with the economy opening out, with things looking brighter, there is a sense of fulfillment as far as people and certain consumers are concerned. So, in these kinds of times, when things are looking a little brighter, usually down-trading doesn’t happen. So my personal feeling is that this is not the time where we will see down-trading. But yes, we will see as we move through this time. We haven’t seen it in the last six months and we are hoping that we don’t see it in the future as well.

Percy Panthaki — IIFL Securities — Analyst

Okay. That’s all for me. Thanks a lot and all the best.

Operator

Thank you. The next question is from the line of Arnab Mitra from Credit Suisse. Please go ahead.

Arnab Mitra — Credit Suisse — Analyst

Yeah. Hi, Varun. My question was that this kind of a 10% price increase is happening after a very long time in the industry. As you cut grammage, do you expect the volume consumption in the category to go down as consumers may consume lesser, given that it is happening through a grammage cut or do you expect that dynamic to be laid up to higher volume? And the second thing is, if the volume growth does remain very tepid, let’s say, almost a flat number, will it be something which worries you or given that your market shares are doing fine, it’s okay to have this kind of a low volume growth for this period of time?

Varun Berry — Managing Director

No, so you’re absolutely right. We are going to see a period of low volume growth, not just for us but for the industry as a whole. But — and it’s not a great place to be. But considering the kind of inflation that we are seeing in the marketplace, there is no other alternative. So, I think we’ll have to take it in our stride. We will probably see a scenario of low volume growth for a year or so and then things will start to come back to normal.

Arnab Mitra — Credit Suisse — Analyst

Sure. And Varun my second question was on the non-biscuit portfolio. During the COVID period, you had taken a bit of a step back there because of obvious reasons, and now given the very high inflation those — do those things still remain a little bit on the backburner or do you see next three, four quarters, you going lot more aggressive on the new products, non-biscuit portfolio, I’m talking about?

Varun Berry — Managing Director

No. So, we will go very aggressive on that. So what we are doing even in the non-biscuit portfolio is we are actioning price increases there as well for most of our products and with that done, we will make sure that we put in all the right initiatives, whether it’s advertising or sales promotion, activation, etc., and we go aggressive behind our non-biscuit portfolio as well. But just to let you know, even in our non-biscuit portfolio, we’ve seen a very good momentum on market share.

Arnab Mitra — Credit Suisse — Analyst

Okay. Thanks. Thanks, Varun. That’s it from my side.

Operator

Thank you. The next question is from the line of Harit Kapoor from Investec. Please go ahead.

Harit Kapoor — Investec — Analyst

Yeah. Hi, good morning. So, first question was on the non-biscuit innovation agenda. So, over the last 18 months or so, that agenda has been partially derailed because of COVID and we’ve had the ambition to beat Uber [Phonetic] food. I just wanted to get a sense of the next six months, will we see, given the high inflation in biscuit and non-biscuit, some of this innovation agenda to get postponed to maybe fiscal year ’23 or the category-led innovations that we were looking at prior to COVID and the intent in some of these categories — these new categories, all that innovation starts to come back? So I just wanted to know the timeline on when we can see a higher push there?

Varun Berry — Managing Director

No, so we will start to see higher push in the next quarter or so. See, the innovation was not put on the backburner because of inflation, right? Innovation was put on the backburner because of COVID. Most of the innovation products are on-the-go products and hence, because on-the-go was out of fashion, that’s the reason why we put that on the backburner. But now with price increases all taken and the margin table moving back to normal, I think we will be looking at going aggressive on the non-biscuit portfolio and innovation portfolio.

Harit Kapoor — Investec — Analyst

Got it. Second question was on the distribution side. You’ve had a significant penetration gains on rural distribution. I just wanted to understand what could be the universe for this for you. Already at 25,000, do you see yourself now getting close to a steady state there where further expansion is unlikely? Will the focus be more on throughput, rather than addition? And this question is more from a maybe two, three year perspective.

Varun Berry — Managing Director

No, so that always is a balancing point. Throughput is important, but as I’ve said in the past as well, our share in the rural markets is 70% of what it is in overall, right? So we’ve got a much lower share in rural markets. So the first target for me is to make sure that we equalize the share in rural and urban, right? The difference between rural and urban share is huge for us, right? So for that to happen, there are — and there is no reason besides distribution for our rural share to be lower than urban. It’s our own inability to get to all of these villages and all of these areas where we have lower share. So, the target is really to equalize this and I would say it’s not going to happen in a hurry, but the way — the rate at which we are going, maybe in the next three years, we’ll have the same share in rural as we have in urban. So, I think with that objective in mind, our rural push will continue for a lot more time.

Harit Kapoor — Investec — Analyst

Okay. Thank you. Wish you all the best. Thanks.

Varun Berry — Managing Director

Yeah.

Operator

Thank you. Ladies and gentlemen, we’ll take the last question from the line of the Vivek Maheshwari from Jefferies. Please go ahead.

Vivek Maheshwari — Jefferies — Analyst

Hi. Good morning, Varun and team. First, a very basic question on Slide 18, where you have shown the price increases. So just to get it right, what you have essentially done is 10% price hike, of which 3% is explicit and let’s say, 7% is grammage? That 3% price hike is getting reflected in second quarter already, 1% is grammage, which will move up to 7% by exit. Is that understanding correct?

Varun Berry — Managing Director

That’s a very complicated equation, but yes, I would say, more or less.

Vivek Maheshwari — Jefferies — Analyst

So explicit price hikes, whatever you have had to take up, that you have done already, which is why the 4% number jumps up to 10%, right?

Varun Berry — Managing Director

Yes. So these — the rest have all these grammage reduction numbers that will come in Q3 and Q4.

Vivek Maheshwari — Jefferies — Analyst

Got it. Second, Varun, a few of your — at least the personal care peers have sounded a word of caution on rural with either AC Nielsen showing a deceleration or their own numbers by the exit, showing some kind of deceleration. Where — what is your experience in outlook on rural? I know you’re under-indexed…

Varun Berry — Managing Director

Our outlook is very positive. We’ve seen very good growths in rural and I think it’s not so much about the economy. It’s more about our ability to get — reach to those villages and distribute our products. So, we continue to be bullish as far as rural is concerned.

Vivek Maheshwari — Jefferies — Analyst

Okay. Got it. And last thing, I mean if I draw parallel with Marico’s Parachute, we have generally seen in high inflationary environment, Marico ends up passing on the hikes to the customers and there is an unorganized to organized shift which is in favor of typically Marico. Now, in case of biscuits, there are more than or there is more than one player, so let’s say, three, four organized, but the unorganized deal is also quite large. Do you think this — I mean if Britannia is facing this headwind, the unorganized will be far more impacted. Do you think this will be — the next 12 to 18 months could see actually the larger guys benefiting from a share gain standpoint?

Varun Berry — Managing Director

See, I can only talk about what’s happened in the last six months since the inflation became rampant. So, what you are saying has played out, right? So, the larger players have been gaining and the smaller players have been losing, right? So, you’re right. With our scale, we can get a lot better bang for our buck in terms of countering inflation, while the smaller players have a difficult time. So in the past that’s happened. I don’t know how it plays out in the future as well but we will make sure that we bring in all that’s required to give us the upper hand as we go forward, and as you know, 35% of the biscuit market is unorganized. So, we’ll try and see what we can get out of it.

Vivek Maheshwari — Jefferies — Analyst

Got it. Thank you and wish you and your team all the best.

Varun Berry — Managing Director

Thank you.

Operator

Thank you very much. I now hand the conference over to Mr. Yash for closing comments.

Yash Bagri — Investor Relations

Thank you everyone for spending time with us on the call. We look forward to interacting with you again.

Operator

[Operator Closing Remarks]