Britannia Industries Ltd (BRITANNIA) Q3 FY22 Earnings Concall Transcript

Britannia Industries Limited  (NSE:BRITANNIA) Q3 FY22 Earnings Concall dated Jan. 31, 2022

Corporate participants:

Mayank Mundra — Executive Assistant to Managing Director

Varun Berry — Managing Director

Vipin Kumar Kataria — Vice President – Adjacent Bakery

N. Venkataraman — Executive Director & Chief Financial Officer

Analyst:

Abneesh Roy — Edelweiss — Analyst

Avi Mehta — Macquarie — Analyst

Percy Panthaki — IIFL — Analyst

Shirish Pardeshi — Centrum Broking — Analyst

Nitin Jain — FairView Advisory — Analyst

Harit Kapoor — Investec Capital — Analyst

Jaykumar Doshi — Kotak Securities — Analyst

Manoj Menon — ICICI Securities — Analyst

Chinmay Gandre — Reliance Nippon Life Insurance — Analyst

Presentation:

Operator

Ladies and gentlemen. Good day and welcome to the Britannia Industries Limited Q3 FY’22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Mayank Mundra. Thank you, and over to you, sir.

Mayank Mundra — Executive Assistant to Managing Director

Thank you. Hello, everyone. This is Mayank from the Investor Relations team. I welcome you all to the Britannia earnings call to discuss the financial results of Q3 ’21-’22. Joining us today on this earnings call is our Managing Director, Mr. Varun Berry; Executive Director and CFO, Mr. N. Venkataraman; VP Procurement Mr. Manoj Balgi; and Chief Marketing Officer, Amit Doshi.

The analyst deck is uploaded on the BSE website for your reference. Before I pass it on to Mr. Varun Berry, I would like to draw your attention to the Safe Harbor Statement in the presentation. Over to Mr. Varun Berry with remarks on the performance. Thank you.

Varun Berry — Managing Director

Good morning, everybody. I hope all of you are keeping safe in these completely unprecedented circumstances. Now getting to the deck, let me take you straight to Page number 3 which gives the highlights of our performance for the quarter. So, our consolidated revenues on a year-on-year basis grew by 14% and 24-month growth was at 20%. Operating profit however dropped by 13%. On a 24-month basis, this was positive 7%.

We continue to make progress on our market share. In fact, the delta between us and the number 2 player widened this year and this quarter. So, moving onto the next slide which again shows you the strategic planks that we work on. These have been consistent, so we’ll not drain the slide because you are aware of what we are doing. So, getting onto the first plank which is our distribution and marketing, some very exciting stuff here. So the first one, if you see on the left-hand side is a product called 50-50 Potazos. We’ve done a national scale up of this. It’s a bridge product between a biscuit and a salty snack and we have — we are now running at a run rate of INR70 crores on this product. We’ve got a very interesting advertising as well for this and that seems to be giving us, not just quarter-on-quarter, but a month-on-month growth as well on this product.

The second one on this page is the Milk Bikis Atta which has also been doing extremely well. We are now at a run rate of approximately INR400 crores on this. We used to be predominantly a South Indian brand with most of our revenues coming out of Tamil Nadu and Kerala. So this run rate that I’m talking about is not the two states that I just mentioned but outside of these states. So, it’s becoming a pan-India brand and it’s giving us a great response from all of these states.

And then we have certain other products we’ve advertised this quarter. So, the Layer cake, the Cream Cracker, Cream Cracker by the way is doing extremely well. Tiger Crunch which we sell in a very few states about 7 states but again, all of these high double-digit growth. The Tiger Crunch is at a run rate of INR300 crores today and similarly other products which are on this slide, the Chocolush, the start-up program on Marie and we had some key promotions biscuits as well as cakes.

And now moving onto the next slide which is about our second plank which is driving efficiencies in distribution. You know, every company which has reported results has spoken about a slowdown in rural especially for the FMCG products. However, we have seen no slowdown as far as rural is concerned. We continue to build on our distribution in FMCG and our — in fact our market share growth in rural is two times what it is in urban. So, we continue to make progress. We continue to grow our business in rural areas. Our direct reach agenda did take a little bit of a setback during COVID but September onwards, we are once again on this program to build direct reach and we reached, in December we reached almost 22 lakh outlets.

The next slide which is on our cost efficiencies across functions. So, on manufacturing in the last 7-8 years, we have built this 7.5 times. The clients are the same and energy efficiency, where we have both power and fuel. And as far as fuel is concerned, we are now looking more and more at our sustainable fuels. So, we are looking at solar, we are looking at wind and that agenda is moving very well and giving us efficiencies as well.

Second is on automation which reduces our labor costs and the third agenda really is on the productivity and efficiencies within our plants. So, all of these have moved well and as a result of that we have seen the kind of efficiencies that I’m reflecting on this chart. The second one is on material. The material efficiencies have also gone 5 times what they used to be in 2013,’14. The various planks here are also pretty familiar to you. So, the reverse auction process. There are some forward covers, localization of procurement near our factories and packing material efficiencies, tray removals and also corrugated boxes and bringing some efficiencies and standardization to those. So, those are the kind of efficiencies that we are looking at as far as material is concerned.

And then finally, moving on to distribution which has also gone 4x from where we were in ’13,’14 and the pillars there really are distance reduction, truck utilization and reverse auction for transportation rates. As a result of that the total efficiencies that we’ve seen are 5.6 times what they used to be in the year ’13,’14.

Moving onto the next slide which is on Good Day and we’ve recently relaunched a Good Day where we’ve got every pack carries four different types of biscuits which have four different smiles on them. So, there are multiple smiles and every pack which is a very, very exciting proposition and we’ve taken this with the approach of 360 degrees. We are looking at a print campaign. We’ve got digital, we’ve got outdoor and we’ve got new TVC which is doing well. So, we are very excited with the position that we’ve taken on Good Day.

On the adjacency businesses, again, we’ve seen very healthy growth with consistent margin delivery on Bread and Rusk cake because it’s on the go. It’s not done as well but it’s a matter of time as we move forward to normal life. Our dairy drinks has grown two times this year. Our local operations in the International business in Uganda and Egypt have started and are scaling up. We have seen a strong growth in cash in the Croissant in the present markets. And I’m happy to say that we are almost there with the new product. The design has been finalized for all-India launch which should happen in a quarter or so and we’ve attained product superiority at a very high level of confidence against competition. So, this national launch should probably happen in the next financial year.

Milk collection for our dairy factory has gone up almost two times from 35,000 to 60,000 liters per day and we’ve also increased the number of farmers from 1500 to 2500 who are providing us the milk. Nepal continues to grow handsomely with very healthy margins.

So, moving on to the next slide which is slide number 10 which is our sustainability agenda. So, as you know that we are working on 4 pillars; people, resources, growth and governance and we’ve taken targets for ourselves in each one of these pillars. So, the first one on people. We’ve taken a target of taking 50% women in our facilities which are 15 factories that we have. We employ over 17,000 workers in these factories and as of date 42% of these workers are women. Our target is to take this to 50% and this 42% also we’ve achieved off late. So, we are tracking very well versus this target.

The second agenda there is about our Britannia Nutrition Foundation and the beneficiaries. We have achieved our target there. We have 1,15,000 beneficiaries of the products that we provide to malnourished children and women. So, we will keep scaling this up as we go forward. The second agenda is on resources. As I was talking to you about energy, 60% renewable energy by March 2024. We seem to be on track on eliminating 20 lakh kilos of plastic trace by March 2023. We are on track on that as well.

Water consumption to be reduced by 30% through recycling and reuse by March 2024. Again, we are on track on that. On the growth agenda, 6% reduction in sodium again on track, 8% reduction in sugar by March 2024, clearly on track on all of these targets that we’ve taken. On the governance front, we are targeting second or third quartile in the S&P Global Corporate Sustainability Assessment Index in the food products category this year. We’ve made great progress there. As you can see from the comments on the right hand side, current year Dow Jones Sustainability Index rating has gone up to 37 which is three times what it was earlier. So, we’re making good progress there as well.

We’ve rolled out 3 ESG policies which is the Sustainability Policy, the Human Rights Policy as well as the Vendor Code of Conduct. We’ve also got the ESG metrics integrated into our — the top teams key performance indicators. So, and just going back to the comments on this slide. We are looking at– we are already at third position amongst FMCG peers in India from a sustainability index perspective.

Moving on to page number 12 which shows our revenues. So, our revenues are at INR3,531 crores which is a 14% growth versus last year and if you were to look at the 24-month growth, it’s at 20%. Now if you look at what’s happened to commodities on page — on slide number 14, you will see that every commodity has moved up. So, if you look at wheat prices they are on a uptick. Sugar prices also from where they were in the second quarter of ’21 are on uptick. Crude prices, you all are aware of where it’s going and palm is on a complete boil. This is the international picture.

Now coming to our own story. So if you were to look at where we are at. We’ve had a quarter-on-quarter inflation which is third quarter compared to second quarter of 4% and a year-on-year inflation of 20%. So, inflation has been the highest that we’ve seen in a very long time. Flour, quarter-on-quarter has been a 6% inflation. Sugar, quarter-on-quarter has been a 5% inflation. RPO, quarter-on-quarter has been 3% and year-on-year has been 45% and similarly, milk quarter-on-quarter inflation of 5%. So. basically why are we showing you the quarter-on-quarter number because just to make you understand that we did not estimate each quarter to move up so sharply and our entire agenda was based on what we had estimated inflation to be but that has surpassed our expectations by a fair margin.

Now moving on to the next slide which is slide number 16. If you look at industrial fuel, there is a quarter-on-quarter inflation of 18% on industrial fuel and a year-on-year inflation of 57%. Freight and diesel again on a year-on-year basis is 24% while it’s flat on quarter-on-quarter. Laminates, again, there is an inflation of 21% year-on-year and even on a quarter-on-quarter basis, it’s moved up by 1% and similarly, corrugated boxes while there has been a slight correction but year-on-year inflation is at 39%.

So, what is our response to these inflationary pressures that we are facing? Clearly three. So, one is in the area of value creation for consumers which is controlled discretionary spends, cost efficiency programs that we run very successfully for almost nine years now, and third is obviously there is we have to take price increases because there is no way that with this kind of inflation the first 2 pillars will be able to help us meet the inflation equivalent numbers. So, on the control discretionary spends, we’ve done– we’ve really focused our A&P spends. We’ve controlled– rigorously controlled our overheads and we have leveraged our fixed costs in every which way we could.

The cost efficiency programs are doing extremely well. We will beat our target for the year by a reasonable margin. It’s in the area of accelerated programs in every function that we are running as well as the IT transformation project that we are — which we have taken up last year. Price increases, we have taken judicious price increases and we have taken them ahead of competition because we are the market leaders. Onus is on us to lead the market.

Getting to the next slide which shows the material inflation quarter-on-quarter. So, on a cost base the material inflation was 4% in quarter 1, 14% in quarter 2 and in quarter 3 it was 20%. So the price increases that we’ve already taken, we took a 1% price increase in Q1. We took a 4% in Q2. In Q3, we’ve taken 8% price increase and we plan to take a 10% price increase in Q4.

Now, the issue is that what — the price increase that we’ve taken in Q3 are only taking care of the inflation in Q2 because if you look at the commodity base, it’s about 60% of the total cost. So, 8% price increase does take care of a 14% inflation but in Q3, we have seen further inflation happening and that’s what we’ve got to address. No one could have estimated that the quarter-on-quarter inflation would be so high.

Now coming to the next slide which is on the key financial lines. This is our consolidated report. So, if you want to look at Q3, our net sales as I’ve already said 14% growth on a year-on-year basis and a 20% growth, 24-month basis. Similarly, operating profit minus 13% and 7%. Profit before tax minus 18% and 2% and profit after tax at minus 19% and flat versus 24 months. And similarly on the right hand side, these are the numbers for YTD for the three quarters of this year.

If you look at the table at the bottom which gives profit from operations So YTD, we are at the pre-COVID levels of 14.4%. And similarly, on profit after tax as well. So, that is the presentation for me. Very happy to open the house for questions.

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 — Analyst

Yes, thanks. My first question is on two of your adjacencies. So when I see the milk drink that has become double and also sourcing of milk also almost has doubled. So, is this more of this sourcing capability which is required or sharper pricing? And second is on cake. So, cake you have said because of travel. It has got impacted. In Q3. most of the travel was fairly normal. The other companies have called that out. So, cake is there any other issue? It’s a tougher category, I understand, but what will make cake come back to good growth.

Varun Berry — Managing Director

Yes. No, so Abneesh the point is that the milk drinks, there is no connection with the milk that we collected because as of now, it’s all about sales and distribution and marketing on the brand and that’s what’s given us the results that we’ve seen. The milk that we are collecting is being given to our contract packers as of now. It’s not being used because we are not producing our milk drinks in our factory yet. That will happen only two quarters later. So, that’s the first question for you. The second is on cake. Cake, it’s not that we’ve done badly on cake. We’ve grown on cake. We’ve done, our growth have been reasonably good in the third quarter. However, I was just comparing it to the other 2 products which is Rusk which is just on a complete a boil, it’s growing very high double digits, etc, so — and cake, you got a number that there is a little bit of tiffin for kids and there is a lot of out-of-home consumption which has suffered while yes, it did come to, at least in the first two months of Q3, it did start to become a little normal, but still not gone back to the fully normal state.

Abneesh Roy — Edelweiss — Analyst

Sir, that’s helpful.

Varun Berry — Managing Director

Yes.

Abneesh Roy — Edelweiss — Analyst

My second question is on the market share differential with the number 2 player. So, what has changed here because downtrading is a clear trend currently and you have taken pricing growth ahead of the competition. So, maybe your grammage cut would have been higher than the competition which also has an impact on the grammage. So, could you explain in FY’21 when Parle was closing the gap and now you are again increasing the gap what has changed?

Varun Berry — Managing Director

See, we– our agenda remains the same. So, what we’ve done is, so I’d in the marketing slide, I had spoken about those 2 or 3 big ticket initiatives, Milk Bikis for instance, Marie continues to do really well. Our Hindi belt agenda, all of that is giving us the kind of momentum that we need. In fact in the first 4-5 months of this year, we have seen a very, very high market share growth because all of our brands were really, really doing well. It became a little flattish towards the end of the six months because of all the price increase, etc. But I think we have the capability to charge a premium and that’s what this reflects. Our brand have the power to charge a premium when necessary. It might not be for very large periods of time. You can’t do it forever but if it comes to crunch time and we have to take the price we can hold on to a premium and still gain share.

Abneesh Roy — Edelweiss — Analyst

Sir, last quick question. So, when I see Varun Potazos and Croissant, so if you could give us some number of Croissant, you’ve mentioned numbers for Potazos at INR70 crores. So, my questions are essentially is the success of Potazos giving more confidence on scaling up the salty snack? And when you say Croissant is strong growth in existing market. So, does it mean that this is largely a Top 20 city or Top 40 city kind of a potential because you have been trying a lot, you have been aggressive on pricing, but you still say that it is strong growth in existing markets. So, what is the pan India potential there?

Varun Berry — Managing Director

So, yes, that’s true Abneesh. So, we are only in our– we’ve started this in South and East and we continue to be only in Calcutta and Chennai right now and of course, Modern Trade. So, these are the 3 areas that we are in and those are the two towns and Modern Trade where we are doing really well. So, we haven’t opened this because you see it’s– you’ve got to realize that it’s a very new product and we have to.–so we had what we had set for ourselves was we will not expand this till we find that perfect product which the consumers are really, really liking and I think we are almost there. So with this, we will be launching it pan India. But yes, it’s not going to be a product which is going to get to the hinterland in a hurry. So, we will look at launching it in the big towns to start with, establish the habit and then start to take it to the rural markets and the small towns as well.

Abneesh Roy — Edelweiss — Analyst

And salty snack more confidence.

Varun Berry — Managing Director

So, yes, so on Potazos. Now, that’s a very interesting one, the idea, as you know, is not ours. The idea was a Bangladeshi brand called Pran but I think we perfected that. We had a great product. Our product wins against everyone else in the market and it’s showing us today because we are seeing month-on-month growth and huge growth month-on-month and you know, the point is that if you have a product like that, you have a lot of the efficiency in the system because salty snacks there is a lot of air in the bags. Here you are able to give a lot more product to the consumers because we are not transporting just air. So, that’s I think it’s a great product, it’s a good brand. We’ve got very good, very interesting advertising and we’ve also got the efficiencies related to that. So, this will make us get into with a bridge product get into the salty snack territory.

Abneesh Roy — Edelweiss — Analyst

Sure. Thanks. That’s very helpful. Thanks a lot.

Varun Berry — Managing Director

Yes. [Operator Instructions] The next question is from the line of Avi Mehta from Macquarie. Please go ahead.

Avi Mehta — Macquarie — Analyst

Hi Varun, hi team. I just wanted to first kind of go into slide number 18 which you have mentioned. Now if I go back to second quarter, you had clearly indicated that EBITDA margins will normalize sometime by fourth quarter. Now obviously because inflation that seems to — that would be pushed out. Would it be fair to expect EBITDA margin to remain flattish now in fourth quarter on a sequential basis? And with movement to normal more in the first quarter, how should we look at that?

Varun Berry — Managing Director

Yes, I would say so. I would say that’s where it’s going to pan out because while you know, see the thing is that when you have such a rampant inflation it also, it’s a little bit of a tightrope walk because it’s not about competition, it’s about the consumer itself, right? We don’t want the consumer to feel a pricing shock immediately while there can be a huge increase that you can do but that can lead to one, the consumer feeling the shock. Second, it could lead to inefficiencies in our plants with the volumes not growing because despite all our pricing, we’ve been growing volumes fairly. So, that’s what we are trying to do. We are trying to make sure that we normalize. Obviously, we want to normalize and get back to where we were but in the interim, in this dramatic inflation period we would like to make sure that we do not shock any stakeholder in this entire bargain including the consumers, the producers, all of the stakeholders need to move in unison.

Avi Mehta — Macquarie — Analyst

But then, Varun, should we not look at — or even first quarter would be difficult because typically, I remember in the last conference call also you had highlighted that it takes time for us to flow through this, for these price increases to flow through, which is why in your chart also, you’re seeing the 10% flow through in fourth quarter, while it was taken in third quarter. So, in that essence then normalization is more first quarter, second quarter or how should I– what is your internal kind of thought process right now? If you could help us understand this better.

Varun Berry — Managing Director

So I — usually we don’t give any future view to where the business is going but because these are very, very uncertain circumstances, I would think that because now we know the picture. We understand. We never estimated that’s the quarter-on-quarter inflation is going to be so high. But now that we know the picture, the time that you are talking about is starting now. It’s not like we are going to be waiting for quarter 1, 2 or quarter 4 to look at what we want to do as a price increase in quarter 1. So, it all starts now. So, I think we should be in a good place reasonably quickly.

Avi Mehta — Macquarie — Analyst

Okay, perfect, perfect. The second which I just wanted to — you have done almost a 5% kind of volume growth this time. Now as we go forward, despite the price hike, would it be fair paradigm to say that rural distribution expansion should offset these pressures and hence we are kind of looking at a volume growth sustaining and that is what is the focus because I sensed that from your earlier comments, so I just wanted to reaffirm that.

Varun Berry — Managing Director

Ideally, yes. We would — see, the most important thing is to get your number of facts to keep growing and also your tonnage is to keep growing and we would like to keep it that way as we go forward.

Avi Mehta — Macquarie — Analyst

Okay, perfect Varun. If it’s okay a bookkeeping I think–

Operator

Mr. Mehta, I’m so sorry to interrupt.

Avi Mehta — Macquarie — Analyst

No problem. Thank you.

Operator

[Operator Instructions] The next question from the line of Percy Panthaki from IIFL. Please go ahead.

Percy Panthaki — IIFL — Analyst

Hi, Varun and team. Good afternoon. My first question is on the distribution front, I see that versus March ’21, your direct distribution in September and December has sort of reduced. So, what is the reason for this? And connected question to this is that INR21 lakh, INR22 lakh outlets is a fairly decent distribution number. I think you would be in the top 2 or 3 as far as FMCG is concerned, even I think HUL somewhere in the region of 2.5, 2.7 with such a wide basket a offering. So, do you think there is much more leeway in terms of expanding the direct distribution? And if not, does that sort of takeaway one lever of growth from your story?

Varun Berry — Managing Director

No. So, let me answer your last question first. So, I do think that there is enough potential for us to increase our direct distribution to about INR30 lakh outlets or so because what we’ve seen is that, it’s not if, we are already in the market, getting to these outlets which are within that purview is not too much additional cost. Second, if we get to those outlets, the kind of execution that we can provide and the kind of market share that we can gain in those outlets is tremendous. So, we will continue to go on that front. What was your first question, Percy?

Percy Panthaki — IIFL — Analyst

Versus March ’21, there is a drop in September, December ’21.

Varun Berry — Managing Director

No. So Percy, I will let Vipin answer that, but in short, basically it’s the COVID factor. So, as we keep coming against waves of this what happens is that supervision drops a bit. Our distributors are stymied. They are not able to get to the market. They are not able to — so, those kinds of things happen. And then the human factor comes in and you have to really think of what is best for all the people in the team. It’s better that they do not — even if we have to take a step back from distribution at least our people remain safe. So that is really the reason but Vipin are you on the call? Vipin, are you there?

Percy Panthaki — IIFL — Analyst

No problem, sir. I’ll just ask my next question. Next question is on the price increases last quarter also, you had mentioned that by Q4 the price increase would be 10%. In this presentation also it is 10% only. Now, given that the Q-o-Q inflation has been more than expected, haven’t you taken any more price increases so that the 10% number can go up actually?

Varun Berry — Managing Director

No, actually we did to do that, Percy, but there were a few places where we had to hold our price increases because there were some areas where we thought that these were probably a little premature because we had seen some early signs. So, depending on whether it’s rural markets, Hindi belt, etc. So, we redid it a bit but now we’ve had the time. So, even if you look at– so first of all even if you look at Q4 versus Q3 now, we are still seeing inflation of 2% to 3% quarter-on-quarter. So, now we are — what we are doing is we are looking at making sure that we take all these into consideration and then plan our price increases accordingly so that we are able to match up to whatever inflation the business has seen.

Percy Panthaki — IIFL — Analyst

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

Operator

I’m sorry to interrupt but we have unmuted the line for Mr. Vipin now. We will proceed to the next question from the line of Shirish Pardeshi from Centrum Capital. Please go ahead.

Shirish Pardeshi — Centrum Broking — Analyst

Hey, hi Varun and team. Good afternoon and thanks for the opportunity. I’m still stressing on the volumes. Your press release says that we have reported a very strong high single digit growth. So, I just wanted to understand what is the domestic volume growth and maybe if you can share in terms of the INR400 crore run rate in Milk Bikis, what is the volume growth which we have seen and what was the number, was that INR400 last year?

Varun Berry — Managing Director

So, the total volume growth is 5%. Domestic volume growth would be slightly more than that, right, because our international business has been not, it’s not on a growth trajectory this year, so it will be slightly more than that, but it’s a very small business. The international business is a very small business. It doesn’t impact overall growth to that extent.

Shirish Pardeshi — Centrum Broking — Analyst

And on Milk Bikis?

Varun Berry — Managing Director

Milk Bikis has been seeing very, very large. So the non-south Milk Bikis has been growing somewhere in the region of, revenue growth are 40% plus and volume would be in the same vicinity I would say, maybe slightly lower.

Shirish Pardeshi — Centrum Broking — Analyst

Okay. Okay. My second question is on the dairy business. Though it is good that we are ramping up our collection but at what point, we will start manufacturing in-house and maybe a follow-up on that, what is the capex we are incurring, I mean, maybe next one year and how much has already gone into it?

Varun Berry — Managing Director

So, a lot of the capex is already gone in and it’s only the process fees capex which has not yet hit the ground. So, if you happen to be anywhere in the vicinity of Pune, we would be very happy to show you our plant. We are very proud of the way it’s turning out. It’s looking really good and we are hoping that we will be commercializing parts of the plant. It’s not going to all come together but parts of the plant, we will be commercializing towards the second quarter of next financial year.

Shirish Pardeshi — Centrum Broking — Analyst

So, what is the total overall capex we are going to incur on this?

Varun Berry — Managing Director

About INR650 crores is the total capex, a bulk of which is already gone in.

Shirish Pardeshi — Centrum Broking — Analyst

Okay, thank you. I have questions. I’ll come back in the queue.

Varun Berry — Managing Director

Yes.

Operator

The next question is from the line of Nitin Jain from FairView Advisory. Please go ahead.

Nitin Jain — FairView Advisory — Analyst

Yeah, thank you for the opportunity. So, I just wanted to know where we are on the inter-corporate deposit. Where is the number at this point?

Varun Berry — Managing Director

Venkat, do you want to comment?

N. Venkataraman — Executive Director & Chief Financial Officer

Yes, Group 1 cities as of 31st December is at INR580 crores.

Nitin Jain — FairView Advisory — Analyst

And as of last quarter, you were at what number?

N. Venkataraman — Executive Director & Chief Financial Officer

INR505 crores.

Nitin Jain — FairView Advisory — Analyst

Okay. So quarter-on-quarter, it has moved from INR505 crores to INR580 crores.

N. Venkataraman — Executive Director & Chief Financial Officer

That’s it.

Nitin Jain — FairView Advisory — Analyst

Okay, thank you.

Operator

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

Harit Kapoor — Investec Capital — Analyst

Yes, hi, good afternoon. Just had two questions. Firstly, you spoke about rural not being slower for you. I just wanted to understand, is it a function of some of these new initiatives on the biscuit side that you’ve taken specifically on Milk Bikis because the growth there is significant or is it just a demand trend that you’re seeing at the end user level?

Varun Berry — Managing Director

So it’s certainly market share. As I had mentioned our share gains in rural are two times what they are in urban. So, it’s our distribution initiatives which are giving us the upper hand in terms of growth. If you’ve seen some of the Nielsen numbers which have been published for FMCG, it seems that the growth for rural is half of what it is in urban in the last quarter. So, to that extent I think we’ve been able to buck the trend and keep our rural agenda moving forward.

Harit Kapoor — Investec Capital — Analyst

Right. And is there some level of concern at your end also as we pass on these price increases. What would be the impact there because as we have passed these price increases on, the initial sense that you’re getting over the last say 30, 45 days in terms of the market acceptance, are you seeing that impact there or you are seeing that the share gain or even overall growth has been fairly robust?

Varun Berry — Managing Director

Well, the market, the price increases as have been this year will — are certainly going to have some kind of impact. So, what we are trying to do is we are trying to overcome that through market share gains and our distribution agenda. So, we are hoping that momentum will continue. I will let Vipin comment on that. Vipin?

Vipin Kumar Kataria — Vice President – Adjacent Bakery

Yes, hi. So, see if you see chart 6, we have gone more deeper into rural. In fact we’ve been able to appoint about 3,800 [Phonetic] dealers which basically means that we have opened up 3000 more towns farms and that is what Varun is referring to that, this growth impetus in rural is distribution driven. So therefore the agenda here is that we keep going to the hinterland and direct, gives us a lot of wing in terms of carrying those brands and that is what is giving us the growth. The second part of that growth story is on these focus states which are the Hindi states, namely UP, Rajasthan, MP, Chhattisgarh. So, these states also are showing pretty good response. And I think that the price increase that we had started right in August and September has been well taken by the market. And like Varun has been mentioning, we have not given a root shock to the market. We took it piece-by-piece, month-by-month and therefore we’ve been able to hold on to our growth momentum.

Harit Kapoor — Investec Capital — Analyst

Got it, got it. And the last thing is on the clarification on Potazos. So if I heard you correctly, Potazos is going to be your brand for the savory extension and compared to maybe pre-COVID you are also looking at Time Pass etc. Would this be the key play or you will also look at this space separate?

Varun Berry — Managing Director

So, we will continue to look at the extruded space but again, as I had spoken about the Croissant, the extruded space also it’s in test market and in test market, obviously there are lots of things which are coming to the core. So we are making sure that we get our act right with whatever feedback that’s coming from the consumers and as and when we are ready, we will start to look at the next phase of launch for extruded products.

Harit Kapoor — Investec Capital — Analyst

Okay, that’s it from me. Thanks.

Operator

Thank you. The next question is from the line of Jaykumar Doshi from Kotak Securities. Please go ahead.

Jaykumar Doshi — Kotak Securities — Analyst

Hi, good afternoon and thanks for the opportunity. Varun, I would like to know your thoughts on build versus buy when it comes to expanding in adjacencies. Are you looking at brands from an inorganic perspective? And does your balance sheet in any way constrain you from potentially acquiring some good brands in adjacencies that you would otherwise have done given the cash generation that the company has?

Varun Berry — Managing Director

No, so that’s a good question. I don’t think we are averse to one versus the other. Obviously, as of now we are looking at the build model, but if there is the opportunity of a buy, we would look at that as well. But I think what we do is we are very, very stringent about acquisitions because see, most of these acquisitions in terms of payback etc. are very, very weak. So, we have a very clear screen through which this has to pass and we’ve done quite a few valuations and acquisitions but if the paybacks are not there, we don’t move forward with that. So, we will continue to do that if there is the right opportunity, we are happy to look at buy as well.

Jaykumar Doshi — Kotak Securities — Analyst

Right. Second bookkeeping question on the development of Chipita at a global level, does it change anything for you in India in terms of your JV that you have?

Varun Berry — Managing Director

No, it doesn’t. So, the business which has been bought out excludes the India JV.

Jaykumar Doshi — Kotak Securities — Analyst

Understood and a very small bookkeeping. Is there any way you can quantify what is the impact on volumes from grammage cuts that you would have done on the price point pack?

Varun Berry — Managing Director

Well, it would be in the region, as I had said last time, we do about 65% of our price increase is from grammage cuts, right? So, taking that into consideration it would be anywhere in the region of 4% to 5%.

Jaykumar Doshi — Kotak Securities — Analyst

Understood.

Varun Berry — Managing Director

But it’s very, very difficult to quantify that impact.

Jaykumar Doshi — Kotak Securities — Analyst

I understood. Thank you so much. That’s it from my side. Thanks a lot.

Operator

The next question is from the line of Manoj Menon from ICICI Securities. Please go ahead.

Manoj Menon — ICICI Securities — Analyst

Hi team. One question is on the quarter. When I look at the price increase volume and all those interplays which you just mentioned versus the gross margin, is there a mix angle also been a headwind for you, whether it is the channel mix, category mix, product mix, SKU mix? And what I’m getting at is, is there also an angle of let’s say one of your most profitable brands like a Good Day, need to catch up to the overall group, something like that.

Varun Berry — Managing Director

No, I don’t think it’s product mix but channel mix is certainly there because what we’ve seen is during these COVID waves, there are certain channels which completely cave in, namely money trade reduces considerably and e-commerce gains considerably and those kinds of things do happen. So, I would think that more of a channel mix impact, not so much of a product mix impact.

Manoj Menon — ICICI Securities — Analyst

Lot of brand mix impact. I understood. And secondly Varun, a philosophical question actually. When I look at the NPD journey which you had embarked upon as I recall post, let’s say, from an articulation point of view, 2015-2016 where are you currently? I mean in the sense for example, what I just — it would be very helpful to understand if you could help us understand, let’s say, how do you define NPD intent into the company? Anything non biscuit is NPD or what is the structure you have — so what I’m trying to understand is, where are you in the journey in terms of structures, learnings or even the readiness, etc. Is it that, let’s say you have done a lot of investments or you still need, let’s say a new structure, people, revamp etc.? So, how do we think about NPDs over the next, let’s say, 2 to 3 years?

Varun Berry — Managing Director

So, from a structure standpoint we’ve had evolution within the organization. We’ve got very clear and very strong leadership in these areas. I’m actually fairly happy with the way that has panned out. We’ve also got– we’ve given in the power to the teams to take decisions and move forward and make a few mistakes and step back and look at their mistakes and correct, etc. in certain new categories which are completely new to the system. From a progress standpoint, I would say, it has been average and I would say, it’s been average because one, it’s been a very unprecedented situation with the waves of COVID that we’ve been seeing as a result of which product trials and launches and people in the market etc. was periodically been issues and I’m not saying that whatever we have done has hit the bulls eye, certainly not, but quite a few of our products are doing quite well and some of them I had highlighted in my presentation. So, I would say the jury is still out. It’s a mixed bag. It has been unprecedented circumstances but we are very hopeful that we are on the right track and hopefully, in the next year with normal life coming back we should be able to make great progress in this front.

Manoj Menon — ICICI Securities — Analyst

Understood, thanks Varun. One follow-up on this–

Operator

Mr. Menon, I am so sorry to interrupt. May I please request you to rejoin the queue. Thank you. The next question is from the line of Chinmay Gandre from the Reliance Nippon Life Insurance. Please go ahead.

Chinmay Gandre — Reliance Nippon Life Insurance — Analyst

Yes, thank you for taking my questions. Sir, I just wanted to understand that how much further of price increase we need to take, I mean in excess of 10% to kind of offset the sequential supply chain inflation which you have seen? And to follow-up this question basically how do I read this number versus your other intent is that you want to kind of take the market with a very aggressive pricing from here on.

Varun Berry — Managing Director

See, it’s– so it’s a very dynamic target that we have. So, just to give you an idea, the commodity bucket itself is about 60% of the total inflation that you face. So, if you were to look at material inflation of 20%, you would require at least 12% price increase but the fact is that there are other factors as well which come into play. So, fuel and industrial fuels, etc. which I had highlighted. So to that extent, it’s a moving target. However, my feeling is that this inflation, how long can this inflation last? If it lasts and if it keeps growing quarter-on-quarter, then I think we will have to really roll up our sleeves and look at at least another 4% or 5% price increase before we hit the beginning of next year. I hope that answers your question.

Chinmay Gandre — Reliance Nippon Life Insurance — Analyst

Yes. But I mean the second part of the question was like, do you feel that our market would it be ready to absorb another let’s say 4% price increase over and above the 10% which you have kind of already–

Varun Berry — Managing Director

No, so that’s what I was talking about. It’s a tight rope walk because we don’t want to get to a situation where the consumer is facing such a high pricing impact that they start to say that these products are not as attractive as they used to be. So, it is a tight rope walk. I don’t think I can answer this in this forum because it’s a very complicated question. So, you’ve got to do, as they say you have to be cautious in every step in this situation and that’s exactly what we are doing.

Chinmay Gandre — Reliance Nippon Life Insurance — Analyst

Thank you, sir.

Operator

The next question is from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.

Shirish Pardeshi — Centrum Broking — Analyst

Yeah. Hi Varun, where I left, I had one question on the Potatos product. You started the journey in the Eastern part and you mentioned that you are looking for a pan-India launch. So, is that pan India launch already happen? And on the manufacturing front are we manufacturing in-house or we have outsourced this product?

Varun Berry — Managing Director

No. So, the interesting thing, Shirish, is that one to your first question, yes, we have launched pan India. While it’s very recent, we are just scaling up in various parts of the country. The second interesting thing is that this product is being manufactured on the same lines that we have, right? So, we’ve been able to leverage the costs tremendously because with a little bit of modification we are producing the product on our Cracker lines and we are now producing it in-house in two factories and there is one contract that we have but we have the capability of modifying some of our other Cracker lines also if this takes off and we will be able to produce this in our existing lines.

Shirish Pardeshi — Centrum Broking — Analyst

Okay, just one follow-up on this since you said that largely it will be getting manufactured in-house. So, any color or any ballpark number you would be able share in terms of profitability, gross margin?

Varun Berry — Managing Director

So, it’s accretive to our overall margins and that’s what we look at for every innovation.

Shirish Pardeshi — Centrum Broking — Analyst

Okay. Thank you. Wonderful. And all the best to you.

Varun Berry — Managing Director

Thanks.

Operator

Thank you very much. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments.

Mayank Mundra — Executive Assistant to Managing Director

Thanks everyone for spending time with us on this call. We look forward to interacting with you again thanks.

Operator

[Operator Closing Remarks]