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Edited Transcript of BRITANNIA.NSE earnings conference call or presentation 15-Nov-19 10:30am GMT

Q2 2020 Britannia Industries Ltd Earnings Call

Kolkata Nov 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Britannia Industries Ltd earnings conference call or presentation Friday, November 15, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* N. Venkataraman

Britannia Industries Limited - CFO

* Varun Berry

Britannia Industries Limited - MD & Whole Time Director

* Yash Bagri

Britannia Industries Limited - Executive Assistant to MD

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Conference Call Participants

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* Abneesh Roy

Edelweiss Securities Ltd., Research Division - SVP

* Aditya Soman

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Arnab Mitra

Crédit Suisse AG, Research Division - Research Analyst

* Devansh Jain;Devansh Traders and Securities;Analyst

* Harit Kapoor

Investec Bank plc, Research Division - Analyst

* Kaustubh Pawaskar

Sharekhan Limited, Research Division - Senior Research Analyst

* Krishnan Sambamoorthy

Motilal Oswal Securities Limited, Research Division - VP of Research of FMCG

* Nandan Vartak;Wealth Managers;Analyst

* Percy Panthaki

IIFL Research - VP

* Prasad G. Deshmukh

BofA Merrill Lynch, Research Division - Equity Research Analyst

* Shirish Pardeshi

Centrum Broking Limited, Research Division - Senior Analyst

* Siddhant Chhabria

HDFC Securities Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Britannia Industries Ltd. Q2 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Yash Vardhan Bagri. Thank you, and over to you, sir.

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Yash Bagri, Britannia Industries Limited - Executive Assistant to MD [2]

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Thanks, Karuna. Hello, everyone. This is Yash from the Investor Relations team. I welcome you all to the Britannia earnings call to discuss the quarter 2 '19/'20 financial results. Joining us on the earnings call today is our Managing Director, Mr. Varun Berry; and CFO, Mr. N. Venkataraman.

We will start the call with remarks on performance by Mr. Varun Berry. Subsequently, we'll open up the call for questions. Before we get started with the presentation, I would like to draw your attention to the safe harbor statement included in the presentation.

I will now pass it on to Mr. Varun Berry for his comments.

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [3]

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Good afternoon. So let me start with the presentation. So if you get to Page 3, that shows the progress of the top line. So our consolidated NSV for the quarter has been INR 3,000 crores for the first time. That's a benchmark that we've never crossed in the past, so INR 3,023 crores.

Not very happy with the growth, but as you know, the environment is such that the top line growths are subdued. So 6% growth for the quarter. If you look at the 24-month growth, it's 19%, which has also been coming down. So if you were to look at the peak, it was at 25% in the last 6 quarters, and we are at 19% as of now.

Moving on to the next page, which is about our market share. So we continue to strengthen our market leadership. The gap between us and the next competitor has widened even further. And this has happened in very, very tough market environment, which all of you are aware of. So I'm not going to drain this chart, which is Chart #5.

We are aware of what the situation is. We're also aware of the steps that the government has taken. And we are hopeful that with these steps, the economy should revive as we go forward. Although at this point in time, in the last quarter, we didn't see much of the recovery happening. So it will take time, I would say. But probably in the next 9 to 12 months, we should start to see the recoveries.

Moving on to the next slide, which shows what we are doing in these challenging circumstances to drive profitable growth. So it's the same model that you've been seeing, building brand equity, innovation, relaunches, new category entries, distribution strengthening, technology and back-end efficiencies as well as sustainability.

Getting on to the next slide, which shows the investments in the brands. So there have been a lot of brands which have been on air. So we've launched Treat Burst, which is the democratized version of our Chocolush. It's a chocolate-filled biscuit, which is doing really well for us. We've also been advertising Treat Stars, which is a completely new format of biscuit. That's doing extremely well for us as well. We've got -- we've relaunched our cream cracker. It's a much thinner, much better bite, great product, which is also doing well.

And what we have done is we've made an attempt to take Milk Bikis to the rest of India. It's predominantly a South-based brand with most of the business coming out of Tamil Nadu. So what we have tried to do is to we've tried to broad-base it and make it a pan-India brand, and we are seeing some very good results with that as well. There have been some digital activations behind NutriChoice, Milk Bikis. And we've had some promotions on our big brands, which is Good Day and Marie Gold.

Moving on to the second platform, which is innovation and relaunches. In this quarter, we had a limited edition launch of cream biscuits, which was Treat tiramisu and red velvet. These are limited-edition launches, which are going to be in and out. And we are seeing some very good traction with these products.

I don't think any company has done an in and out in biscuits. It used to be quite common in my previous company. So we used to do in-and-out beverages. We used to do in-and-out snacks us well. So we are trying to do that in the biscuit industry. And I think this could be a game-changing move because it creates the excitement, at the same time, doesn't create the complexity that launches create. So this is going to be for a period of time and then we're going to withdraw it.

The second one is we've test-launched Little Hearts Strawberry in the West, which again has had a very good response. We've relaunched -- as I have already said, we've relaunched our NutriChoice cream cracker. We've relaunched Good Day. We've also relaunched Thin Arrowroot, which predominantly sells in the East. And all of these have shown the right traction as far as we are concerned.

Number three is about new categories. You've seen that we've launched wafers a few quarters ago. We have started to see traction on wafers. We have become the #3 brand in wafers in the country in a very short period of time. We've also got a double-digit market share in this category. Salty snacks, we have launched in the South. And we are seeing traction from Q1 to Q2. As we speak, we've also launched it in the West. And we've had a fairly good response to our products in the market, although it's too short a time to really declare victory. But we've now got 2 lines, one in Bangalore in our (inaudible) plant; and the second one in Ranjangaon in our Pune plant. And both of these plants are producing salty snacks, which are now in the South market as well as entering the West market as well.

The other new category launch has been our milkshakes, where we've got a 20%-plus market share in a very short time from launch. We are the #2 brand in less than a year of launch. Croissants, where we had started in the first quarter of this year, but we've had some back-end issues. So we resolved those. Today, we've got perfectly good products. But we've just made sure that we are absolutely careful about the products as well as the response from the consumers.

So what we have done is a limited territory launch. So what we've -- we've launched it West Bengal and Tamil Nadu as well as in modern trade. And this is going to be a test market, which is going to give us indications of any changes, any modifications that we might require as we go forward. As of now, it seems to be moving in the right direction. But we will run this through for 3 to 4 months before we take a decision of taking it pan-India.

The number four platform is about our distribution drive. We have increased our direct reach by about 300,000 outlets. We are sustaining our rural distribution as well, where from March to September, we've gone up by almost 2,000 rural distributors. We are also sustaining our numeric distribution increase. Month-on-month, we've been looking at higher numeric distribution throughout the country. Our market share gains in the Hindi belt have also continued. Quarter-after-quarter, month-after-month, we've seen this. However, there has been a slowdown in our growths in the Hindi belt, which as we all know, is connected to the economic slowdown as well as the rural slowdown in the country.

Number five, our high-tech food park in Ranjangaon, which is now up and running. We've got 12 lines operating there with a total capacity of 140,000 tons per annum. We've got 8 biscuit lines, 2 cake lines, 1 croissant line and 1 salty snack line. A lot of these lines are imported. Some of these lines are -- the first time this kind of technology for us as well. So we are looking -- definitely looking at a much improved product as well as much better efficiencies in our plant in Ranjangaon.

Moving on to the next page, which is sustainability drive on plastic. We did have an awareness drive amongst employees. And we ended up collecting 2 metric tons of plastic waste across 6 locations. We've also had a digital campaign to inspire every person to make a start in the waste segregation journey. So we are firmly on to making sure that we eliminate plastic from our products. We are looking at a 5-year time frame on how we can eliminate as well as look at recycling all the plastic that we put in the environment. And we are making sure that this becomes an essential part of not just the team here but the entire Britannia family across all locations.

On the next page, it's about Adjacent Bakery. Bread, focus continues to be on profitability and we are making good progress there. Dairy, what we have been doing over the last 2 years has been reducing the commoditized part of dairy. So while we've seen a single-digit growth, the fact is that the value-added products are growing while there is obviously a decline in our commoditized products, like ghee, et cetera. International, we -- Middle East and Africa continues to be a very challenging environment. Americas have been growing in double digits. Nepal operations have started and are doing extremely well. And we've seen very steep market share gains in Nepal as a result of that.

On the cost front, Page 16. We've seen that the overall commodity inflation is moderate at 3%. And the flour, there is a huge inflation of 14%. And similarly on milk, there's an inflation of 37%, which is balanced by inflation of only 1% on sugar and a deflation of 13% on palm oil. So this is under check.

And also, our journey on reducing wastages, leveraging fixed costs and driving cost efficiencies is moving ahead with full steam. But I must say that as a result of the slowdown that we've seen in the last 1 year or so, there have been some inefficiencies which have crept into the business. And all of us are aware of these and working towards making sure that we remove them and also continue with our cost efficiency programs very, very aggressively as we move forward.

Moving on to Page 18. Our profitability has improved. So our operating profit is at an all-time high of INR 447 crores in Q2, which on a 24-month growth basis is at 30%. So happy with that number, it is the highest ever at 14.8%.

Moving on to the financials, Page 20. We have seen a 6% increase in net sales to INR 3,023 crores, a 9% increase in PBT to INR 498 crores and a 33% increase in PAT. Thank you to the government for reducing corporate taxes, which has given us a 33% growth. And if you look at the numbers below that, you will see that profit from operations has again moved up to highest ever at 14.8%. Profit before tax has moved up to 16.5%. And profit after tax, because of the corporate tax reduction, has moved up very sharply from 9.4% to 13.4%. So happy with our financial performance, a lot to do as far as the top line is concerned.

So that is where we are at. We're happy to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Abneesh Roy from Edelweiss.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [2]

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My first question is on Treat croissant. So here are a few sub-questions. One is versus Bauli, say, in Bengal, how is the distribution? Second is are you advertising in these 2 markets of Tamil Nadu, Bengal? Third is INR 15 is still a very high price point for most Indian consumers. So would you need to look at INR 5 and INR 10 at some stage? So these would be the key questions on croissant, yes.

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [3]

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Okay. So your first question, Abneesh, was on distribution. I don't think we've reached the level of Bauli at this point in time. But we are moving towards that. And I would say in a month, we would have crossed them comprehensively. Second is about advertising in these 2 states. Yes, we are looking at advertising in both Tamil Nadu as well as West Bengal. And that's the reason for us choosing these test markets as well because both of these markets have secluded media. And hence, we are choosing these markets as the 2 markets where we are doing it. So that's the second.

Your third question was about the price. Now price-wise, I think we don't want to really get into that trap of INR 5 at this stage. Because I think if you were to look at the product, it's also important that the product should be substantial and it should be enough to fill the consumers' hunger. As well as organically particularly, it has to be really good so that it also gives them the pleasure of eating.

So we feel -- and also from the research, it seems that INR 15 is going to be all right with the consumers. Well, yes, a round price point of INR 10 would make the proposition even more attractive. But I think a combination of quantity as well as price is important. So we -- for the time being, we are going to stick with INR 15. And we are going to make sure that we drive that hard and make this into a substantial business as we go forward.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [4]

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Two follow-ups here, Varun. One is how is that small company like Bauli able to have such a good distribution? Even in Mumbai, I find very good distribution. Is it that focused small companies in specific niche categories are getting good sales? Is that from chains? Second is you mentioned weak flour procurement. So what was the specific issue here?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [5]

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So basically, we needed a specific kind of flour. So the flour required had to have higher gluten. It had to have -- there were certain other criteria that was required for that particular product. So what we've done was we went -- we've gone out and we imported flour from Australia. But unfortunately, what we found was that if you kept the flour for more than a month, then the properties of that flour changed. And you are not able to get the same product from a flour which was imported and which was a month -- more than a month old. And when you are importing flour, it's always would be more than a month old. So then we decided that it's important that we source locally. So we then partnered with some farmers to get the same properties with Indian wheat. And we were able to crack that. And I think we are at a stage now where all those are behind us. We've got the right flour. We've got the right product. And every product, you have that kind of issue. We've got it. And now just to make sure that everything works, we are making sure that we do a detailed test market with very, very clear consumer feedback so that there's nothing which can go wrong in the future.

Now coming to Bauli. Bauli is a one-product company. And it's -- I would say they've done a good job as far as distribution is concerned. But at what cost is the question. Because with a one-product company, the kind of money that you pay, not just for your production facilities but also for your distribution, et cetera, becomes prohibitive. So we have to watch how they sustain this. But you're right. I do think that there is some truth about the fact that smaller companies who are focused on one product, obviously that is their bread and butter. And they have been doing well. And I do think that we have to also be extremely nimble as we go forward and make sure that we have all the requisite qualities of a startup, of a small company so that we can also have a certain kind of way of working, which gets us to settle these small products and new products as we go forward.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [6]

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Right. My second and last question is on China...

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Operator [7]

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Excuse me, this is the operator. Mr. Roy, may we request you please rejoin the queue?

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [8]

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It was only one question. Now I am coming to the second question. So in Timepass, Varun, my second question is when do you launch in West India? And second is out of the 3 formats, which ones are doing well? And in South India in terms of percentage distribution again, what kind of outlets are you able to reach for this kind of (inaudible)?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [9]

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So Abneesh, you're asking too many questions. Okay. Anyway, I'll answer. So the fact is we have actually already launched in the West. As we speak, I think just 3 days back, we've launched it in the West. Out of the 3 products, the [wavy] seems to have an edge. But the others are catching up. The sticks as well as the fills are catching up because those were launched later, wavy was the first one to be launched. So we're catching up. My favorite is the fills. But obviously, the consumers have to like it as well. My liking it doesn't help us. So we are confident that all 3 flavors have -- all 3 formats have a certain difference to what there is in the market. And hopefully, all 3 of them will do well as we go forward.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [10]

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And what percentage of outlets they are reaching South India?

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Operator [11]

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Excuse me, this is the operator. Mr. Roy, can you please rejoin the queue for follow-up, sir?

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [12]

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I have already asked that.

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [13]

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So we've got -- I think we are reaching about 100,000 outlets in the South.

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Operator [14]

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The next question is from the line of Sameer Gupta from India Infoline.

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Percy Panthaki, IIFL Research - VP [15]

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This is Percy Panthaki here. Sir, my question is on the slide of cost inflation that you put in your PPT. This quarter, your inflation was modest because probably you had some low-cost covers. Going ahead, can you give some guidance on what will be the overall cost inflation? And how do you plan to tackle it? Do you plan to pass it on to the consumer or do some extra cost initiatives? Or do you plan to take a hit on your margins?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [16]

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No, sir. We -- I think that the inflation continues to be modest. And we continue to have covers. So I don't think that this 3% could go to 4%, 4.5%. And if there is a need for price increases, we will take that. So selectively, we have been taking a few price increases. And we will continue to do so selectively as we go forward if the inflation is more than what we can get out of our cost efficiency programs as well as all the other initiatives.

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Percy Panthaki, IIFL Research - VP [17]

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Right, sir. Secondly, if I do a consol minus standalone at the sales level, the derived subsidiaries are showing a decline in sales. Can you explain the reason for that?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [18]

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So see, our dairy company is -- it's a part of our dairy portfolio. So our fresh dairy as well as our milkshakes sit in Britannia, right? So in our other -- in the portfolio which sits in BDPL, which is our subsidiary, obviously the commoditized businesses are going downwards in terms of sales, so -- and that is showing a reduction. And also, it's the Middle East sourcing, which was being done -- so what we had thought of was to move our plant from Oman to Dubai and we were preparing for that. And in the interim, the Middle East was sourcing its products from our plant in Mundra. But then we went back to the government in Oman, and they gave us a very good package. So we are now staying in Oman. But during that period where there was no decision on which way we are going, there was a sourcing -- and that was a period of this quarter. So there was sourcing from India. So I think that were the 2 reasons.

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Percy Panthaki, IIFL Research - VP [19]

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Right, sir. And lastly, in this difficult economic climate, can you just give some idea how the consumer is behaving in terms of your sales? How is the mix moving? Is it moving towards more premium, more low price points within the mass market brands? Or I mean any kind of flavor that you can give on this is helpful.

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [20]

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Well, the mix is moving towards premium and which is truly a conundrum to me. So what the sales are showing is that the premium products are doing better than the value products. So what consumers seem to be doing is cutting back. But whenever they're consuming our products or any other products in the market, they seem to be leaning towards the premium products.

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Operator [21]

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(Operator Instructions) We move to the next question from the line of Devansh Jain from Devansh Traders and Securities.

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Devansh Jain;Devansh Traders and Securities;Analyst, [22]

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Sir, this is Devansh Jain. So a follow-up to the question that the previous participant asked. You said that your stand-alone top line growth includes the impact of some exposed limited timing, the Oman (inaudible) plant. So how much...

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [23]

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Yes. Mundra.

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Devansh Jain;Devansh Traders and Securities;Analyst, [24]

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Mundra plant. So how much of the top line growth is aided because of that stand-alone top line growth? So you reported a 6.8% top line growth. So how much of that was on account of this (inaudible)?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [25]

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It won't be substantial. It will be -- how much would it be?

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N. Venkataraman, Britannia Industries Limited - CFO [26]

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(inaudible)

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [27]

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So probably about 0.3%, 0.4%.

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Devansh Jain;Devansh Traders and Securities;Analyst, [28]

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Okay. And how much is the volume growth then in your overall top line growth this quarter?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [29]

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It's about 3%. The volume growth is 3%.

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Devansh Jain;Devansh Traders and Securities;Analyst, [30]

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Okay. And one more question, on your stand-alone margins, the gross margins (inaudible). So if I would look at your inflation chart that you're showing in PPT, so there's an inordinate inflation that we have addressed in milk with around 37%. But this would not be a significant raw material as far as the standing (inaudible). This would not be a significant component of a raw material. So if exclude that, what would be the inflation of your standing in your gross margin of Britannia this quarter?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [31]

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That's a very complicated question. Your inference is right that milk is a fairly small part of our bakery business. But I can't give you the calculation on how much difference would it make. I don't think it will be a very large number.

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Devansh Jain;Devansh Traders and Securities;Analyst, [32]

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Is it 3% then essentially verifiable to infer it could be? Or is it just 2% down?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [33]

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I don't -- I really don't know. We'll have to calculate that.

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Devansh Jain;Devansh Traders and Securities;Analyst, [34]

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Okay. And sir, (inaudible) rates or not the impact on your margins, overall commodity inflation is moderate 3%. The number that you reported (inaudible)

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [35]

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Yes. Total basket.

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Operator [36]

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The next question is from the line of Nandan Vartak from Wealth Managers.

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Nandan Vartak;Wealth Managers;Analyst, [37]

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So sir, my first question is on revenue mix. So if you split between biscuit and non-biscuit as 2 parts, what will be current mix in revenue?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [38]

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Biscuits would be at about 75%.

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Nandan Vartak;Wealth Managers;Analyst, [39]

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Okay. And where do you see this number, this mix going towards in 2 years?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [40]

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2 years, I would say maybe down to 70%.

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Nandan Vartak;Wealth Managers;Analyst, [41]

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Okay. And what would be the components in non-biscuits? So a large contribution from non-biscuit would be which product -- those would be?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [42]

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All the adjacency products, so cakes would be the larger one. Even our croissants and then salty snacks, all of that is going to be adding to our total revenue.

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Nandan Vartak;Wealth Managers;Analyst, [43]

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Okay. And the second question is on SG&A. So if we look at SG&A contribution towards margin, initially it has been significant. So do we see that going further? So do we expect the same expansion in margin from contribution of squeezing SG&A cost?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [44]

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No. Yes, so we don't give any guidance. So I would not like to comment on that. Excuse me for that. But you know that we always look at efficiencies. We always look at making sure that we bring in the best cost and the best overheads. So we will continue to do what is necessary to...

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Nandan Vartak;Wealth Managers;Analyst, [45]

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Okay. So basically medium term, you are moving towards (inaudible)?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [46]

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Yes, okay?

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Operator [47]

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Next question is from the line of Prasad Deshmukh from Bank of America.

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Prasad G. Deshmukh, BofA Merrill Lynch, Research Division - Equity Research Analyst [48]

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Two questions. Firstly, while you continue to gain share, when the industry move to GST, the expectation was that there, the unblended players will start to lose share. Is that phenomenon visible? Or has it -- it's now stabilizing at the level that -- at a new level?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [49]

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Well, what we've seen was when GST was first brought in, we saw the local players lose some steam. Thereafter, I think it started to come back. And again, we are seeing that the organized players are now once again making a little bit of a surge. So I don't know which way it goes. I think it depends on how strictly GST is implemented. And I do think that the government has become fairly strict with the rules and regulations now. And if that happens, then organized players would benefit from that.

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Prasad G. Deshmukh, BofA Merrill Lynch, Research Division - Equity Research Analyst [50]

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Sure. And second question in terms of your in-house manufacturing, what is the percentage now?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [51]

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It's close to 60%.

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Operator [52]

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

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [53]

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Just a few questions. One is that we have seen that you have now targeted the Western market. So is the Western market is much more evolved in terms of salty snacks? And then my guess is that North has a much evolved market for salty snacks.

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [54]

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No. The Western market is actually -- the West India market is, I wouldn't say evolved. But yes, from a consumer standpoint, they consume a fair amount of salty snacks. But there are lots of value players. So it's going to be a good acid test for us to be able to establish ourselves because all of the value players are based in Central India and West India. So we are hoping that we will be able to find traction with our products even in this value market.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [55]

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Actually, that was my question. Because if you look at Western and mid-India, which is more crowded in terms of more number of players. Since you have chosen, that is primarily because of your Ranjangaon facility and supply?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [56]

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Well, we want to be a pan-India company, but we want to do it in stages. We don't want to put large facilities with capacities which will have to be transported long distances. We want to have self-sustained capacities within each region so that our logistics cost of transporting product, which is basically transporting (inaudible), is the bare minimum. So with that in mind, we put up smaller lines in every region. And we will continue to do so hereafter in the North as well as in the East. So we want to be pan-India. So it's not that we were going to leave the West vacant. We were going to launch there. Because if you want to be a national brand with national advertising, then you have to have presence in every region.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [57]

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Okay. My second question is on the industry growth. Last quarter, you guided that value segment was declining or probably it has not grown to the expectation. So the question is there are two parts. One is that what is the industry growth? And what is our domestic volume growth? You have mentioned that domestic growth is about 6.8%.

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [58]

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Yes. So the total industry growth is obviously less than 5% as of now. And hopefully, we just hope that it starts to move in the right direction because these are really low-priced products. And I do think at some stage, these will start to move in the right direction. Also, you've got to remember that as the base reduces, we are just about completing 1 full year of slowdown. As the base reduces, growth will come back. But opportunity, which has been lost, will be lost forever. So it's the way you look at it. I always look at 24-month growth because that gives me -- that brings in the base effect and factors that into the equation as well.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [59]

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So within that domestic 6.8% revenue growth, what is the volume growth we have seen in domestic market?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [60]

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3%.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [61]

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Okay. And overall is also 3%?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [62]

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Yes. And see, everything else is so small. What really determines the growth is the domestic market.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [63]

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Okay. Just last question on wholesale. What is our wholesale contribution? And which part of India you are seeing the pain in wholesale?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [64]

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So our wholesale contribution is about 33%, which I think which would be the lowest amongst all the big companies. And we are seeing the wholesale pain all across the country.

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Operator [65]

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(Operator Instructions) We move to the next question from the line of Siddhant Chhabria from HDFC Securities.

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Siddhant Chhabria, HDFC Securities Limited, Research Division - Analyst [66]

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My first question is regarding your rural and urban growths. So how is that compared with each other?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [67]

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So for us, it's -- I would say rural is still faster because we are still making inroads into some of the rural areas. But from an industry standpoint, we know that rural is much slower than urban. So there is pain. There is pain in rural. And it's important that, that gets sorted out for the overall growth to come back for every possible FMCG company.

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Siddhant Chhabria, HDFC Securities Limited, Research Division - Analyst [68]

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Okay. And sir, you had also stated that during the slowdown, you would moderate your aggression on new launches. So my question is now, how do you look at your aggression within scaling back or you're adding more products? What kind of timelines are you thinking of?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [69]

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So we have postponed some of our launches. We had a fairly packed calendar. But as I was saying, when we started to see the slowdown, we decided to postpone these launches because what we were seeing was that there were inefficiencies coming into the system. When you have new launches, you tend to have some amount of product coming back to you because you can't fully estimate how much product you will require for the market. And that creates a negative cycle within the company and outside the company in terms of -- because it obviously creates financial stress as well. So we decided that it's best to postpone this. So there were 2 things that we did. One, we strengthened our supply chain to an extent that whatever products we'd launched, we made the new products available only on a replenishment basis. And second, we postponed our new launches to make sure that we are not doing too many things in an environment which is fairly painful. So those are the 2 steps that we've taken.

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Siddhant Chhabria, HDFC Securities Limited, Research Division - Analyst [70]

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Okay. And considering full inflation has now at a 33-month high, how do you think that impacts consumer sentiments in rural? And how does that impact demand?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [71]

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Well, you've seen the demand. You've seen what's happening to the rural economy, et cetera. So I do think that there is some amount of negative sentiment, which really needs to go away for the paths to be cleared for the kind of growth that we've seen in the past years. So let's hope for the best. I do think that the government is taking all the right steps. They might be missing a few, which I'm sure they'll take as they go forward. And hopefully with that, I think that we should be able to see the economic growth coming back.

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Operator [72]

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The next question is from the line of Aditya Soman from Goldman Sachs.

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Aditya Soman, Goldman Sachs Group Inc., Research Division - Equity Analyst [73]

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Just a couple...

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Operator [74]

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Mr. Soman, we're unable to hear you.

As there's no response from the current participant, we move to the next question from the line of (inaudible) of HDFC.

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Unidentified Analyst, [75]

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So just one little detail, which might help us understand the cost structure of the company. I can see that other expenses that comes after raw materials, employees, ASP and all of that, other expenses are a long tail of many subitems. But as a percentage of revenues, this club number is at a 6-quarter low of 15.4%. Should I interpret this just to be a little bit of operating leverage, which is not suggested by the 6% top line growth? Or is there -- are there 2 or 3 large parts in this, which have moved pretty differently from trend?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [76]

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No. So essentially, it's leverage, right? One is -- it is operating leverage. And second is, it's the own production versus outsourced, which is leading to some amount of saving there.

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Unidentified Analyst, [77]

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So there is a tail of items in other expenses related to the outsourced part of the production, which has gradually dipped and which has reached the stage where the expenses have fallen through to as low as 15.4% in the mix? In the...

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [78]

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Yes. Venkat, you want to add something that?

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N. Venkataraman, Britannia Industries Limited - CFO [79]

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Yes. I think maybe you should look at the employee benefits and other expenses together. And if you see this, employee cost is showing some increase, whereas other expenses showing reduction. Probably, you can look at all the lines together.

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Unidentified Analyst, [80]

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Yes. But -- so I hate to argue, but that is actually the benefit of seeing these 2 numbers separately. And there is probably some sub-item under other expenses which is moving in a way so as to influence its role in the mix. And if I look at the trailing 5 quarters, as many as the last 5 quarters, it's been an average of 16.5%. And in this quarter, it's less than 15.5%. Now 100 bps from trend line doesn't get shaved off just by 6% top line growth. Something in the -- I agree that there's a long tail of items here, but there's something in the mix of those items, which has moved in a way that has tended to bring this down to 15.5%, in fact, 15.4%.

So that's the sense I wanted. Maybe what we'll need to do is look at your annual statement, your annual report, open up the schedules and then see which items might have influenced. So I was hoping that I might get some insight into what's happening in the cost structure of the business here.

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N. Venkataraman, Britannia Industries Limited - CFO [81]

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Yes, these are the 2 elements that Varun just explained, sequentially, they moved about 13% on the top line. So if it's line items, we'll show reduction. The second is the mix of owned versus outsourced manufacturing. These are the 2…

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Unidentified Analyst, [82]

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I think the both of them combined, and it kind of provides some explanation, and I'll take that.

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Operator [83]

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You're next question is from the line of Aditya Soman from Goldman Sachs.

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Aditya Soman, Goldman Sachs Group Inc., Research Division - Equity Analyst [84]

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Sorry, I got dropped off earlier. So 2 questions. Firstly, on Treat and [continue]. They don't take a launching on that Treat. Now all of these, the range, gross margin accretive (inaudible)?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [85]

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Yes. They're all gross margin accretives. They are -- so what we do is, we have a very clearly laid out stage gate process. And any product which is not gross margin accretive doesn't get launched. So that really is the process that we follow, and all of these are gross margin accretives.

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Aditya Soman, Goldman Sachs Group Inc., Research Division - Equity Analyst [86]

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I understand. And on what year would you expect all these Treat variants to sort of reach national distribution?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [87]

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As soon as you start buying them in hordes. No, we are looking at building these brands. We are looking at advertising them aggressively. And we are seeing great traction on these. So hopefully, they should become INR 50 crores and INR 100 crores brands in 1.5 years of launch.

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Aditya Soman, Goldman Sachs Group Inc., Research Division - Equity Analyst [88]

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And all these will be at affordable price points, right? So we're talking about INR 5, INR 10, INR 15 price points?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [89]

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Yes, yes. All of these are at affordable price points. And they are very, very interesting products. And what we've done is we haven't compromised on the product, but we've brought the packaging costs down compared to some of the other products in the market so that the consumer does not buy packaging but buys the product and enjoys it at a price which no one else can provide to them.

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Aditya Soman, Goldman Sachs Group Inc., Research Division - Equity Analyst [90]

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I understand. And second question is [largely] market share. So you reported, obviously, an acceleration in market share growth over the last couple of quarters. Have you also seen some of the comments from the #2 player? So would it be fair to assume that a lot of your market share is actually coming from -- at the expense of the #2 player? Or would that be [out of touch]?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [91]

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Well, I think we are gaining margins from the #2 player, but from other smaller players as well because it's a fairly complicated market where different players dominating different geographies. And we probably are the most heterogeneous brand or company across the country. So I think we've gained from the #2 player as well as from the smaller B players as well.

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Aditya Soman, Goldman Sachs Group Inc., Research Division - Equity Analyst [92]

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And I see that this conversion cost, either item in these other expenses, which is the one where you're seeing it is a saving, because, I mean, that was one number that we saw last year, it actually went up sequentially, I think, because of the issue that you have at [Bread]. Would that be an item that we are seeing in (inaudible)?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [93]

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Venkat, do you want to comment on that?

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N. Venkataraman, Britannia Industries Limited - CFO [94]

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So last year, there is some change in the business model. We have no such impact to the sales. However, what you're seeing is the right conversion charges, appears as part of other expenses. Now more and more will manufacture, it goes down on the conversion line, goes up on the employee cost, and that's how it is.

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Operator [95]

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The next question is from the line of Arnab Mitra from Crédit Suisse.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [96]

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First question was on distribution. So it seems that the pace of expansion of direct reach has definitely slowed down this year versus the last year and the previous few years. So is it a function of the fact that you believe this 21 lacs as a good number, and you will now want to consolidate? Or is it a bit of choice given the slowdown? And how do we look at this kind of going ahead from here?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [97]

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Yes. So you're right, what we have done is we deliberately slowed down our aggressive direct reach program while we are continuing with it. And if you think about it, 300,000 outlets is not a small number. But the issue really is that at this point in time where there is an aggressive slowdown in the market, what makes sense for us to distribute more SKUs into the outlets that we are present in? Or does it make sense to go wider? And we've chosen that, let's go wider, but at a slower pace, but let's get more and more SKUs because now, we are launching new products as well. Let's get more and more SKUs into the outlets that we're already present in.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [98]

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Okay. And the second question was on the overall growth. I think you -- I think, started the call by saying that possibly, the stronger recovery would be 9 months away from now. But in the interim period, do you get a sense of stability that the market conditions are stable, and while we are going slow, we continue to grow at these rates? Or are -- is there a risk that the growth could actually slip off also from these lower levels based on what you've been seeing during the quarter? Or maybe even during the third quarter, as we are into it?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [99]

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So again, this is a bit of a guidance. So I won't speak on that. But what I can tell you is that I don't think it's about growth. I do think that growth will start to come back sooner than we expect, basically, because of the base reducing. The opportunity that we've lost will obviously, be lost. The issue really, is when will the country start to see -- this country cannot survive on a 4%, 5% economy growth. GDP growth has to be 7% plus, 8% plus, for this country to thrive. So from a survival to thriving, there is a 3%, 4% delta, which the country needs to create. And I do think that getting to that is going to take 9 to 12 months.

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Operator [100]

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The next question is from the line of Ajay (inaudible) from (inaudible).

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Unidentified Analyst, [101]

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So what was the CapEx outlay for second quarter FY '20? And what's the guidance for the current year and next financial year?

Secondly, what is the value of total ICDs placed with group companies as of September end? And the average rate of interest charged?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [102]

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So the CapEx, we've also tried to slow down because as volume growths are not meeting whatever we set for ourselves, we've tried to contract whatever we are spending. So in the first half, we would have spent about INR 170 crores, INR 180 crores on CapEx.

As far as ICD is concerned, not much of a change. It's about approximately what it was, probably INR 450 crores or so, at a rate of 10%. 10% is the interest rate.

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Unidentified Analyst, [103]

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And the guidance for CapEx outlay for the full year and for next financial year?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [104]

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It won't change much. It will remain at about the same ballpark, unless there are big projects which come through, which when they come, we'll inform you about.

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Unidentified Analyst, [105]

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Can I ask -- there's one -- can I ask one more question?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [106]

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Yes. Go ahead.

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Unidentified Analyst, [107]

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Yes. So if I look at the inventory buildup of -- for the first half FY '20 and compare it with the first half last year, there seems to be a large buildup of inventory. So would this come off as we move forward in the second half?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [108]

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Yes. So a lot of that is because of raw materials. So we've done some opportunistic buying, where we got very good rates on some of our raw materials. So that's the reason for the inventory buildup, and that will square off as we go forward.

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Unidentified Analyst, [109]

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And that -- I recollect distinctly, you mentioned it in the last call, that you have forward covers that ran out in December on many of the raw materials. So is there any change? And have you taken some actions at the covers?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [110]

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Yes, we probably have. See, each one of the commodities has a certain season. So we usually cover till before the season. So mostly, I would say our covers are until about February now.

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Operator [111]

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The next question is from the line of Krishnan Sambamoorthy from Motilal Oswal.

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Krishnan Sambamoorthy, Motilal Oswal Securities Limited, Research Division - VP of Research of FMCG [112]

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Yes. My questions have been answered.

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Operator [113]

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The next question is from the line of Kaustubh Pawaskar from Sharekhan.

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Kaustubh Pawaskar, Sharekhan Limited, Research Division - Senior Research Analyst [114]

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Yes. Just wanted to know, sir, what is the contribution of new product launches now? Because last quarter, it was about 3%. But we are seeing the new launches, they are getting market share and good traction. So has there any change in the contribution from the new launches?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [115]

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No. It's approximately the same, as I said that we'd held back some of our launches. So that hasn't changed very much.

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Kaustubh Pawaskar, Sharekhan Limited, Research Division - Senior Research Analyst [116]

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Okay. And sir, my second question is about the cost-saving initiatives, and your target of about cost saving of about INR 250 crores this year. So that still stand at current level?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [117]

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Yes, it does. So we will achieve that for sure this year. And that's been very, very important for us in these trying circumstances. So we've doubled down on our cost-saving initiatives and our cost efficiency programs through the year.

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Kaustubh Pawaskar, Sharekhan Limited, Research Division - Senior Research Analyst [118]

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Okay. And sir, will some of these savings will utilize for your advertisement and promotional expense? Or there also, you are planning to a little bit slowdown considering the softer demand environment?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [119]

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No. We continue to do -- build our brands. We are not slowing down on that. But there is sometimes, a toggle between promotions and advertising. But otherwise, we continue to build our brands.

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Operator [120]

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The next question is from the line of Harit Kapoor from Investec.

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Harit Kapoor, Investec Bank plc, Research Division - Analyst [121]

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Just one question. Regarding marketing expense for this quarter, would there have been a slightly lower spend growth given the fact that we had a higher spend in Q1 because of World Cup as well the dates in the quarter had the 100k celebration?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [122]

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Yes. There -- certainly lesser than Q1, but it's at the same growth rate as the top line. So we also try to variabilize our advertising and sales promotion expenses to make sure that we don't go beyond what the top line growth is because then you are sort of deleveraging your costs. So our NSV spends have been in the same proportion as our top line growth.

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Operator [123]

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Ladies and gentlemen, this was the last question for today. I now hand the conference over to the management for their closing comments. Over to you, sir.

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Yash Bagri, Britannia Industries Limited - Executive Assistant to MD [124]

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I thank everyone for spending time with us on the call today. We look forward to interacting with you again. Thanks.

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Operator [125]

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Thank you, members of the management. Ladies and gentlemen, on behalf of Britannia Industries Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.