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Edited Transcript of BRITANNIA.NSE earnings conference call or presentation 10-Feb-20 9:30am GMT

Q3 2020 Britannia Industries Ltd Earnings Call

Kolkata Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Britannia Industries Ltd earnings conference call or presentation Monday, February 10, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gunjan Shah

Britannia Industries Limited - Head of Sales & Dairy Business

* 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

* Amnish Aggarwal

Prabhudas Lilladher Pvt Ltd., Research Division - SVP of Research

* Anand Kumar Shah

Axis Capital Limited, Research Division - SVP of Consumer

* Arnab Mitra

Crédit Suisse AG, Research Division - Research Analyst

* Harit Kapoor

Investec Bank plc, Research Division - Analyst

* Latika Chopra

JP Morgan Chase & Co, Research Division - Senior Analyst

* Mohit Khanna

Future Generali India Life Insurance Company Limited - Sr. Manager of Equity Research

* Percy Panthaki

IIFL Research - VP

* Prasad G. Deshmukh

BofA Merrill Lynch, Research Division - Equity Research Analyst

* Richard Liu

JM Financial Institutional Securities Limited, Research Division - Research Analyst

* Shirish Pardeshi

Centrum Broking Limited, Research Division - Senior Analyst

* Tejash Shah

Spark Capital Advisors (India) Private Limited, Research Division - VP of Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q3 FY '20 Earnings Conference Call of Britannia Industries Limited. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Yash Vardhan Bagri, Investor Relations team, Britannia Industries Limited. 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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Thank you, Margaret. Hello, everyone. This is Yash from the Investor Relations team. I welcome you all to the Britannia earnings call to discuss the quarter 3 '19/'20 financial results. Joining us today on this earnings call is our Managing Director, Mr. Varun Berry; CFO, Mr. N. Venkataraman; VP Sales and Dairy, Mr. Gunjan Shah; VP R&D, Mr. Sudhir Nema; VP HR, Mr. Ritesh Rana; and Head Marketing, Mr. Vinay Subramanyam.

We'll 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 would 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, everyone. We are back with the conference call. So I'm just going to take you through the presentation. So if you were to get to Page 3, which shows what we've done in this quarter. So it's a 4-quadrant chart. The first one is on revenues. It's a 4% revenue growth, 3.8%, in fact.

Our market share has -- we haven't seen a larger market share increase than what we are seeing this year. Operating profits are at the ever highest, and we moved up by 100 basis points. And PAT is plus 24% at 12.7%. So that is our results at a glance.

Moving on to the next page. All of you are aware of the economic slowdown that we are facing in the country. So we thought that it might be a good idea to take advantage of it and just make sure that we do not just keep pushing volumes because there is a limit to how much elasticity the system has at this point in time. So we focused our energies -- obviously, we are driving top line as much as we can, but we are not dumping at all. And we focused our energies on making sure that we set up the right systems and processes for the future. So we worked on a continuous replenishment system for our inventories, which is completely pull-based, and we are moving in the right direction with that. We've improved our distributor health, that is the lifeline of our company. And as the economy slows down, they also feel their own stresses and strains. So it's important that we focus on improving their health as well.

We've reduced wastages in the system even further. We've tightened our fixed costs. We've looked at every possible method of capacity extraction so that we can postpone capital investments in capacity, if we can get more from what we have. And we are implementing S/4HANA with huge process improvements in the system as a result of that.

On the innovation, what we are doing is there were a few projects which were in test market. So for example, Croissant and salty snacks is in test market. So we haven't moved beyond that because these are not probably the times to take these projects nationally. We are trying to fine-tune those. And we've also prioritized some of the future innovation projects because in times like this, when the economy is a little slow, consumers tend to go back to their favorite brand, that gives them more comfort, and they are not as experimentative as they would be in good times.

Moving on to Page 5. Our strategic planks, you're all aware of: to be a total foods company, continue to be cost leaders in everything that we do. Distribution and marketing, basically expanding our distribution to make sure that we get to the rural areas with the same share that we have in urban areas. And a cutting-edge marketing strategy on all our mega brands. And the fourth is getting to adjacent businesses. Obviously, the underlying in all of these is striving for a profitable growth.

Moving to the next page. Our journey to be a total foods company has begun. We've got wafers and milkshakes, which are available across the country. We have salted snacks and Croissants, which are in test markets, and we continue to fine-tune those mixes as we plan to take them across the country.

The next page is about cost efficiency programs. We do zero-based budgeting. And we look at -- we are -- even for the next -- this year, we should be very close to our target as far as cost efficiencies were concerned. So we will get about 2.1% of our revenue from cost efficiency programs.

And as we speak, we are in the process of planning for next year so that we can hit the ground running as we get to 1st of April 2020. We are looking at improving productivities, reducing waste and reducing distance that our biscuit travels to get to the consumer.

And all this -- sustaining this is very, very critical for us. And the last 5 years have proved that we have been able to do it, and we are hopeful that we will continue to do this as we go forward as well.

Next page is about our commodities. And we've taken a position on commodities, which has really helped us. As a result of which, our inflation was very moderate in this quarter. But this is only because of the positions that we've taken. Otherwise, the inflation would have been higher. Our mark-to-market gains year-to-date this year have been about INR 125 crores.

Moving to the next, which is distribution drive. We've seen really good results from a distribution standpoint. We continue to ratchet up our distribution month after month. Every month, we are looking at our distribution reach going higher, and we've bridged the gap to a large extent by the largest distributed competitor that we have.

We've also got a direct reach, which is today at almost 22 lakh outlets, 21.7 lakh outlets. This year, obviously, the gains are not as much as they've been in the last 2 or 3 years, but it's important that we don't overdo this in a year like this where the economy is not looking good.

As far as our rural distribution is concerned, again, our -- the number of rural distributors has gone up from -- in March, we had 18,000 distributors and in December, we had 21,000 rural distributors, which has taken our market share in all of the rural states, the Hindi Belt states, up considerably. In fact, the kind of share gains that we've seen this year are unprecedented, albeit the growths are not what we've seen in the past, but the share growths are much more than what we've seen in the past.

On the marketing activities, we've had most of our key brands on air, and we've also had some promotions, which are giving us the right kind of the lift with the consumers.

On the next page, which is Page 12, is about the adjacent businesses. Bread, we continue to drive profitability as far as bread is concerned. Dairy has been a very tough year. The milk prices have -- there's been a huge upsurge in milk prices. But we have been able to maintain our profitability fairly well in these tough times.

International. While Middle East continues to be very, very challenging, our startup in Nepal is growing high double digits, and we are market leaders in that country.

Moving to the next section, which is about growing responsibly. We have a credo here, which we are following. So what are the 4 planks that we are working on? We want to make a difference with reducing plastic in the environment, enhancing the good in the product that we sell, utilizing renewable energy and reducing fuel usage and conserving water, and fourth, better human lives through nutrition.

So I'll go through all of these planks one by one. So first is on reducing plastic. The work done so far is that we've reduced almost 12% laminate by weight per tonne of laminate that we use. So that is the first move that we've made. Second, 20% of the plastic that we create will be recycled in the year '19/'20. What is our promise? Our promise is that we want to remove all the plastic trays in our products by 2022. We want usage of recyclable laminate by 2024, and we want to focus on plastic recycling, and we are looking at doing a fairly large project on this as we go through the years.

The second plank was about enhancing the good in our product. So what is the work done so far? We've got all our products 100% trans-fat free. 46% of our portfolio is fortified with essential micronutrients. We've increased whole grain and dietary fiber by serving by almost 10%. And our promise, as we go forward, is to reduce 5% sugar and sodium in our bakery products by 2021.

Third plank is about utilizing renewable energy, reducing fuel and conserving water. What is the work that we've done so far? We've got 28% usage of renewable power in our units. We've had 30% reduction in fuel usage since the year '13/'14, and this is per tonne of usage. We use treated water for our green zone in our plants. We do rainwater harvesting in all our plants. And our promise is that 50% of the usage of renewable power in our own units will -- is our promise. So we want to make sure that it goes up from 28% to 50% exit 2021.

Better human lives. So what have we done till now? We have nutrition programs running in 4 states. We provide fortified biscuits to 36,000 children. We do employee activities as well. We've educated people on the importance of water conservation, and we've done plastic waste collection drives across 6 locations, and this will intensify as we go forward.

Moving on to the Page 16, which is about recognitions. So we have been the #1 food product category brand in 2019, and the #4 brand overall in brand equity. We've also got the Aon-Hewitt Best Employer for 2019. Our food -- we are Food Company of the Year at the Food Safety Summit this year. So quite a few awards that we've won, and we want to make sure that we live up to these awards and not just feel good about what we've got.

Getting to the financials, Page 18. So as you will see, we have had a slowing down of the top line. So last year, Q1, we were at a 14% growth. It came down to 13%, 11%, 10%, and this year, first 2 quarters were at 6%, and we've come to a 4% growth. Even our 24-month growth is at a low of 15%. So I would say, at this point in time, the growths are low. But in India, things will never remain as we see them today, and we are hopeful that as we go forward, this will improve.

As far as our profitability is concerned, and this is our consolidated operating profit. This has been the highest ever profit for the last 2 quarters. So we were at INR 447 crores with a 14.8% operating profit in Q2, and this has gone to 15.5% with INR 455 crores in Q3. So the profitability story is looking fairly solid.

On the last slide. So this is the algorithm. So net sales grew by 4% or 3.8%, operating profit by 11%, profit before tax at 7% and profit after tax by 24%. And as you see in the table below, you will see the trajectory of our operating profit, PBT as well as PAT. So from a 5.7% on operating profit, we've moved to 15.5% from '12/'13 to '19/'20. From a PAT of 5.8%, we've moved to 16.9%. And what we are really proud of is the consistency of our performance. And on PAT, we've moved from 4.2% to 12.7% in Q3. So this, in a nutshell, is the performance of our quarter. I will now open the forum 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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Sir, in the stand-alone business, so India business, last 4 quarters, there used to be difference of 400 to 500 bps in terms of the volume growth and the sales growth. This time, there's no difference. So what I'm surprised is this quarter quarter-on-quarter if you see, there is inflation in milk, RPO and sugar quarter-on-quarter, but your gross margins have expanded 50 bps. So I don't understand gross margins expanded in an inflationary scenario, but price hikes have come off from 4%, 5% to just 0% this time.

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

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Not 0%. The delta between volume and revenue is about 1%. But what had happened was that last year, we've taken some price increases, right? Which is helping us at this point in time. The other thing really is that it's been a quarter where our mix has been fairly favorable. So I think it's the 2 combined, which is giving us the right upside on profitability.

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

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But do you need to take a price hike or, say, reduce promotions in the near term? You manage inventory quite well, but is it now enough for the next 6 months in terms of pricing?

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

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No. I think what has happened is that while we did some strategic buying, which helped us maintain our inflation levels. Inflation, as we see today is moving up. We just have to make sure that we take a balanced view, basis the slowdown in the top line and the inflation in the market and we make the right kind of price increases on the right products so that there is not -- that this top line doesn't slow down further. So we are in the process of working that out, and we will take a very balanced view on that.

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

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My second question is on Croissant. So last quarter, you said this product seems to have stabilized and next 3, 4 months, you'll take it pan-India. This time, you have said ongoing pressure test, you are evaluating and learning from this. So what has changed? I couldn't understand? Is the product still having some issue of breakage, et cetera?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [7]

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No, not really. So what really we are testing in the 2 centers where we launched is we are trying to fine-tune the flavors completely, right? So what -- for example, some of the things which have come out of our research are that the Indian consumer prefers a slightly milkier, sweeter chocolate note, while we have a slightly European chocolate note. So those are the kind of things which are coming out. I'm just giving you example. So in normal circumstances, we probably would have taken it national by now. But as I was saying in -- during my presentation, in times like this, people stick to the comfort of what they've been consuming thus far and experimentation is not on their heads. So we thought that it might be a good idea to take this to absolute finality and then launch it, so that we are able to fine-tune it completely.

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

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Sir, pan-India as of now, any time lines?

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

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Probably in the next 3 to 4 months.

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

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And finally, Varun, on the wafers. So you -- in biscuits, you have a 35%, 40% market share. Obviously, your distribution is far, far higher than the leader in wafers. So you're offering a free gift also. So my sense -- my question is in wafers, what is the long-term market share you're aiming? Will it reflect the biscuit market share, which you have?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [11]

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Well, hopefully, for sure, we have become the #3 player already as far as wafers is concerned. See, the wafers market is a little different because most organized players were not operating in that market. So it was a market which was high discounts and that kind of stuff. A very high-priced, but very high trade discounts, et cetera. What we are trying to do is, we are trying to operate differently and not focus so much on trade discounts, but to create a brand, which has the pull in the long term. And hence, instead of in lieu of giving a trade discount, we are giving a pen inside a jar, which has -- so those are the kind of promotions that we are doing.

But hopefully, this will -- as we go forward, we will taper that off as well. But yes, the objective will be to try and see how we can get to our biscuit market share in the long term.

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Operator [12]

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(Operator Instructions) The next question is from the line of Percy Panthaki from IIFL.

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Percy Panthaki, IIFL Research - VP [13]

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My question is also on the interplay between the price and the margins. So on a Y-o-Y basis, you are saying the price growth is about 1 percentage points. And in the presentation, you have also mentioned that there is almost a 4 percentage points inflation in the input cost basket. So then your gross margin should have dipped much more than it has, arithmetically speaking, shouldn't it?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [14]

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Yes. So our cost efficiency programs have come in very handy. So as I was saying, we've got about 2.1% from cost efficiency programs that we run. So that's what's -- and it's not 4% actually, it's about just over 3%.

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Percy Panthaki, IIFL Research - VP [15]

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Okay. Understood. And going ahead, since your benefit of low-cost inventory goes away, just assuming that the current spot prices continue, this 3% inflation in the input cost basket will turn out to be how much in the future?

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

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It would be in the range of 4% to 5%, maybe 5%.

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Percy Panthaki, IIFL Research - VP [17]

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Okay. And in this kind of an environment where consumption is subdued, do you think that it would be possible to pass on that extra sort of burden to the consumer or do you think that you would really have to take a hit on your margins to some extent?

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

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No. We will pass that on, but we'll do it selectively. We will not do it across our portfolio. As I was saying earlier, we will do it very selectively. And I don't think it's going to make a huge difference because it does impact your volume growths, but it doesn't impact your revenue growths. So that's fine. We are happy to make that arbitrage.

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Percy Panthaki, IIFL Research - VP [19]

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Right. And what are the lead indicators you would look for to sort of call out recovery in the underlying demand trends?

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

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I think overall, first of all the fact is that as the base corrects, growths will start to come back. If you look at it, this quarter was the quarter when we had started to see the revenues to come down last year. And we haven't seen growths this quarter. But I'm hopeful that as the full impact of the last year base starts to come in because, as you see, in the first 2 quarters, we grew only 6%, as that starts to come in, I think things will obviously change.

But more than that, all the rural schemes, et cetera, the infrastructure projects that the government has unfolded, hopefully, that will help. And I think the Indian consumer is extremely resilient. At some stage, she's going to say that enough is enough, let me live my life. And that's the time that things will start to fall back into place.

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Operator [21]

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The next question is from the line of Richard Liu from JM Financial.

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Richard Liu, JM Financial Institutional Securities Limited, Research Division - Research Analyst [22]

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Varun, you are someone who has always been focusing on this 24 month's growth number. And I recall you mentioning in H1 that growths is are where they are because there were some benefit that you got in the base H1 because some competitors had some product issue and because of which Good Day grew 30%-plus. With that high base now over, your growth still decelerated, would be grateful for your comment on this. I know you spoke about slowdown, but then if there's something more than that. And also if you can dovetail into this response, how did operating other income suddenly bump up to such a big number this quarter?

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

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Yes. So the first question, yes, the growths have decelerated, but we -- our share has -- we haven't seen this kind of share gain ever before in any year. So it's just overall phenomenon of where the consumer is today. And we are not looking at pushing volumes at this stage because it will bounce back on us at some stage. So it's better to look at process changes, keep the house tidy rather than do a hectic activity of push. It's best to be on a pull model, and that's what we are trying to do.

Your second question is on the other income. Yes, so there, it's the fiscal benefits that we are getting from some of our factories. So there are 2 factories which have come up. One is the Guwahati factory. And the second is in Ranjangaon. So we are getting fiscal benefits from those 2 factories, and this is going to be -- it's going to continue. It's not just a one quarter phenomenon, it's something which is going to continue as we go forward as well.

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Richard Liu, JM Financial Institutional Securities Limited, Research Division - Research Analyst [24]

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Okay. And second question is, if I get what you said, right, I think volume growth for this quarter is somewhere to the tune of about 2% versus 3% in Q2. Two related questions on this. One is the pricing growth that was in the ballpark of about 3.5% to 4% in first half, I think that has suddenly taken a dip to 2% in an inflationary environment. I heard you speaking something about mix being positive. So if you can help understand this.

And second, to your point about raw material costs having been hedged. Despite that, if we look at the growth in COGS, which was 6.7% in Q2 and 6.5% this quarter, with the lower volume growth, your growth in COGS is exactly the same as what it was in Q2. How did the hedge exactly help in this regard then?

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

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No. So I wouldn't be able to give you so many details. But all I can tell you, our mark-to-market gains versus what the market stood at were at about INR 125 crores. And the overall inflation was much more than what we saw. So we saw between 3% to 4%, but overall inflation in the market was much larger. There are a lot of things at play, there's mix, there's a whole lot of other things. So I wouldn't be able to decipher it for you on a call on what exactly were the reasons for the COGS growing 6.4% versus -- yes?

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Richard Liu, JM Financial Institutional Securities Limited, Research Division - Research Analyst [26]

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And Varun, what about the pricing part, the fall from 3.5%...

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

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So pricing part is basically, we've taken the last quarter, we had -- Q3 of last year, we had seen a pricing gain. So that's what's creating the gap between volume and revenue.

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Operator [28]

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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 [29]

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In this slowdown environment, how are you seeing competitive intensity overall, both on product pricing and on trade promotions playing out?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [30]

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So we are seeing competitors flaying a bit. Obviously, when you face a wall, you tend to -- so there are different ways that different competitors are taking this slowdown. So some of them -- most of them are trying to push as much as possible, right? But I don't think that's the right strategy because there's no point in increasing inventories with distributors or with trade because the consumers are not consuming as they were. There has been a slowdown. So as long as your product is available. So we have taken a very different approach to this. We have not taken an approach of pushing hard.

So I would say that most of our competitors would have a very high skew of sales towards the end of the month because if you have to prove that you are growing, then you will just go and push distributor, which leads to serious attrition as far as distributors are concerned, which leads to unfresh stocks lying at the distributors and also stocks that get to the market are not as fresh as you would want them to, which also leads to market returns which are much higher. So we don't want to go down that path.

From a promotional standpoint as well, we've seen a fairly aggressive approach from competitors, and we are matching it wherever we think that it's something which can impact us. So we are being absolutely competitive standing toe to toe where it's necessary and standing off where we think it's not necessary. So that's the approach that we're taking.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [31]

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Sure. That helps. And my second and last question is on other expenses. There is a, say, cost reduction on that line item. So besides your cost saving programs, has there been any reduction, one, in advertising spends? And second, is there any impact of Ind AS 116 in the other expenses, how it's reported now?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [32]

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Not really. It's the cost efficiency programs, which feature there, which is bringing down the costs to an extent. And also our advertising, I would say, has been flattish. So it's not grown at the rate of our top line growth, it's flattish.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [33]

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Sir, and no impact of Ind AS 116 on the other expenses?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [34]

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No, no.

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Operator [35]

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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 [36]

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First question, in terms of your growth and now contribution from modern trade and e-commerce, how has that faired?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [37]

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It's been reasonable, I would say. So modern trade, again, so as a result of the tightening of the economy, what we've seen in the last 2 or 3 quarters was that, again, there was -- from a competitive standpoint, there was a lot of dump happening into modern trade. And so we've desisted from that. We've made sure that we don't overdo this volume game scenario. So we've desisted from that. We've also tried to make sure that modern trade doesn't become dilutive to our overall business. But yes, we've been growing double digits as far as modern trade and e-commerce is concerned. And it's very important because there is tailwind on the modern trade and e-commerce business.

It's very important that we keep this to be not accretive, but at least at the same level as our overall business in terms of profitability. And that's what we are focusing on.

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Aditya Soman, Goldman Sachs Group Inc., Research Division - Equity Analyst [38]

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All right. And in terms of contribution, what would be the contribution now?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [39]

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It's at about 10%, 11%. It's not a very large part of our business, but growing faster than traditional trade. So it will continue to increase as we go forward.

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Aditya Soman, Goldman Sachs Group Inc., Research Division - Equity Analyst [40]

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And that's both together, right, modern trade and e-commerce?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [41]

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Yes, yes.

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Aditya Soman, Goldman Sachs Group Inc., Research Division - Equity Analyst [42]

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Yes. And just following up on that, there was -- you recently filed a case against Future Consumer, copyright on one of their products, is that more of a threat that you're seeing that some of these retailers have their own private label?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [43]

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No, no, no. They are free to do what they need to. And that case has been solved amicably, so there is no issue.

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Operator [44]

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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 [45]

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Two questions from my end, sir. The first was on the distributor health that you spoke of. Is it that you've reduced the inventory in the pipeline or that you've increased credit days or a bit of both to improve the ROI?

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

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No. So we've definitely reduced inventories. So we have this program called zero-day inventory for certain cities, which are the more expensive cities to operate in for the distributors. And even in the regular distributors, we've made sure that we give them as much inventory as is required. We've got this system called the continuous replenishment system, which looks at what does the distributor require and absolutely provides only what is required to the distributor rather than dumping extra stocks there.

So we are following that continuous replenishment system to the T. Credit days, we haven't increased. And that's something that we don't believe in. It's not about throwing credit because that, again, becomes a volume game. Whatever we can do to help the distributors remain healthy. Whatever support they need, giving them the right products, the right advertising material and making sure that our people guide them in the market, and our people understand their terrain and what is required for the future success and the ROI of the distributor is what we provide.

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Harit Kapoor, Investec Bank plc, Research Division - Analyst [47]

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Got it, sir. Second question was on biscuit industry growth. Have you seen the industry growth from quarter 1 to quarter 2 to quarter 3 now slow down? And if you could give a sense on where -- which segments or which regions this is more pronounced?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [48]

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So it's predominantly the rural part of the country, which is growing much slower than what it was last year. It's not that the slowdown is not hitting large cities and urban areas. It is, but the largest slowdown is in the rural areas. And as I was saying earlier, it's -- while we've grown share very aggressively in the rural areas because of our programs but growths have not been comparable to what they used to be 3, 4 quarters back. But we are hoping that things will stabilize at some stage as the base comes back in our favor as well as the government programs start to operate and the Indian consumer starts to move back with normal life. I do think it's not going to be immediate, but I would think that in a quarter of 2 -- or quarter or 2, we will start to see the uptick as far as growths are concerned.

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Operator [49]

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The next question is from the line of Amnish Aggarwal from Prabhudas Lilladher.

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Amnish Aggarwal, Prabhudas Lilladher Pvt Ltd., Research Division - SVP of Research [50]

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Hello? Hello?

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

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Yes. Yes, yes.

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Amnish Aggarwal, Prabhudas Lilladher Pvt Ltd., Research Division - SVP of Research [52]

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Yes. Sir, I have a couple of questions. My first question is on other operating income, and whereby we have seen a Q-o-Q jump of around INR 20 crores. Now I was just -- it is due to 2 new facilities, so I believe it is due to the VAT and some of these types of gains. So at the optimum level of your production, can this number be significantly higher from what we have seen in the current quarter?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [53]

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Well, I would say that it will remain about at this level. There could be certain upsides, but I would not budget for those as we go forward. I would think that about the same level as what we see this quarter.

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Amnish Aggarwal, Prabhudas Lilladher Pvt Ltd., Research Division - SVP of Research [54]

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Okay. And sir, this is likely to continue for, say, next 5 years?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [55]

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Even more than that.

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Amnish Aggarwal, Prabhudas Lilladher Pvt Ltd., Research Division - SVP of Research [56]

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Okay, okay. Sir, my second question is on the -- your intercorporate deposits, so any update on that?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [57]

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So it's in the same ballpark. It's within the limitations of what the board has sanctioned. So no major movements there.

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Operator [58]

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The next question is from the line of Anand Shah from Axis Capital.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [59]

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Just a couple of questions. Sir, firstly, if I look at the subsidiary financials, as in consol minus stand-alone, I mean, for the last 4 quarters, growth was negative, now it's turned to positive. So is it the same shift of -- that you were exporting from India and now it's shifted back to Middle East or so?

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

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Yes. That's right.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [61]

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Okay. So that production shift has now happened. So the stand-alone number, rightly, would have gone down a bit and has better look at consol to that extent?

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

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Yes, absolutely.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [63]

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Okay, okay, okay. Perfect. And secondly, you have also highlighted some -- that from -- you may look at INR 800 crore kind of a raise from debt from time to time, I mean, so what is the purpose for that?

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

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No. The purpose for that is this is the weak season as we speak. And we -- in the last 2 years, we've gained a lot from strategic buying. So we are using that. And today, it's -- the money is available at a very low rate. So it's best to make sure that we use that for most of our strategic buys.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [65]

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Okay. So the INR 500 crore that you had sort of taken, let's say, 9 or 12 months back that was supposed to largely expire, right? So that is over?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [66]

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Yes. That was repaid.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [67]

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That was already repaid. So that amount of INR 500 crore debt has gone and then from time to time for the same purpose, you may look to as on -- as and when the opportunity is available?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [68]

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Yes, absolutely.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [69]

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Okay, okay. Perfect. And -- okay. So -- and just lastly on this -- in terms of covers, now you're hedging all the covers are completely expired for the various commodities? Or you are still covered for a bit more for the next 3 to 6 months?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [70]

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So we -- no, we cover it till the season is there for the commodity. So wheat will be a short cover because the wheat season is going to start, the harvesting is going to start soon. So it's like that. There will be some sugar which is covered, there'll be -- so we do it from season to season.

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Operator [71]

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The next question is from the line of Mohit Khanna from Future Generali.

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Mohit Khanna, Future Generali India Life Insurance Company Limited - Sr. Manager of Equity Research [72]

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My question is regarding the hedging of commodities. Last year, you disclosed that you had hedged wheat. Is there any other hedge currently underway? One. And second, on the distribution side, what is the target that you are -- that you have to have number of distributors in the rural and the urban centers?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [73]

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Venkat, do you want to comment on the commodities?

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N. Venkataraman, Britannia Industries Limited - CFO [74]

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So on commodity, as Varun just explained, depending on the crop season, which is different for different commodities that we have. So it is March/April for wheat, it is October/November for sugar and so on, right? So we...

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Mohit Khanna, Future Generali India Life Insurance Company Limited - Sr. Manager of Equity Research [75]

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So right now you are hedged for wheat?

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N. Venkataraman, Britannia Industries Limited - CFO [76]

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Yes, hedged for wheat, not for very long, till the new season will start, which is going to be the March/April, yes.

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Mohit Khanna, Future Generali India Life Insurance Company Limited - Sr. Manager of Equity Research [77]

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Okay, okay. And then, so as the season goes by, you generally hedge yourself, that's the standard practice?

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N. Venkataraman, Britannia Industries Limited - CFO [78]

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Depending on the inventory of the commodity in India, the world commodity market, et cetera.

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [79]

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So there's a lot of work that we do in terms of understanding what the situation on the commodity is, but the general principle is that during the season, the prices come down, so there is no point in holding commodities beyond a certain period of time, which ends, let's say, just before the season comes in.

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Mohit Khanna, Future Generali India Life Insurance Company Limited - Sr. Manager of Equity Research [80]

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Fair enough. And in terms of distribution, do you have any internal targets of where to reach? Or what kind of directories the company plans or targets to have?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [81]

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So we would certainly want to be the big -- the largest distributed company within our category. Today, while we are the largest in terms of market share. But in terms of distribution, we are still below our largest competitor. So our objective is to at least get to their level in terms of overall distribution. So our current distribution is at about 5.5 million outlets and 8 lakhs is the gap. So we would certainly want to, in the next 3 years or so, cross the 6 million mark.

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Operator [82]

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The 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 [83]

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Yes. Sir, 2 questions, sir. One, in terms of wholesale performance separately in urban and rural. Could you give some sense as to what is happening in the channel?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [84]

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So our rural shares, while they've moved up much more than what our urban shares have moved up, but still are lower than our -- Gunjan, would you like to comment?

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Gunjan Shah, Britannia Industries Limited - Head of Sales & Dairy Business [85]

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Yes.

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [86]

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So Gunjan is our Vice President, Sales.

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Gunjan Shah, Britannia Industries Limited - Head of Sales & Dairy Business [87]

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So your question was, I guess, specifically on wholesale.

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [88]

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Is it wholesale?

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Prasad G. Deshmukh, BofA Merrill Lynch, Research Division - Equity Research Analyst [89]

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Yes, the wholesale, separately rural, separately urban, how are they performing?

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Gunjan Shah, Britannia Industries Limited - Head of Sales & Dairy Business [90]

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Sure, sure. So wholesale, both urban and rural is the one that's the most muted in the slowdown that Varun just talked about to you over a period of time, not only the last quarter has taken the bulk of the toll, and we have been relatively a little better off in this entire matter because our dependency on wholesale as well as the direct reach expansion that Varun talked about, which has been our agenda over multiple quarters has given us a competitive base. But yes, wholesale has been relatively more muted for us.

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Prasad G. Deshmukh, BofA Merrill Lynch, Research Division - Equity Research Analyst [91]

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So both urban, rural have been relatively muted?

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Gunjan Shah, Britannia Industries Limited - Head of Sales & Dairy Business [92]

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Yes, yes, absolutely. Rural, may be a bit less because we've been penetrating. But I mean, from a category point of view, yes.

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Prasad G. Deshmukh, BofA Merrill Lynch, Research Division - Equity Research Analyst [93]

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Okay. And there is no -- like, sequentially, there is no improvement in the last year?

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Gunjan Shah, Britannia Industries Limited - Head of Sales & Dairy Business [94]

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No, nothing noticeable.

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Prasad G. Deshmukh, BofA Merrill Lynch, Research Division - Equity Research Analyst [95]

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Okay. And second question is on the new products, could you give some details on the run rate that these 4 categories are running at now: wafers, salted snacks, milkshake and Croissant?

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Gunjan Shah, Britannia Industries Limited - Head of Sales & Dairy Business [96]

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Sorry, new category's run rate?

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

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Yes.

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Gunjan Shah, Britannia Industries Limited - Head of Sales & Dairy Business [98]

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So we are seeing -- basically, I will not be able to share exact details, but broadly, what we are seeing is about 1%, 1.5% of our growth coming from these categories. We are obviously aspiring and wanting much more, but that's the current status.

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

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So currently, if you look at our growth, which is, let's say, about 4%, almost half of that is from our base business, 1% is from innovation and 1% is from new categories.

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Operator [100]

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The next question is from the line of Latika Chopra from JPMorgan.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [101]

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Varun, just a very broad question on your new product forays. Is there any shift or change in your thought process around expansion into salted snacks? Are there any -- is there any other challenge besides the subdued demand that you have postponed it? And if you could throw some light on when do you think you will go back behind these segments with full force?

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

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So what we are doing currently, Latika, is we are not expanding it from the test markets that we have. And I would think that -- so our challenge is, there are a few challenges in every category that you get into, and that's what helps us. The test market really helps us to fine-tune those till we get to a national launch. So I would say that no red flags at this point in time. There are minor challenges here and there which we are resolving as we go forward. So I would say, between Croissant and salty snacks going all out, maybe Croissants will be the next 3 to 4 months and salted snacks would probably be in the next 6 months.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [103]

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All right. And could you share the CapEx plan for FY '20 and '21? Initially, you remarked that you would like to utilize more of existing capacities?

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

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Yes. So what is the CapEx number that you -- yes. So this year, we will have about -- a CapEx number of about INR 190 crores so -- versus in the previous year INR 250 crores. Yes, yes. And predominantly, if you look at it, this year, our CapEx is going into our Ranjangaon factory, which is turning out to be a really beautiful food path for us. So that's where most of our CapEx is going besides minor CapExes and then some CapEx into our IT systems, et cetera.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [105]

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And just a clarification, 2.1% of revenue is the cost savings you're targeting for FY '20. Any thoughts on what these could potentially be targeted for the next fiscal? Would it be in a similar ballpark?

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

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Yes. We'll be in the similar ballpark.

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Operator [107]

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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 [108]

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I have 2 questions. One is on international business. Varun, you mentioned that Nepal is doing well. Could you quantify how is the business? What are the scope or what are the -- what is the run rate?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [109]

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So just to give you an idea, we used to do about 300-odd tonnes a month, and our exit in the previous months is about -- at about 600, 650 tonnes a month. So it's more than doubled after we've set up the factory. There's -- and as it would turn out to be, the import duties in that country have gone up during this period as well. So that's given us some benefits. And we -- so that's the ballpark for you to understand where we are going with that. And the total capacity that we have in that factory as of now is 600 tonnes, but with a little more investment, we can take that up to 1,200 tonnes a month. So we have head space when required to scale up that country even further.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [110]

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So just expanding on that. So we've seen international business has gone through a lot of issues in FY '20, and now you say that the growth is back. So is it safe to assume that Middle East will get resolved, and we can see double-digit growth?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [111]

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Well, see, the Middle East problem is, obviously, there are 2 problems. One is the problem of the genuine growth potential in that belt because a lot of countries have shut down and even the countries which are operating, the big part of the business for us is UAE, where there is clearly a slowdown. But more than that, the second issue there is that because we were shutting down our plant in Oman last year, we had built inventories with our distributors which we had to wind down this year. After we got the -- we restarted that factory after being in dialogue with the government and getting some good deals from them. So we've restarted it, and we had to wind down our inventories with our distributor as well. So that's why the business has been a little slow this year from a primary standpoint.

From a secondary standpoint, it's a little better, but I wouldn't say dramatically better than what you see.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [112]

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Okay. My last question is on biscuits category. You've been saying that the biscuits category is under pressure, would you be able to quantify where is the problem? Is the basic biscuit, which is glucose, is seeing the trade up or it is declining and the value-add segment is really showing the resilience?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [113]

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Well, I think it's the belly of the category, which is growing, right? It's not the base, the base has been stagnant for many years now. So the glucose, et cetera, have been stagnant, even the value cookies and value creams have not been growing very fast. It's, I would say the medium premium products, which are growing. So the cream -- the premium cream products, the premium cookie products have been growing for the last 3, 4 years. So that's -- and the Marie and Milk Bikis, et cetera. That's where the growth is. It's not the top end. It's not at the complete top end but it's almost at the premium level where the growths are coming.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [114]

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Any quick comments on nonbiscuit portfolio for us?

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

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The nonbiscuit portfolio for us has been at about the same level. It's not -- this has not been a great year for us on the nonbiscuit portfolio as well. It's not growing faster and which we'd expected because it's a much smaller portfolio, and we thought that the consumption of these products will improve as we go forward. But that's not happened. And I would say that it's probably because of the downtrend in the economy and hopefully, as we go forward, things will start to unwind. And that portfolio will start to grow much faster.

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Operator [116]

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The next question is from the line of Tejash Shah from Spark Capital.

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Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [117]

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Sir, first question pertains to when the current RM forward expires and the current steeper RM price hit the P&L, are we planning to take any pricing interventions?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [118]

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Yes. I think we will have to take selective price increases while we understand and fully internalize the fact that there is already a slowdown. So we don't want to impact that further by taking a price increase in the segments which already have taken a price increase in the last 12 months or so. But wherever we haven't taken a price increase for the last 24 months are the categories and the brands, where we are going to take some price increase. So it's going to be a selective game of price increase without really upsetting the apple cart.

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Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [119]

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But sir, our competition would not have the cover that we had, so have they taken any price increases already, which gives us some room to do that?

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Varun Berry, Britannia Industries Limited - MD & Whole Time Director [120]

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Well, we are the market leaders. There had been some price increases that certain competitors have taken. And we are very quick to follow wherever that happens. But we are the market leaders, there are some categories where competition is sussing us out in looking at whether we will take the price increase. So we have never ever gone against the grain as far as pricing is concerned because it's a zero-sum game. We would want to follow competition and not take advantage of competition being at a higher price. That's not the way we operate. And I think that's how rationality comes into the category.

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Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [121]

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Sure. And sir, lastly, if I may squeeze in one more? So usually, food inflation also means more money in the -- in front of rural consumer, so if you have to share you're reading from the past, how does this food inflation versus rural uptick or potential rural uptick plays out for a category like biscuits?

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

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No. So you're right, it's money that the consumer has in her hand. And she first has to think about (foreign language), and then think about the other categories. We are almost in that category of (foreign language). We are almost essential for the housewife. So -- but yes, we are still, I would say, at the periphery. So it does impact. And I think that's what's been happening. It's just the sentiment as well as the inflation, which has been keeping the consumer away from getting back to normal consumption. And we are hoping that things will -- obviously, for a period of time, there will be inflation but things will fall into place as we move through the year.

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Operator [123]

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Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. Yash Vardhan Bagri for closing comments.

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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 call today. We look forward to interacting with you again. Thank you.

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Operator [125]

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Thank you. On behalf of Britannia Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.