Britannia sees rising input cost, double digit growth: CEO

Vinita Bali, CEO, Britannia says that the UAE and Oman arm of the company have notched the number two spot in select segments. She also says that consumer companies have seen an increase in input cost by 7-9 percent.

"The cost of inputs like wheat and sugar has seen an increase of 30 percent and 15 percent respectively on year-on-year basis," says Bali.     
Also read: Expect better growth rate going ahead: Godrej Consumer Below is the edited transcript of her interview to CNBC-TV18. Q: Can you just take us through the profitability of Britannia's subsidiaries at this point? What is the trajectory that we could expect for the bottom-line for them going forward and how exactly is the performance?
A: Our consolidated net profit in the first half grew by 28 percent where our standalone growth was about 12 percent. Our revenue numbers indicate that our standalone growth was 10 percent and consolidated growth was bit above 11 percent.
Overall our subsidiaries, the dairy and the Middle East business, have been accretive not just to the top-line, but also quite significant to the bottom-line. These The subsidiaries operate in sectors like in the Middle East - several GCC markets, which is our main markets, there we have reached the number two position in bakery category. 
In the dairy segment, domestically, we are not competing in every category. We are limiting ourselves to key towns and channels. Within our channel, we are either number two or three brand in the cheese segment. Our yogurt has presence in about 7-8 markets, and there too we are either number two or three brand. In dairy, Britannia is either the number two or number three brand in the categories in which it operate as far as the Middle East is concerned. We are now a number two brand in the UAE and Oman. Q: How has the consumer demand been in last quarter or half year? One hears about a lot of consumer down trading and perhaps rural demand getting a bit miffed and perhaps some recovery in the last couple of months because of festive season. What is your own experience?
A: The consumer demand is increasing so there is no need to panic if the market is growing or not. The market is growing at a double digit rate. I think our industry and several FMCG is used to high double digit growth. In last six year our Compounded Annual Growth rate (CAGR) was about 20-22 percent.
We are still seeing double digit growth but it is not the order of magnitude that we were used to. The market is growing but the rate has slowed down slightly and I think there are some good reasons for that growth rate to slow down.
There is pressure on the food basket. If you look at the consumer spending pattern, he will first spend on things which are non-negotiable, then the balance disposable income he will spend on non-essential. We are again seeing a shift between categories. But in every category we are seeing a slight declining growth.
When the GDP growth comes down from 8.5 to about 5 percent then the disposable income is stressed. When the disposable income is stressed people spend their money differently. Food inflation continues to remain very high. The cost of wheat flour is up by 35 percent and cost of sugar is up by 15 percent in a year and this adds stress to the consumption basket.  Q: Is there a distinction between high value products like Cookies or NutriChoice and the basic Maries? Don’t you see a downtrend in slightly higher value product because it caters to a different category?
A: NutriChoice and related products are very specifically positioned. If a diabetic person wants to buy Ragi or Oats biscuits, which falls under NutriChoice, then he has limited substitution whereas, for a basic Marie, glucose or basic cream biscuits there are many substitutions.
Demand elasticity is less in brands like NutriChoice and we see higher elasticity in normal cream and plain biscuits brands. Another difference is that the size and velocity of the market is very different.  Good Day is a larger brand than NutriChoice. Tiger is a larger brand than Treat. So there are two kinds of interplays. One is the elasticity of demand and the second thing is the velocity itself.
Q: How exactly are the input costs affecting Britannia in general? For your biscuit category, are margins pressured despite you all maintaining market share?
A: Lets start with wheat first. Wheat flour has gone up by about 35 percent, sugar is 15 percent. Over and above that, there is actually a pretty significant inflation which is almost hidden and that is the price of fuel or diesel. With diesel rates having gone up by Rs 5/ litre, Rs 40 has become Rs 45. That is the hidden cost, because it is impacting both my receipt of materials as well as my own cost of distribution.
If I were to put all of these together, we have had some favourable trends when it comes to the price of milk and milk products. Price of milk has not gone up significantly this year, neither has the price of other ingredients like RPO. When I put all of this together then what we are looking at, is a total input inflation of anywhere between 7-9 percent
The other thing that has been significant for packaged commodities in India, is the implementation of the new Legal Metrology Guidelines effective November 1. So, the entire industry has actually looked at prices and weights and adjustments. On an average, the industry pricing would have gone up anywhere between 7-8 percent as well. So we have tried to cover most of the inflation through pricing, but also significantly through a lot of the cost effectiveness programs that we have.
There are three things that we are focusing on-cost management, revenue management and innovation. At a time like this, when we are living through a pretty inflationary period, the emphasis on cost management also becomes very, very critical. Q: In a report which forecasts your EBITDA margins to increase from 5.7 percent last year getting closer to 6 percent in this and the next year. Would that be a correct assessment? The report also forecasts your sales to fall from closer to 19 percent growth to something like 12-13 percent. Would that be a fair assessment of how things might pan out?
A: I do not want to give a fair assessment. We have a policy whereby we do not give any forward looking call. Q: What is the next big product from the Britannia’s table? Are you looking to break apart from where you already are? The confirmed market leaders producing biscuits get on into some other snacking or other allied or not even allied products, because you have a great distribution to build on. You have a stronghold coming into the non-biscuit bakery products as well. Take us through what exactly would be the next growth driver?
A: There is significant impetus behind our pillar brands, whether it is NutriChoice, Good Day, Milk Bikis, Marie, Treat etc. You can certainly expect to see innovation in each of these.
For example, Good Day, is one of our most iconic leading brands, which also happens to be celebrating its 25 years this year. We have launched little tepidly, a version of Good Day which was called Fresh Bake. It is a totally different kind of product. It is a different process. It is a different texture and taste appeal and you will see a lot more of those kinds of innovations coming in to actually fortify and strengthen our already strong pillar brands.
We look at ourselves as being in the baked snacks business. We dominate the sweet category, out of those baked snacks. We are just putting our toe into the savoury category of those baked snacks where we have launched products like 50-50 Snackuits, NutriChoice Thins as well as NutriChoice Roasty both in a normal version as well as in a low glycemic index version.
So, you can expect to see more of those kinds of products being consolidated and fortified. Within our dairy portfolio, we are expanding the range of our dairy based beverages. We already have a Badam Milk as well as Chocolate Milk and we are also introducing Chaas in several of those markets. So, in other words, what you can expect from us is a fortification of the large brand franchises that we have, both in bakery as well as in dairy.