As we gear up for the goods and services tax (GST) rollout on July 1, focusing on the biscuits segment, CNBC-TV18 talks to Varun Berry, Managing Director, Britannia Industries.
In earlier interviews, Berry had said the 18 percent tax on biscuits would be tax neutral for them and reiterating the point today, he said going forward GST would be good for the overall business.
According to him, there it is unlikely that they would raise prices now although inflation in raw material has been rampant, which actually necessitates them to take increases. So, this could put pressure on margins for a short period of time.
He does not think GST would help them gain market share. GST in fact, will make it an even playing field, he said.
Internationally, Africa and Middle-East would continue to remain pressure points. However, the company is looking at entering into other geographies to help ease the pressure.
He is very upbeat on the government initiatives, like GST, ease of doing business etc.
Below is the verbatim transcript of the interview.
Nigel: There is so much of talk about goods and services tax (GST). The last time we spoke, you said that the rate of around 18 percent should be tax neutral. A couple of competitors in the market were indicating that maybe they will have to take price increases, etc. Do you see this as an opportunity for Britannia to get some market share?
A: I do not think it is an opportunity to get market share. I do think that being tax neutral is a great place to be. The thing is that the fast moving consumer goods (FMCG) industry is going through a little bit of a downturn overall and we did not want a tax rate to be higher than what it was. That would have caused a downturn in the industry. With all the right measures that the government is putting in with GST, obviously the ease of doing business, etc. all that happening, this is going to help us take the growth rates, once again, to the heady numbers that we have seen in the past.
So it was not about market share. I do not think it is about being overly competitive. I do think that certainly, it is going to make it an even playing field.
Nigel: A couple of your competitors like Parle and ITC, they have indicated maybe they will have to go ahead and increase prices. Do you think that you will be able to increase prices?
A: I do not think it is required.
Mangalam: So, in that case, would you gain some market share given that the value segment would increase their prices?
A: There might be a fine tuning which is required. There might be some amount of price increase in the value segment, but overall if you look at biscuit average, it will not change. So to that extent, I think it is going to be a pretty easy rollout.
Mangalam: You spoke about ease of doing business and all of that going forward as far as the GST is concerned. But in its current form, filing thrice a month, e-waybills and filing across the states and all, do you think really GST will ease life for you or do you think there could be further complications as far as the administration is concerned?
A: Initially, we are going to have some hiccups, but as we settle down, as the government realises what is the best way to implement this and companies understand how to do it the easiest way, it is going to certainly help us as we go forward. So there is no doubt in our mind that this is a measure which is going to be good for the business.
Nigel: I wanted to focus on any kind of levers you are working with in terms of margin improvement. You have told us in the past that do not expect double digit volume growth for the next few quarters. Do you believe margins can move around from here?
A: With volumes not getting to the levels that we expected a year back, etc. I do think that it will be important for us to get the volumes going before the margins start to get to a higher level. So this is a time when we have got to keep our head down and just keep executing and keep getting all these issues which will come through GST, etc. out of the way. Once we smoothen out the execution of all this, we will get to growth, we will get to margins and that is what we are looking forward to.
Mangalam: You were talking about volume growth ahead of margin growth, but you said cannot expect double digit volume growth for at least the next 3-6 months. In that case, what kind of margins are you working with as far as FY18 is concerned and what kind of raw material inflation are you pencilling in?
A: The raw material inflation has been fairly rampant. The government has taken some measures to soften the blow, but I do think that there will be inflation as we go forward, at least 6-7 percent in the next six months. So with that kind of inflation, it necessitates price increases but, in the current scenario, we will not be taking price increases because it is a fairly tumultuous situation. So it might just put a little bit of pressure on margins for a short period of time, but we have got to take in our stride.
Nigel: We are talking so much over the domestic story, international business is only around 7-8 percent of your total revenues. There were some pressure points in Africa as well as Middle-east. All cleared out now? Can we look at an uptrend from there?
A: Africa is continuing to be a currency crisis situation and similarly, Middle-east is continuing to be a geopolitical crisis as well. So considering that, we are doing reasonably well within those constraints, but it is going to be a pressure as we go forward as well. These are two areas which are going to put some pressure on most companies that operate there. But yes, we are looking at spreading our wings, we are looking at getting to more countries, we are looking at getting to be in different regions, etc. So that will help us to an extent.
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