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Britannia Industries Limited Q4 FY16-17 Earnings

Conference Call

May 30, 2017

MANAGEMENT: MR. VARUN BERRY - MANAGING DIRECTOR,


BRITANNIA INDUSTRIES LIMITED
MR. N. VENKATARAMAN - CFO, BRITANNIA
INDUSTRIES LIMITED
MR. GUNJAN SHAH HEAD (SALES), BRITANNIA
INDUSTRIES LIMITED
MR. ALI HARRIS - HEAD (MARKETING), BRITANNIA
INDUSTRIES LIMITED
MR. VINAY SINGH KUSHWAHA - HEAD (SUPPLY
CHAIN), BRITANNIA INDUSTRIES LIMITED
MR. MANOJ BALGI - HEAD (PROCUREMENT),
BRITANNIA INDUSTRIES LIMITED
MR. PIYUSH BHANDARI - INVESTOR RELATIONS,
BRITANNIA INDUSTRIES LIMITED

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Moderator: Good day, ladies and gentlemen, and welcome to the Q4 FY16-17 Earnings Conference Call of
Britannia Industries Limited. As a reminder, all participant lines will be in the listen-only mode
and there will be an opportunity for you to ask questions after the presentation concludes. Should
you need assistance during the conference call, please signal an operator by pressing * then 0 on
your touchtone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Piyush Bhandari, Investor Relations team. Thank you,
and over to you, sir.

Piyush Bhandari: Thanks, Margaret. Hello, everyone. This is Piyush from the Investor Relations team in
Bangalore. I welcome you all to the Britannia Earnings Call to discuss the Q4 Financial Results.
Joining us today on this earnings call is our Managing Director Mr. Varun Berry; CFO Mr.
N. Venkataraman; Head of Sales Mr. Gunjan Shah, Head of Marketing Mr. Ali Harris; Head
Supply Chain Mr. Vinay Singh Kushwaha and Head of Procurement Mr. Manoj Balgi. We
will start the call with remarks on performance by Mr. Varun Berry. Subsequently, we will open
up the call for questions.

Before I pass it on to Mr. Varun Berry, I would like to remind you that anything which we say
that refers to our outlook for the future is a forward-looking statement, which must be read in
conjunction with the risks and uncertainties that the company could face in the form of general
economic conditions, commodities and currency fluctuations, competitive product and pricing
pressures, industrial relations and regulatory developments.

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

Varun Berry: So, good afternoon, everybody. Welcome to the call. Thank you for joining us. So, let me start
with the deck which has been uploaded. So getting to the first page. It's been a good quarter in
the face of the challenging market environment and the sluggish demand that we have been
facing, especially post demonetization.

The next page, in this environment, our focus has been clearly on exactly what we have been
doing, increasing direct reach coupled with our agenda in our weak markets which has helped
us grow faster than the market, which has been important for us, because in a market which has
been really, really down to a very low single-digit growths, we have kept our nose ahead of the
category growths.

Next page, gives you the journey as far as our direct reach is concerned. So, we were at about
700,000 outlets in March of 2014 and we have ended the year at 1.55 million outlets. This is a
very important criteria for us. We are continuously looking at building our distribution in the
outlets that we get to directly and we made very good progress on this front.

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The next page is about our agenda in the Hindi belt, as we call it. Gujarat continues to be, despite
all that has happened, demonetization, etc. we have continued to see very good growth of 23%
in Gujarat. Similarly, in Rajasthan, it's been a 20% growth. MP, it's been lower at 13%, but a
reasonably good growth in the environment that we are at and UP has been constant at about
9%.

The next page, if you were to get to, that gives you a feeling of what we have really done from
a marketing standpoint. So, the first and the most important thing for us has been to make sure
that we identify and plug our portfolio gaps and we are continuously working on that, but
secondly, also competitiveness as far as competition in different categories is concerned. So, we
have seen a little bit of market heat up on certain categories, and we have made sure that we
have matched that. So, we have seen competition heat up and competition generally heats up
when the market growths are low. So the growths, which everyone looking at are small and
everyone is fighting for the same small growth. So that's what we saw. And we made sure that
with a little bit of a lag, we were able to match with competition and you'll see some of the
brands and what we have done to make sure that we keep our competitiveness with competition.

On portfolio gaps, one gap that we have always had is in the mid-premium range and we have
recently launched, actually, it was towards the fag end of Q4 that we launched a new brand called
Good Day Wonderfuls. I don't know how many of you tried it, but it's a great product, we have
got three variants. We have only launched it in the south till now, but as we speak, we are
extending it to other markets as well. Initial reactions have been reasonably positive. In the value
segment, we have launched Tiger vanilla cream biscuit which is also very important poor man's
cream biscuit, which is doing reasonably well. And we have done some innovation as far as price
points are concerned. So, Jim Jam, 50-50 Top as well as Vita Marie Gold did not have Rs. 10
offering and Rs. 10 offerings are very important for our consumers. So we made sure that we
play in that price category for these brands.

Moving on to the next page, all this and obviously a lot more than that has helped us deliver a
high single-digit growth in our base business. So, we have seen a 8% value growth in Q4 in our
base business, which is up from 6%, which was in Q3. So base business has seen a little bit of a
uptick, but actually that has been taken away by some of the downsides that we have seen in our
international business and some of our adjacent businesses, and I'll come to that in a bit. But
that's what has happened in our base business. And the volume growths are obviously low single-
digit as far as our base business is concerned in the face of very inflationary environment.

Now, coming quickly to the next stage, which is about our adjacent businesses. Bread, right from
the beginning of the year when this whole potassium bromate issue started up has been a very
slow, not just for us but the entire category has been slow. In fact, we have seen pretty large

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volume downsides during the year, but we did see towards Q4 that we were coming back with
some amount of growth as far as bread was concerned, but it was still a downside that we saw.

In the international business, we have continued to be impacted with deteriorating geopolitical


situation, especially in the Middle East and Africa and that's where a big part of our business is.
And on the dairy front, dairy has seen a huge inflation and as a result of that, we have had to
prioritize our focus areas. So, what we have said is that we will only focus on profitable offerings
and the commoditized offerings that we have, some of the commoditized offerings, we will down
play those. And as a result of that, while we have seen fairly good growth in our cheese business,
there are certain parts of our business, especially the north ghee, which is fairly commoditized
with very little profitability, which has seen downside. So, as a result of that, in all of these three
parts, essential parts of our business, we have seen certain downsides.

Now, moving on to the next slide which gives us the growth by quarter four, the last four years,
you will see that in '13-'14, we saw 11% growth, which went up to 14% in the next year and then
10% and this year, on an overall basis, we have seen a 8% growth. If you were to go below,
where you see the growth by quarter, you will see that in Q3, our total growth was 6%, which
stayed at 6% despite an uptick in our base business and the reason for that was our other
businesses, which did not do as well as they did in Q3.

Moving on to the next page, which is what I was talking about right in the beginning. It's been a
slowdown as far as the industry is concerned and which is reflecting in our revenues as well. But
in this industry, we have kept our share agenda going. So, from quarter-to-quarter we have been
seeing reasonable growth as far as our share is concerned. So, we still are gaining in a segment
which is showing lower than what we expect in terms of growth. And while all this was
happening, the material prices have continued to firm up. So, inflation is in excess of 10% and
if you were to look at it commodity-by-commodity, flour inflation has been 11%, sugar has been
34%, oil has been 16%, and milk as I was saying, has been 23%. So, a fairly inflationary
environment. The government did a few things to make sure that this comes under control. They
did a few things on flour, they did a few things in sugar. It did come under control, but the
numbers still are what they are. So we are dealing with an inflationary environment. However,
we hope that as we go forward, this will start to look better.

Our pricing action has been fairly limited. I'm on the next page now. Now, the reasons for that I
have already spoken about. Basically, the growths have been smaller. There is a lot more fight
for a smaller growth which is available for everyone. So there is a slightly heightened
competitive reaction, that is one. Second is, also, we still are at a stage where we don't know
what the GST rates are going to be. So, that has to unwind and that has to be very clear as we
start to take pricing action. What we have, however, done is we have really accelerated our cost
efficiency programs, which has helped us mitigate some of the inflation that we have seen. We

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have also rationalized a situation where demand is not what we had expected it to be. We have
rationalized some of our advertising costs and we have focused our spends on ensuring
competitiveness in the marketplace to make sure that we do what is extremely necessary for our
business.

Obviously, this is a short-term measure to tide through this situation of low growths. I'm sure
that with all that's happening with GST, with good monsoon, the pay commission, everything
put together, things should start to become better as we move forward, especially as the effect
of GST starts. If there are no issues as far as GST is concerned, I think we should be back and
we should certainly see a good growths in the next three months or so.

Now, moving onto our bottom line performance. This has been, I would say, reasonably robust
considering the hyper-inflationary environment that we have seen. If you were to see full-year
'16-'17, the number on profitability still looking, fairly good and even the growth is looking
reasonably good as far as profitability is concerned. I am sure there will be questions on that, so
I won't drain that chart.

Now moving on, as we progress on our journey, we are confident of keeping our momentum
going by working on multiple opportunity areas that we have laid out in the last quarter's
presentation as well. So, what are the opportunity areas? The next slide says that all. So, in the
base business, there are certain segments that we are weak in, there are certain segments, which
are emerging. We want to go after those segments and we want to make sure that we start to
dominate those segments again.

There are adjacent businesses, there is cake, there is rusk, and there are new formats that we are
looking at, there are innovations that we are looking at in these businesses. Our agenda on the
hindi belt and our weak markets where we are only one-fifth of the market leader will have to
continue, because we are still very far away from the internal targets that we have for these
markets. The new adjacent opportunities, we are in a continuous process of evaluating these and
making sure that we have a roadmap to getting to these opportunities.

Distribution, we still are a long way off from where the market leader in our category, in the
biscuit category is. We are still at 4.5 million outlets that we get to on a total basis, direct and
indirect while the market leader is 1.3 million more than us. So, still opportunity is there and
obviously international markets where we have only 7% of our business coming out of, we are
continuously in the process of scoring out new markets that we can get to and have a right to
succeed. So, those are the opportunity areas.

Now, coming back to new categories, in this regard, I'm delighted. I'm sure you must have read
the announcement, but I'm personally delighted to tell you that we have signed a joint venture

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with Chipita, which is a Greek company and basically the product that we are banking on is a
long shelf life filled croissants and the project is expected to be commercialized. We are in the
process of working out all the details and starting to even put the technical details together.

So, the commercialization of this project will happen by July 2018 and frankly, if you were to
look at the product, what really the excitement of this product for me is that, one, it does very
well with consumers who are young, consumers below 30 years and that is one area where biscuit
manufacturers are not so strong. So that's a tick in the box as far as I'm concerned. If you look
at other countries around us, it's done really well in economies which are like India. So Middle
East, Egypt, Greece, etc. done very well. In fact, some of these countries, it's as large, if not
larger than the biscuit category. So if we were to not even dream of that, but if you were to dream
of this becoming 25% of what the biscuit category in India is, that will be a big opportunity for
us. It also puts all the ticks in the boxes from, is it a filling snack, is it a delightful snack, is it on-
the-go, etc. So all those ticks are there for this product. It can be a quick breakfast, it can be
anytime snack for during the day. So from that standpoint, I think it is a very, very exciting
category and we genuinely are very happy to have signed this joint venture.

Just a little bit on the next page about the company and where they operate, etc. And the fact that
they have been in India trying to sell their spreads, they have got chocolate spreads which they
sell in a few markets, which we will start to evaluate and see if that sort of fits into our portfolio
as well.

Moving on to the next page, which says that we shall continue to work on such opportunities to
drive profitable growth. I have already spoken about it. We are looking at all macro snack
categories and which are the categories which are attractive for us. So what we have sort of
chartered for ourselves is that we should get to launch one new category every year. We should
look at differentiated products, which leverage new to India technologies and these products are
also new to India.

And third from an international business perspective, we enter new countries, new geographies
and increase our international play. And Nepal is the first country where we are looking at setting
up operations and that we are very excited about, because it is a highly potential country. It is a
country which has the potential of consuming a lot more of our products than what it does
currently. So that's our first foray, but again what we would like to do is, every year, we would
like to get to one additional country.

Moving to the financials. Our net sales have grown at 6% and profit after tax has also grown by
6%. The key reasons really are the inflation that I have already spoken about, low category
growth whether you look at foods or FMCGs. We have started to see low category growth post

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demonetization and a slowdown in the international markets, which again some of the Indian
companies which operate in those markets, most of them have reflected that.

And there has been a wholesale channel disruption post demonetization, where there were lots
of clarification that wholesalers and distributors were seeking on, how much cash business can
they do, etc.. So, we have seen a little bit of that in certain states and now with GST, I think
long-term prospects on GST are fantastic, but I would think that there might be a few disruptions
before this becomes smooth.

Now, if you were to get down to the profit from operations by quarter and similarly, profit before
tax and profit after tax, quarter-by-quarter, it's down there in that chart below. Now, getting to
the next slide, which is a reconciliation between IndAS and the GAAP. So, just there are no big
differences really, but I would just like to point out one small thing, which is, if you were to go
down to the bottom table, which shows as per IndAS our profit from Q4 '15-'16 has gone up
from 199 crores to 211 crores, which is a 6% growth, but if you were to look at it versus GAAP,
it's gone from 190 to 220. So, actually the profit growth versus GAAP is 16%, but that's a small
thing because we got some benefit of that in the previous quarters and this quarter, we have
actually got hit because of that. Had it been the previous method of accounting, we probably
would have reflected a 16% growth in our profit.

So, that's all from me. Happy to open the house for questions.

Moderator: Thank you very much. We will now begin with the question-and-answer session. The first
question is from the line of Abneesh Roy from Edelweiss. Please go ahead.

Abneesh Roy: Sir, my first question is on volume growth. This quarter we have seen in Q4 most of the stable
companies show some improvement. In your case in both quarters, it is a low-single digit volume
growth. And you said even the biscuit industry has seen a low single digit volume growth. So
why in spite of market share gains and doing much better in the Hindi market, why you are not
able to grow much faster than the industry? And why no improvement than earlier?

Varun Berry: Abneesh there has been a market share gain for us in this quarter as well. So our market share
has been going up fairly consistently. The issue really is that it's a category issue and frankly, in
all my years of experience, we have learned as managers to get share, we have not learned how
to grow the category. Frankly, even if we have one-third of the category, it's very difficult for us
to take the mantle of growing the category. And especially, in disruptive environments like what
we have seen in the last six months to eight months, it becomes very, very difficult and
categories, they unwind themselves. I think it's a category, which has got tremendous potential.
While there is consumption, the category itself is showing signs of transformation because the
priority for the consumer is delightful products, more premium products and we have been

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seeing that in our sales as well. So I think once we have gotten to a stage where all of these
disruptory issues are behind us, I think we will certainly start to see good category growths.

Abneesh Roy: Sir, two follow-ups to my first question only. One is why in UP still no improvement? So last
year's same growth rate and last six months, the entire industry has been inflationary. We see the
market leader gaining market share in inflationary and competition in fact coming down. You
said the competition has in fact gone up in the last few months. So, why that aberration?

Varun Berry: Competition has gone up meaning what, Abneesh?

Abneesh Roy: Sir, you said competitive intensity has gone up in the past few months. We are seeing Parle as
example coming out with high intensity ad. But my question is not really regarding Parle here.
My question is inflationary condition, leader gains market share and competitive intensity
normally comes down.

Varun Berry: Actually, in our industry that is not true. The truth in our industry is that in inflationary
environments, we see a lot more activity at the bottom of the table. We start to see all the local
players starting to play harder in terms of what they do, looking at cheaper products etc., but the
issue is not that. The issue really is that, let's say your market is 100 and it's growing at 10%,
you have that extra 10, which is going to go to most competitors. So, everyone is in and around
10%, right? So, someone is growing 5% and the other person is growing 12%, 13% etc. But
when the growth itself is at 2% or 3%, the fight obviously will intensify. You will always see
people fighting, because they are not seeing the growth, right? We know how we think in our
organization. Similarly, ITC, other companies will be thinking similarly, what's happening, why
are we not growing as fast as we think, why is that this double-digit numbers not coming etc.
So, the intensity builds and that's what's happened in the last 2 or 3 months. And it's a matter of
making sure that all the external factors which are leading to the market growth coming lower
is sort of sorted out and I do think that it is happening. As I told you, we have seen a better
growth in our base business in Q4 versus Q3. So I do think

Abneesh Roy: The price, right? That's because of price?

Varun Berry: It's price and also volume. Volume is about the same. So, volume growths are about 2%, in this
quarter, they were about same, let's say about 1.5% in Q3. So, it's about the same. But, yes, it's
about making sure that we keep doing the right things. Believe me, we cannot impact the
category.

Abneesh Roy: Sir, my second follow up question was on UP, how is the recovery?

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Varun Berry: Yes. Well, I would say that in this environment, Abneesh, a 9% growth in UP is a fairly good
growth. I don't think there will be many companies which would be growing at that rate in a
state like that. Am I happy with it? Certainly not. Can we do better than that? We certainly can.
If we can do 20%, 23% in Rajasthan and Gujarat, I do think that we can do better in UP. It's a
very large state. You have to manifest, you got to make sure that your team is completely on it.
We have got to make sure that our distribution agenda is working. So I think we are getting parts
of that right. It will take a little bit of time, but I'm glad that we have been growing around 10%
for the last three years. I don't think we have seen three years where we have grown at 10%
consistently in a state like UP. So to that extent, I would say, it's a middling performance, but
certainly better than what we have seen in the past.

Moderator: Thank you. I would request Mr. Roy to come back in the queue for follow-up question. We will
move to our next question which is from the line of Aditya Soman from Goldman Sachs. Please
go ahead.

Aditya Soman: Hi. Good afternoon. So my first question is on your margins and you said you'll talk more about
this slide, but you said that you endeavor to maintain margins at the current level, but is there a
reason why you wouldn't look to expand it further or you think that the competitive intensity
will get more intense if you allow the margins to increase? And second thing was, can you throw
more light on the commercial terms of your agreement with Chipita as well as a more specifics
in terms of how much do you think it will contribute to the overall growth of the company?

Varun Berry: Right. So, the margins as far as the margins are concerned, I think at this point in time where
growths are low, category growths are low and competitive intensity is high, and inflationary
environment is at its peak, our objective really is to make sure that we shore through this, we get
through, we course through this environment in the next 3 months to 6 months. Obviously, the
agenda after that is going to be very different. I think the competitive intensity will also come
down once the growths start to come back for the category. And we will be back, hopefully, to
a different way of thinking rather than what we are thinking at right now, right? So that is one.
Second is that our focus on cost savings has intensified quite dramatically because of the
environment. So last year we have taken a target of 135 crores as far as our cost savings was
concerned. We actually overachieved it by getting to 155 crores. This year, we are looking at a
40% more as far as cost saving is concerned. We are dialing down to make sure that we start to
think like companies in developed countries think. And I say developed countries, because the
growths in those countries are much lower than what we in India are used to. So we have started
to think like that, which hopefully will continue to be a reason for our margin expansion as we
go forward.

The second question that you had was on Chipita. It's 60-40 joint venture. 60% of the equity is
with us. We are looking at launching in the middle of next year. We are putting up a factory,

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which is going to be right next to our factory in Perundurai, in Tamil Nadu. That's going to help
us establish ourselves in the South predominantly. And the quality of their products, the
equipment etc., it's a fairly elaborate process. It's not as simple as some of the other food
categories that we think about. So we are in the process of making sure that we collaborate with
them, understand the processes, understand the recipes, understand the raw material and start to
produce it. In terms of revenues, we would say that we would like to get to a profitable number
of 200 crores in the first 3 years. So we would like to get over 200 crores in terms of turnover
with the first line that we are putting up. So that's our first objective, as far as Chipita is
concerned.

Aditya Soman: Understand. Thank you. Just to follow up on each of the points I think in terms of margins, so
just to get it clear, you said that a target to maintain margins is over the next few quarters and
after which you'll again reevaluate it, you can raise margins, right?

Varun Berry: Right.

Aditya Soman: Yes. And in terms of Chipita, is there any CAPEX that you have outlined specifically for that
project?

Varun Berry: Yes. So there is a fairly large CAPEX which is required for that project. So it'll be in the vicinity
of about 80 crores - 85 crores.

Moderator: Thank you. The next question is from the line of Mike Sell from Alquity. Please go ahead.

Mike Sell: Could you please update us on the stakes of any inter-corporate deposits between the various
group entities at the end of the year, please?

Varun Berry: I'll request Venkat to answer that question.

N Venkataraman: ICD as of March 2017 it's maintained at the same level that it was earlier, but subsequent to
March, it's come down by roughly about 40 crores.

Moderator: Thank you. The next question is from the line of Amnish Aggarwal from Prabhudas Lilladher.
Please go ahead.

Amnish Aggarwal: I have a couple of questions. First being that you have indicated a double-digit inflationary
scenario. Now, looking at the current situation where some of your raw material cost like your
wheat has softened, maybe some of the other ones like sugar and all the kind of increase it might
not happen now. So, what's your outlook then on your gross margins, in particular, going
forward?

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Varun Berry: So we don't give any forward forecasts. But you are right, there's been some amount of respite
from inflation that we have seen, but it's not enough.

Amnish Aggarwal: So, it means that the pricing we have undertaken, it's not sufficient enough to cover the input
cost inflation so far?

Varun Berry: Right. So, last year we did not take enough pricing to cover the entire inflation because as it is,
the category growths were low. If the prices have been taken further, you would have started to
see even lower category growths which is something that we were not interested in getting, plus
obviously the second reason was the competitive pressures because of the category growths
being lower.

Amnish Aggarwal: Okay. Sir, just a couple of your data points, one being how much was the ad spends bias in FY17
vis--vis the FY16 and what's our outlook on that? And secondly, 2 to 3 years back there were
some your resolution or something of that sort for paying some brand charges or some royalty
to the promoter group. So, is that being paid, and if yes, then under what head it is being reflected
in the P&L account?

Varun Berry: So, let me just take the first question, which is the ad spend. So, let me talk about Q4 and then
Venkat can indicate on the full year as well. So, Q4 we were lower than last year by about 20%
- 22%, right, and the reason for that was because in the environment that we were, we decided
not to take a few large properties that we had last year. So Filmfare Awards, which used to be a
very large property that we owned, we decided to give that up. IPL, we used to do activities with
two teams. We used to do with the Bangalore team and we used to do some activity with the
Punjab team. We decided to move away from that, as well. As a result of that, our advertising
spends were about in the mid-20% to 25% lower than what they were in Q4 of last year. Venkat?

N Venkataraman: So far as year is concerned, our A&SP spends have been roughly about 13% lower than it was
the last year. That's the first point. Second thing, you were asking about Group charges. Group
charges are grouped as part of other expenses. So, it continues to be classified under other
expenses.

Varun Berry: And there is no change in that.

N Venkataraman: There is no change in that, yes.

Amnish Aggarwal: Sir, can you share the amount which we paid last year under the Group charges?

N Venkataraman: So, it's roughly about 34 crores.

Amnish Aggarwal: 34 crores, but as a percentage of sales then it is, say, roughly around 0.5%?

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N Venkataraman: Actually. slightly lower than 0.5%. It's about 0.4%.

Moderator: Thank you. The next question is from the line of Latika Chopra from JPMorgan. Please go ahead.

Latika Chopra: My question was on category growth rates again. Can you share with us how the growth rates
for biscuit category would have moved versus the savory snacks, just to get a sense on how
consumers are behaving? And also if you could comment on growth trends across the key sub-
segments of creams, cookies and plains? I'm just trying to get a sense on the underlying
premiumization trends that you are witnessing.

Varun Berry: So I think this particular year, I don't think there was much to choose between various macro
snacking categories. So there were certain categories which, let's say, in the years gone by like
3 to 4 years back, were really galloping ahead and salty snacks was one of them. Similarly,
chocolates was another category, which had been growing really fast. While biscuits had also
been growing, but these two categories they had a delta of almost 30% to 40% versus biscuits,
higher than biscuits. But in the last year, we saw all of these categories growing single digit. So,
it wasn't like there was one category which was driving growth and the other which was lagging.
Within biscuits, it's very clear. So what's happening is that entire value category is shifting. So
the premium cookies category, where Good Day plays and some of the other brands play, is
seeing a very large growth, right. And Good Day is about 65%, 66% of that category. So, that
has been growing much faster than most other categories. The health category which is where
NutriChoice plays has also been seeing aggressive growth. The very large category which is the
value category has not been growing at all, in fact. They have been declining, that category has
been declining. So, there is an upward movement as far as consumer is concerned, which is
always a welcome sign.

Latika Chopra: Right. And secondly on GST, you mentioned you expect short-term disruption. Could you please
elaborate how many months you would expect this disruption likely to be or any thoughts there?

Varun Berry: So, from our standpoint, we would like to make sure that we internally and also with our
customers etc. we are absolutely ready to get everything under order and actually frankly, I
would be pleasantly happy to be wrong as far as these disruptions are concerned. So, if there are
no disruptions, I think it will be very good. But in such a large change, I do think that there will
be some disruption. There will be some people in the value chain who will not be ready for this
change. So, that's why I say that. The only reason why I say it is because last year during the
festive season, we saw demonetization happening. This year we would like to make sure that
everything is out of the way and things are absolutely smooth before we hit the festive season,
because that is a big season for us and for other FMCGs and it's important that the disruptions
get out of the way.

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Latika Chopra: And just to follow-up on that. Would the channel inventories be lower than normalized levels at
this point?

Varun Berry: Yes, I would think so, because, see, there will have to be clarity in terms of how do we deal with
the taxes. So, let's assume that the amount of tax remains the same, but the shift between VAT
and GST, the rates etc. someone in the chain will get hit, right? So, there will be a tendency to
reduce inventories, which is also one of the short-term disruptions in terms of sales that a lot of
companies are going to see.

Moderator: Thank you. We will move to our next question which is from the line of Ashit Desai from
SBICAP Securities. Please go ahead.

Ashit Desai: Your inventory seems to have gone up quite a bit. In fact, the overall working capital. Could you
tell us what's driving this increase in inventory, loans and advances and other items?

Varun Berry: So I will request Manoj to comment on it. But basically what is driving it is opportunistic buying.
Because of the inflationary environment we have had some very good gains from a mark-to-
market perspective and that's happened because of our opportunistic buying of commodities.
Manoj?

N Venkataraman: So far as loans and advances are concerned, we are in the process of finalizing purchase of a
property which is for setting up the factory. It's going to be a full-fledged food park in
Maharashtra. So there are some advances which have been paid. So that's appearing in loans and
advances. On inventory, like Varun mentioned, it's forward buying of some of the commodities
to hedge against future inflation. So this will get mostly corrected between April and September
let's say.

Ashit Desai: Okay. And can you share the amount towards the Maharashtra plant which has been reflected in
the loans and advances?

N Venkataraman: That's about 100 crores.

Ashit Desai: Okay. And lastly, when do you expect international and dairy business to stabilize?

Varun Berry: So, the dairy business I would think that what we are doing is stabilizing it from focusing on the
right product standpoint. So I think for the revenues to start to grow at the rate that we would
them to, it will probably take 6 to 9 months for that to happen, but our focus on the profitable
areas is only going to help us from an overall business perspective.

International, very difficult to say, because it just seems that the whole Middle East and Africa
is going through a little bit of a down cycle. So very difficult to say how long it'll take for that

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to stabilize, but I do think that slowly and steadily, some countries will start to come back, but
the overall strife that the Middle East is having and the overall economic upheaval that Africa is
having, is very difficult to comment on when that will completely go away.

Moderator: Thank you. The next question is from the line of Tejas Shah from Spark Capital. Please go ahead.

Tejas Shah: Sir, just wanted to know are we gaining market share in UP? And one related question on that,
you said that the underlying premiumization trend is still strong and value end of the market isn't
growing that fast. So, as we understand that UP is largely value-driven market. So then this
premiumization trend is there also very strong, so should we be doing better than the market in
that territory?

Varun Berry: Great question. First of all, we are gaining share. We are gaining share in UP and have been
continuously gaining share in UP, which points towards the fact that the UP growths have been
low. Second, exactly the same question that I keep asking my people that if there is such a large
base of value products in UP, shouldn't the growths be higher. But unfortunately it's not turning
out to be such. We have made big inroads with our Good Day product in UP, but it's not turning
out to be a situation where the market growths are turning out to be very large numbers. And
you will appreciate that because the fact is that it's such a large base of value products that if that
base comes down, nothing can fulfill that gap. And that is probably the reason that the growths
in that market are small at this point in time.

Tejas Shah: Both volume and value?

Varun Berry: Yes.

Tejas Shah: Okay. And sir, second, if you can help us to understand? You mentioned that there is a delta
between our indirect reach and the leader's distribution reach, what will be the same delta for
direct reach between the two?

Varun Berry: So our direct reach will be more than two times the market leader. So, we focused a lot on direct
and that's what's giving us the advantage and that's what's giving us the share.

Moderator: Thank you. The next question is from the line of Amit Kumar from Investec Capital. Please go
ahead.

Amit Kumar: Yes, this is Amit Kumar from Investor Capital this side. Sir, just one question, just one follow-
up on this entire GST and possible disruption. Are we looking at just a temporary destocking or
some of your peers have also talked about especially on the North and Central side, wholesale
channel being permanently impaired. So do you sort of buy that argument and what are your

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thoughts in terms of not the temporary disruption, but could there potentially be a more
permanent hit to the wholesale channel as well?

Varun Berry: No, I don't think so. Because I do think that it will be temporary because certainly people will
fall in line. So, if you look at it from a long-term perspective, GST is going to be highly beneficial
for companies like us. That's going to be highly beneficial, why? Because, obviously one tax
rate completely traceable etc. it works well for us. We have been doing that and hopefully
everyone will have to do exactly the same. So, people who have not been doing that will certainly
get disadvantaged. So, that's one. Second is, our focus has moved from wholesale to direct and
hence that should be a big advantage for us. Even if there is a temporary disruption in the
wholesale channel, we will be less impacted because our direct reach is a lot more than that for
competition it is. So to that extent that will help us. So, I think overall this is going to be
temporary and long term it's going to be beneficial.

Amit Kumar: Alright. Sir, just one small follow-up to that. I know some of your peers have also talked about
the fact that if wholesale, which is sort of unorganized not within or at least parts of it not within
the ambit of taxation right now, in fact it has to turn organized and tax compliant, there will be
sort of incremental costs, which will have to be borne by the value chain. So, have you sort of
thought out in terms of any sort of incremental cost pressures on that side and whether you will
be willing to sort of absorb through the excess costs within your P&L pass it on to the consumer,
is there any thought in that direction?

Varun Berry: No. Gunjan, would you like to comment?

Gunjan Shah: Yes. So, some of the shifts that we are talking about in terms of wholesale getting compliant and
therefore adding onto their margins, which they were otherwise not incurring as cost is already
underway since demonetization, because some of the journey has already started. What we have
seen is that some of the wholesalers who have managed to get scale as well as consolidation
have been able to manage this journey and therefore grab share from other wholesalers in the
market. This goes without saying that in parallel our endeavor has been and will be in terms of
getting a direct reach going even better and even stronger and therefore obviate some of this
impact that will happen to the wholesale channel.

Amit Kumar: Alright. So, you don't sort of foresee any significant incremental costs?

Gunjan Shah: No significant margin changes that we are anticipating.

Moderator: Thank you. The next question is from the line of Arnab Mitra from Credit Suisse. Please go
ahead.

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Arnab Mitra: Varun, on your initial commentary you sounded quite concerned on the immediate demand
situation. I just wanted to understand, because what I understand is Nielsen reported growth for
FMCG overall seems to have actually picked up in the last 3-4 months significantly. So, is the
biscuits market growth reflecting differently from the rest of the FMCG market and many of
your peers in other categories have basically put down the entire slowdown to the channel issue
and wholesale. So, are you also seeing that or is retail grocery modern trade that also seen a
slowdown?

Varun Berry: So, first question was about Nielsen. So, yes, Nielsen has reflected certain growth even for us
and for our category for a few months, which were completely out of the box. So, there are some
questions that we have on the Nielsen numbers. But if you were to look at what most companies
have been reporting, you will see that most FMCGs have been fairly muted in their total growths.
So, there is no doubt in my mind that overall growths for most categories since demonetization
have been fairly low and I do think that the disruptions that you are talking about, while there
have been huge disruptions on wholesale which have not really impacted us that much because
our dependence on wholesale is low, but there have been many more disruptions beyond that
which is still not completely settled down. So, I think that it's going to take a little bit of time,
but the resilience that we have in the country is going to start to show up, and it will start to make
sure that settled situation comes reasonably quickly. So, I'm not worried about long-term
category growth. So, I do think that it will come back, but it's a matter of time.

Arnab Mitra: Sure. And on the input cost side, secondly actually your gross margins are pretty steady in the
standalone between the 3rd and the 4th quarter. So, has there not been incremental cost push in
the 4th quarter over what you saw in the 3rd quarter or has the full impact of the commodity
inflation not yet reflected on your materials?

Varun Berry: No. We did do some opportunistic buying, which has helped us. But the fourth quarter was
probably, Manoj, was it at par with Q3 or did we see a little bit of?

Manoj Balgi: We did see a little bit of softening in the 4th quarter.

Varun Berry: So, we did see a little bit of softening in the 4th quarter in terms of commodity prices, but as I
was saying, we haven't really been able to mitigate the entire inflationary number that we have
seen last year through our pricing. There is a lot of cost cutting that we have done, which
continues to help us.

Arnab Mitra: Sir, and if I could just squeeze in one on the GST rate. What would be the neutral rate that you
would be happy with in terms of at least having a neutral situation on your current taxation?

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Varun Berry: So a neutral rate would be 18%. I would say a little better than neutral and for the premium
products, and I don't think it's going to go beyond 18%. So I think we should be in a good place
as far as that is concerned.

Moderator: Thank you. The next question is from the line of Dhaval Dama from Equirus Securities. Please
go ahead.

Dhaval Dama: Sir, just wanted to ask you a couple of questions. Like you mentioned that the GST neutral rate
for our company would be something close to 18%. So, what would be the neutral rate for the
industry at this point of time, because as we all know that under Rs. 100 per kg there is no excise
duty?

Varun Berry: So, I would say there would probably be a difference of 1% - 1.5%.

Dhaval Dama: And one more thing, sir, like in your previous con-call you had mentioned that you'd be looking
to take price hike sometime in Q1. So, like say with GST rates also coming out may be around
June 3rd itself, so do we intend to take price hikes if we want to before the GST gets
implemented, or what would be the thought process on that?

Varun Berry: No. We are not doing that. So we are not looking at price increases before GST comes in. So we
just want to make sure that we are completely compliant with what the government wants us to
do. In fact, that is one of the reasons that we have been holding back our price increases, even if
it's causing a little bit of disruption from a pricing standpoint to make sure that we are completely
compliant by what needs to be done depending on the rate that is given to us.

Dhaval Dama: And sir, one more thing, it would be very helpful if you could highlight what would be the
growth in biscuits as a category for us during the quarter?

Varun Berry: Biscuits was about 2%.

Dhaval Dama: Okay. In terms of volumes?

Varun Berry: In volumes, yes.

Moderator: The next question is from the line of Jiten Doshi from ENAM Asset Management. Please go
ahead.

Jiten Doshi: Just wanted to know what is our cash and cash equivalents on 31 st March? Including the ICDs,
etc. everything, what would be our total cash and cash equivalents?

N Venkataraman: Roughly about 1,200 crores.

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Jiten Doshi: So, Varun, any idea on how this money is going to be spent over the next 2-3 years and of course
it will keep adding, right?

Varun Berry: So, we have actually been spending quite a bit of money in terms of capital that we have
employed. So, we put up quite a few of our plants, we have looked at new technologies. We
have put up a R&D center. Now we are setting up this joint venture with Chipita, which is going
to require some amount of spend. So, in fact, if you were to look at, this year the cash hasn't
really gone up from where it was. In fact, if anything it has come down a bit. So, we will and
when we are looking at, as Venkat was saying earlier, we are looking at putting up a full food
park in Maharashtra, where we'll have all our categories and all our businesses will have aligned
there. And so, we are looking at making sure that we make our business very stable and we have
the right facilities at the right place. In a situation like this, where until the last year where volume
growths were very, very robust, we were fairly bullish about our capacity expansion etc. And
this year, where it's been a little lukewarm in terms of volume growth, we have made sure that
we are also capable of establishing where capital is genuinely required and where we can avoid
it. So, we also want to make sure that we are very careful about how much capital we'll put on
the table.

Jiten Doshi: So, after having done whatever you mentioned, roughly over the next 3 years you should be
sitting on more than 2,000 crores of cash. So, it's only going to accumulate. What is your thought
process on acquisitions and how are you looking at the whole scenario for, let's say, entering
new categories through acquisitions?

Varun Berry: So, that is certainly on the table. But the thing is that valuations in India are sky high. So, coming
across the right acquisition, making sure that we get it at the right price etc. it means that we are
working on it. It's just that we haven't come across something which we find attractive enough
to get into. There could be acquisitions internationally. We are looking at those opportunities as
well. We are looking at Greenfields, we are looking at acquisitions etc.

Jiten Doshi: More in emerging markets, I assume, and not in the developed markets, right?

Varun Berry: No. Completely not. We want to go to markets where we have a right to succeed.

Moderator: Thank you. We will take one last question from the line of Sameer Gupta from India Infoline.
Please go ahead.

Sameer Gupta: Just wanted to get on the pricing bit. If you were to assume that inflation remains where it is and
we are to maintain our gross margins at these levels, what kind of price increase would we want
to take in this year?

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Varun Berry: About 4%.

Sameer Gupta: Okay. About 4% price increase. And given the competitive environment where it is and after
GST, you believe you'll be able to take this price increase, right?

Varun Berry: Yes, I think once we have got a clear view of where we are headed, what is the tax rate etc. I
think at that stage we will have to identify the opportunities and move forward.

Sameer Gupta: Okay, sir. And these price increases would be a mix of your current promotion reduction and
MRP increases or grammage reduction, whatever?

Varun Berry: Yes.

Sameer Gupta: Okay. Sir, one bookkeeping question. What would be your CAPEX guidance for FY18,
including the Chipita plant?

N Venkataraman: It's in the region of about 350 crores to 400 crores.

Varun Berry: About 400 crores.

Moderator: Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to
Mr. Piyush Bhandari for closing comments.

Piyush Bhandari: Thanks everyone for spending time with us on the call. We look forward to interacting with you
again. Thank you.

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

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