Will raise prices by 7-7.5% in FY17 as input costs up: Britannia

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Britannia Industries will increase prices of its products by around 7.0-7.5 percent on a blended basis during FY17 to counter inflation in raw material prices, says MD Varun Berry in an interview to CNBC-TV18. Berry says while recovery is seen in consumption and good monsoon and pay commission will aid it further, commodity prices might go higher for one more year. He hopes for double-digit volume growth during the year, but notes the extent of impact from rollout of price increases on volumes remains to be seen. Being a zero-debt company, interest rate actions of the Reserve Bank may not have any direct impact on the company, he says. However, he feels a rate cut of 25-50 basis points is possible considering international rates are starting to go up. Below is the verbatim transcript of Varun Berry’s interview to Latha Venkatesh, Prashant Nair and Reema Tendulkar on CNBC-TV18. Latha: First up, let me take something which hurt the CEOs most, the deflation question. 60 percent said deflation is over but 40 percent say prices can still fall. What is your take, is this too pessimistic view? A: In our case, deflation is over for sure. We are seeing inflation right now. Our material cost inflation right now sitting at about 9.5 percent and the earlier estimate on this was about 5.5 percent. So, it is a fairly high inflation at this stage. However, very happy with the government’s very proactive approach on this. In fact, some of the commodities like wheat, they have reduced the import duties and similarly on oil and they have put some stocking limits on sugar. So, that is going to cool down the commodity rates. However, deflation is for sure over for us. Prashant: It is over for now but in terms of expectations on the future, you are telling us that there is no problem, no real expectation that prices will fall? A: Certainly not. We have had two bad years from an agricultural commodity standpoint. So, we are going to see one more year of very tight commodity situation. This year’s monsoon is going to only impact is in the next financial year. So, this year is going to be very tight from a commodity standpoint and hence prices will go up. Reema: Are you also in the camp which believes that FY17 growth will be better than FY16? You had about a 10.5 percent revenue growth last year, what should we expect for FY17, mid double digits or would it be closer to the 20 percent mark, give us a sense of FY17? A: We don’t usually give outlook so what I am going to say really is what I generally see of the market. So, from a category standpoint, I do think that the good monsoon coupled with the seventh pay commission, along with very good approach from the government, the goods and services tax (GST) rollout, etc is certainly sending a positive message to the consumers. So, we are seeing a little bit of uplift as far as the consumption is concerned. I do think that is going to continue. The issue really is going to be on prices. I do think that the inflation will lead to price increases and that could subdue the demand in long run. So, I would say at this point in time looking positive and I would think that for the next six to eight months we will continue to see this positive move in terms of consumption. Latha: You are giving us a very different picture of inflation altogether. Until now we had people cribbing to us that they are not able to raise product prices; this is looking different. That was also borne out by the analysis of numbers, we saw a lot of profit growth because raw material costs fell but revenue growth did not pickup for the large swathe of Indian corporate sector. How would the second half pan out for FMCG companies for instance, will revenue growth also pickup? A: I do think so. The categories are showing some kind of uplift as far as consumption is concerned. So, I do think that category growth will start to pickup. It is just that with the category growth as far as the food companies are concerned, there is going to be a price increase coming in as well which could subdue these growths as we go forward. Latha: Price increase coming from Britannia? A: It is very difficult to absorb 9.5 percent inflation scenario, so, we have been taking some price increases as we talk. We have been able to absorb that, so, we will start to see other companies also raise prices. Prashant: Last one was about 5 percent sometime back in June, anything coming immediately, imminent? A: We have taken some prices. We are now dealing with a 9.5 percent inflation scenario so it will probably be more than what we had said earlier. So, it is probably going to be about 7.5 percent price, we have to take about 7.5 percent price as we go forward and that is going to be the weighted average for the year. So, we have taken a bulk of that and we will take a few more prices up as we go forward through the year. Reema: You are saying the weighted average price increase for FY17 will be closer to 7.5 percent versus your earlier expectation of 4-5 percent, would that be correct? A: That is right. Latha: What kind of volumes growth are you expecting? A: We have been seeing reasonably good volume growth. We have got to see as we rollout the price increases, how this pans out. I would think that the atmosphere is pretty positive so I would think that at least for the next six to eight months we will continue to see positive growth as far as our categories are concerned. Latha: Do you expect the cost of money to fall substantially for your companies? A: It doesn’t impact us because we don’t borrow. We are at zero borrowing today. However, we do think that while the repo rate was cut, it was cut from 8 percent to 6.5 percent, the consumers only saw 50 basis points. So, I think that is the first issue. Going forward, I would think that another 25-50 basis points because while we will be cutting interest rates, internationally interest rates are starting to go up. So, there has to be a little bit of a balance. So, I would say between 25-50 basis points. Prashant: Just at the point of margins, even as you take price increases to protect margins and to kind of take in the cost increases on the input side that you are seeing, your gross margins will expand but what will happen at the EBITDA level because there are a lot more variables by the time you get from gross to EBITDA – competition, ad promotions, etc? Anything you are seeing there, anything you can share with us for the year as a whole? A: As I said, we don’t give an outlook but, yes, you are right, it is going to be a very fine balance. We will really have to become artists to draw that fine balance between the topline and the bottomline. I think we are going through that phase and I think we are doing a good job at that. We are hoping for the best, so, getting the prices up, making sure that we keep our fixed cost low and continuing to see growth as far as our brands our concerned in the market, continuing to grow consumption I think is what we are looking at. Latha: I am not asking you for a guidance but I am just asking you which category would you have fallen because this was an anonymous poll and you probably were polled, 26 percent of the CEOs poll said high single digit growth, 18 percent said 11-20 percent and actually 24 percent said over 20 percent profit growth — which category would you fall? A: I would think that if my profit growth is accretive to my topline growth, I would be very happy. I certainly would like to see a double digit topline growth. So, I would fall in that middle category.