Agro Tech Foods Ltd
NSE:ATFL
Earnings Call Analysis
Q3-2024 Analysis
Agro Tech Foods Ltd
The company is seeing a stable cumulative growth rate of 5% to 6% for Instant Popcorn, short of the 8% target necessary for a 10% total Ready-to-cook (RTC) growth algorithm. To address the gap, management plans to increase media spending from 6.5% to around 7% to 7.5%, which is projected to drive an additional INR 4 crores of investment focusing on pushing Instant Popcorn volume growth up to the desired 8% target. This strategic push is aimed to commence from the first quarter of the next fiscal year.
The company is cautiously introducing new products, such as the Cocoa-based Bake Treats and the Plant Meats 1-minute Yum keema, carefully balancing the innovation drive with the potential for obsolescence costs. Additionally, the Ready-to-eat (RTE) sector displayed a strong overall growth of 20% in volume and 19% in value, signaling significant consumer adoption. The introduction of INR 5 and INR 10 price points have notably accelerated penetration in rural markets, which supports the long-term objective of becoming a mass market presence essential for achieving $1 billion turnover.
The Spreads & Dips category is emphasized as one of the two primary focus areas to restore growth back to the 16% to 18% target range. The volume in this category showed a contraction of 3% from the last year, but recent initiatives in mid-size packs and consistent productivity in large packs have set the stage for positive volume growth expectations in the upcoming quarter, despite potential pricing alignment lags. In addition, the launch of the INR 10 Blister pack and enhanced peanut butter visibility endeavors further illustrate the company’s adaptive strategies aimed at boosting the category's market share.
The Ready-to-Cook segment has displayed a reliable growth pattern, anticipated to continue with the backing of planned incremental marketing investments. Despite a downward gap between volume growth (approx. 3%) and value growth, these increases in spending, especially in the cereals and chocolate categories, reflect the company’s balanced approach towards sustaining volume and subsequently, achieving the value growth necessary for an upturn in future quarters. These actions are laying the groundwork for a rebound in the RTC segment, aiming to regain momentum towards set growth objectives.
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Ladies and gentlemen, good day, and welcome to Q3 FY '24 Earnings Conference Call of Agro Tech Foods Limited hosted by Anand Rathi Shares and Stock Brokers. [Operator Instructions] I now hand the conference over to Mr. Ajay Thakur from Anand Rathi Shares and Stock Brokers. Thank you, and over to you, sir.
Thanks, Aditya. I welcome you all to Agro Tech Foods Q3 FY '24 Results Conference Call hosted by Anand Rathi Shares and Stock Brokers. From the management side, we have with us Mr. Sachin Gopal, Managing Director; and Mr. K.P.N. Srinivas, CFO. Now without much ado, I would like to hand over the call to Mr. Sachin Gopal for his opening comments and followed by Q&A session. Over to you, sir.
Thank you, Ajay, and good afternoon, everybody. Thank you for taking the time to join us today. We'll go through the presentation, which has been already uploaded on our website. And after that, we can take questions. So if you could just scroll it, I'm on Page 2 right now so which is the quarter 3 update. Our mission and vision, Page 3 to be the best performing, the most respected foods company in India. And then on to Page 4, which is a performance highlights for quarter 4 wherever it is year-to-date, we have indicated that our commentary is year-to-date. So overall, I think the highlight is we've had a slow growth in foods, certainly less than we'd like it to be, much less.
And we'll walk you through what is going on underlying everything, we believe all the trends are strong, but we need to be able to diagnose this and discuss it with you. And also lower pricing in Staples, that's in line with whatever is the commentary you've heard from us in the prior quarter, and the full impact of that is flowing through in the current year. And probably, I would say some impact from this pricing might even -- the lower pricing might even stretch into a little bit of quarter 1 of next year.
In terms of the actual growth rate, I think the foods growth rate has started to inch up, right? We are now in the -- the volume is in the -- if you will -- low single digit, right? But Spreads are ready to continue to be a drag on the total, right? So we'll update you on the actions taken and what are the results and how do we see it today.
One of the questions that we were asked by our Board and by Chairman was why is the growth rate lower than we'd like it to be. And because our algorithm is clearly talking about the high double-digit growth. And I think there's been a lot of news in the media about how rural is dragging companies down and the question was, so therefore, how does ours look. We are providing that answer in this Board meeting, and therefore, we've been sharing it with you also. We don't normally give you channel-wise split, but it -- I think helps to address the question on why and therefore, why do we believe it can be better.
So the current growth rate of foods, and this refers to the Food business, is driven right now largely by semi-urban/rural. So what we call and many companies call in their network, the super distributor network. So we're not really into rural in a big way, but these are the smaller towns, some hundred thousand towns probably 40, 000, 50,000 operations. And there, we've got a very good growth, actually. We've got a growth of about 11% in revenues and a 13% growth in volume, right? As compared to the more urban parts of the country where we have direct distributors, where we service these distributor directly, not through super distributors where we have a revenue growth of only 1% and the volume growth of 3%.
So what we wanted to, therefore, highlight was, I think a lot of the portfolio work that we've done, actually, a lot that has been in INR 10 and INR 5 is actually paying off. We're getting good -- reasonably good double-digit growth in the most semi-urban/rural parts of the country. But because Ready-to-cook and Spreads are so if you will, so dominant, right? And obviously, our coverage is also that much better. That impacts the more urban parts of the country significantly. So the short answer, therefore, to the question is on why is the food growth less than we'd like it to be, it has nothing to do with the macros, right? It has -- because if it is the macro, then it will behave more similarly to other companies who reported that rural is dragging them down. That's not the case in our country. I think we've got only 2 drags right now, which we are working hard to, and I think they're almost reached there in terms of addressing.
One has been Ready-To-Cook, which is the post-COVID hangover, which we talked about earlier, then we'll tell you now -- therefore now that we have several months of growth, I mean, reasonable growth in this year, we'll tell you what we think we need to get it to the 8% to 10% range. And the second part is in Spreads where we have had a lot of competitive activity, particularly in the midsize packs and where we've taken actions, and we expect to see the results of that as well in the coming quarter, okay? So just a sort of hygiene point, if you will. Yes, these are YTD figure, right, okay? So these numbers -- off you go. Thank you, Srinivas, yes.
In terms of the year-to-date gross contribution and margin, these are actually up nicely. We're up by about INR 18 crores and INR 9 crores, respectively. So year-to-date gross contribution is up by INR 18 crores, and the year-to-date gross margin is up by about INR 9 crores, right? So you'll see that as well in the financial results. For quarter 3, the figures are lower than prior year, right, and figures are INR 3 crores and INR 6 crores lower respectively. And that really reflects the phasing of pricing and the mix between oils and foods, okay? So it's a little anomalous because you would rather normally expect to see the INR 6 crores in the first and then the INR 3 crores later, but that's the way it pans out given our product portfolio and obviously, the impact on oils, right? Overall, however, on a year-to-date basis, I think we are looking at continuing improvement in margin. As a company our margin has gone up nicely, right? Obviously, that's partly due to lower revenues, but we are managing that piece, I would say, okay.
For the quarter, A&P is pretty at prior year levels. You can see that in the financial results. On a year-to-date basis, however, it is higher, and that reflects the additional investments that we made behind the business. In terms of SG&A, overall, I think on a year-to-date basis, it's largely in line with prior year other than salaries, travel and freight, we probably have about INR 2 crores, you will see that in the employee benefits. We have about a INR 2 crores increase in salaries. And this may not be visible to you in the results, but we have got INR 1 crore increase in travel, right, which reflects just coming back higher travel costs also. And quarter 3 PBT and PAT are therefore INR 3.4 crores and INR 2.5 crores, respectively. And year-to-date PBT and PAT at about INR 12 crores and close to INR 9 crores, respectively. Okay.
So if you could just go to Page 5 now, we skip page 5. That's more of a picture page and we'll go to Page 6 and we'll dive into the more important part of the conversation. All right. So as you can see here on a year-to-date basis, our volumes in Spreads -- in Ready-to-cook are up about 3% with a value of 0% -- value growth of 0%. And that's primarily due to the fact that in the largest part of the business, it is Instant Popcorn, we have taken up pricing as -- if you remember last year, we had a huge increase in quarter 1 and quarter 2 in palm oil. And as a consequence, we have to take up the price, which we then started to bring back towards the end of quarter 4 of last year. So what is behind the 3% growth? Behind it is there's a year-to-date volume growth of about 5% in Instant Popcorn, partly offset by flat Microwave Popcorn and lower adjacencies. When we say adjacencies that is basically sweetcorn and pasta, right? So we'll walk through each one of these individually. Now this 5% on Instant Popcorn is very steady now. So we also wanted to see how much of it is the post-COVID hangover, what is it? And now I think barring the month of May, where we had lower commissary orders last year, which is CSD. I would say, every month if you look at the cumulative growth rate of Instant Popcorn is in the region of 5% to 6%. So we are, therefore, comfortable that now this business is at a 5-odd percent growth rate, which we need to take up to 10% -- to 8% because that aid starts to give us a total Ready-to-cook algorithm of about 10%, right, because we expect the adjacencies to go faster. So I would say we, therefore -- our plan is, therefore, to close the gap in IPC growth between the 5% and the 8% that we require with a little higher media spends in FY '25. So that's the conversation that we had with Board yesterday, right? We have indicated that total A&P is going to increase from the 6.5% range to about a 7%, 7.5% range. That's for total foods, not for AT Foods. And probably anywhere between 7%, 7.1% -- between 7% and 7.5% should give us the incremental INR 4-odd crores that we think we need to increase the investments behind. So that is something that we've discussed and therefore, we are going to pursue now, not in this quarter, but starting quarter 1.
The lower base pricing will start to flow through in end quarter 4 and prior year. So as you can see, right now, value is behind volume, but that will change as we end quarter 4 of prior year. That has set the base for revenue to start, therefore, growing in line with volume. So Instant Popcorn growing by about 5 -- gap between 5% and 8%, we will address that with about -- we think, about INR 4-odd crores of higher media, right? That should get us to 8% volume. 8% volume should translate into 8% value, right? Because starting next year of quarter 1, we should -- based on a per kilo based should be compatible, right. And then on top of that, we will build adjacencies on -- in the RTC category. Okay.
In terms of the non Popcorn business, which is sweetcorn and pasta, this was -- the business was -- the business had a gap of 49% at the end of September, right? So that means basically, it was touching to about 51% of last year. That gap has come down as we started putting more energy behind it. And we're doing all that. And I think that should give us a reasonable delta in terms of growth as we enter FY '25. In terms of new products, we started rolling out the Cocoa-based product. So the Bake Treats, which is really a cake mix, right, which -- is something that we're starting to roll out. We're starting to do the demos. We're doing it in a safe manner. So we don't want to be going overboard on it in terms because if you go overboard on any thing, it has obsolescence cost, but we just want to track it, slow and steady and build this category. We think we have very good competitive advantage here. Because we pretty much own the microwavable foods categories in India. We have popcorn, but that's the only one we do, right? And we'll see now as we go forward what all we can do. And we have shared with you the Plant Meats, the 1-minute Yum keema. That market testing has also started now. We started rolling it out. It is going to be slow. But the main thing we are finding here in Plant Meats, the 1-minute Yum keema. That market testing has also started now. We've started rolling it out. It is going to be slow. But the main thing we are finding here in plant meats is that the -- there is a very large difference in awareness between the top end of the socioeconomic spectrum and the bottom end, right? The bottom end even, I would say, middle, right?
But at the top end, actually, the awareness of the plants is more than I expected. So it's pretty reasonable. The product response is excellent. And as it is in the case of the Bake Treats, we'll start adding these up slowly and build up distribution in a very steady manner. Okay.
So that's as far as Ready to Cook is concerned. As far as Ready to Eat is concerned, I think picture looks very good. Overall growth of about 20% in volume and 19% in value. The main volume driver for this category is Ready-to-Eat Popcorn, where I think we've clearly reached a very, very significant inflection point. So that part is going well. And all parts of Popcorn, Savory Popcorn Small Packs, Savory Popcorn Big Packs, Sweet Popcorn, everything doing very well. Sweet snacks, which is basically Caramel Bliss sweet popcorn and our Cruncheez product, the Paan products, are also up 66%. So up to about 8% share of the total RTE business. We had, however, wanted to get well beyond that, right? Because I think at one stage in 1 quarter, we had actually touched even 11% last year.
And then, of course, there has been overall very strong growth, but we wanted to get to like a mid-single digit -- mid -- like mid-teen kind of number. But I think we need to make some recipe changes in the Paan product, something in the fat. So we are working on that. And that would be the first step for us to get past the 10%. In terms of gift packs of sweet popcorn, we rolled them out in quarter 3. They are slower than chocolates, but nevertheless a good start. Our chocolate, these are very natural way to gifting. So it's -- you don't even have to tell anybody, oh, chocolate is a great gift. Popcorn Is a gift, is okay. It's acceptable, but it's not something that is instantaneous or spontaneously come top of mind. But nevertheless, I think we were able to roll this out. We will again make some tweaks in this year. And so that in the coming months and for the next festive season, we are in good shape.
We can see a very visible in impact of the INR 5 range in the rural markets. That's for sure. So we -- I think our -- together with the INR 5 pack of breakfast cereals as well, which is the shelf product in cereals. So I think the INR 5 portfolio is actually really enabling us to make a very significant gains down the line, right? And that is evident in the conversation that I've had with super distributors in different parts of the country. They are feeling -- yes. The Agro Tech's portfolio is absolutely perfect for them to make a breakthrough.
And that is true not only in Ready to Eat, it is true even in Duo or INR 5 Duo, the largest selling depot right now is Patna. We're not selling enough of the INR 5 Duo, but the point is that, therefore, the acceptance, we are finding the right way forward in terms of smaller markets, which is pretty good. Because see if we want to be a $1 billion foods company in India, we're not going to be $1 billion if we don't have the right INR 5 and INR 10 portfolio. It's impossible. No company can do it, right? So we need to get the top end right. We need to get the bottom end right. And all these actions show that we are starting to get the bottom end right very well. This is something, which we talked about three quarters ago. The last point we'd like to make is that on the Ready to eat portfolio, the big packs of Ready to eat also appear to be reaching an inflection point. So that's really good for us because that's taken us some time and this is not only in the channels like quick commerce and all, it's also true in out-of-home in highway stops, et cetera, et cetera. I think more or less, we cracked the supply chain and the formula on this one. So that's done.
Now the thing is that we are trying to work within our supply chain in sales to increase penetration because that should help to further accelerate growth. So to give you an idea, we today -- right in the middle of COVID we took a decision that we will not sell INR 5 and INR 10 products directly to customers, right? And we then -- if you will, restricted the sale of our products because, you know, otherwise we were having heavy obsolescence. It was really effective because you have loading, unloading charges, additional freights all and so forth. And as a consequence, we probably ship our -- directly from our company. We ship to our products -- our Ready-to-eat snacks today to probably in the region of about 500 customers, right?
And we -- as you know, we have about 1,100 direct customers, and we have another 1,500 indirect customers, right, under the super distributor. So the total size of price is about 2,500. Now of that, in the 500, there will also be some of the retail stockists also that we have started servicing directly. But the point is the size of price is very big. So we just need to refine the supply chain, make sure it works for us from a profitability perspective, from a trade perspective and it works for -- make sure for the customer. But this is a very long runway for growth, and that is what we are working on. Okay.
So overall picture on Ready to Eat looks very good. So Spreads & Dips, as we said earlier, Ready-to-cook and Spreads & Dips are really are the 2 focus areas, which we need to address to get back to our algorithm of 16% to 18% growth. And on a year-to-date basis, you can see our volume is about -- down about 3% versus last year, and value is down about 6%. So we've already taken the actions because these actions that we needed to take were largely in the mid size packs. And obviously, if we get some good trial packs in, we've done that. And we are steadily training ground in mid-size packs, driven by recipe-based honey roast peanut butter. As I said, we already dominate the large packs. So this piece is now working very well, I would say. They are gaining ground very, very quickly. And I would expect that we would be in positive volume growth by quarter 4. And that has set the base for solid growth in FY '25, right?
There will, however, be some lag in pricing. So the volume value relationship in the coming quarters may not be on par, but we'll work through that and we'll keep you posted as we develop it. I would say we are actually already seeing the results. For example, in January trade, not in modern trade, where our competitors do have the ability to spend a lot of money. But in general trade, our volumes are already up in quarter 3. I think they were up about 3% versus prior year.
So we can already see the signs. Very soon, we -- the general trade growth itself will go up, and I'm sure even in modern trade, whatever is the initial impact of competitors spending a lot of money, that will definitely has to get away. It cannot -- everything finally has to boil down to some amount of rationality. So all that is good.
In terms of the Blister pack, we've launched it. We told you about this earlier, the INR 10 Blister pack is settling down. We are getting a significant number of transactions every month to be able to get new consumers for this, right? And we are also seeing visible gains in peanut distribution. We are now just under 1 lakh stores now. And I think hopefully, we'll reach that mark in the coming quarters. Certainly, all the indications are that, it had a dramatic movement, I would say, over the last 2, 3 quarters, once we did these actions on the mid-size packs and the entry-level packs.
And work is also completed for the launch of the Dipper pack at INR 10 to further accelerate the trial of Honey Roast Peanut Butter. If you recall, I told you about the on-the-go consumption of peanut butter because that's a big consumption opportunity. It also gives you a lot of visibility in the store, right? Like, for example, in Breakfast Cereals for our Popz brand, you will see it very visible. We will also see ACT II Ready-To-Eat Popcorn very visible.
But you will not see peanut butter that visible, right? Because it's a bottle, stored in a shelf. So we are working on how do we get more visibility and facelifts in the store with peanut butter existence. They can be related to peanut butter, right? It may not be peanut butter only. It could be peanut butter with a dip. It could be something else. So all of that will simply increase our visibility in the trade. And we are the only people honestly who can do it because we are the only people who sell peanut butter who have a huge network of the extracts manufacturing facility. So it's a significant competitive advantage. So we are launching our version of that on-the-go pack with peanut butter. It's going to be priced at INR 10. And we are just -- I think we should be starting production sometime in February. So that's on track. That will address the out-of-home consumption locations for peanut butter. And once we are comfortable that this piece is working, then there'll be a lot of other things that we can do in terms of the on-the-go consumption of flat spreads, right?
So I said, in good shape, the proof of the pudding obviously is in the eating. So you'll need to see our quarter 4 results, and you'll need to see the volume growth there. If you see the volume growth there, then you'll know that we've turned it around, and we can look forward to the kind of solid growth that we needed -- that 10-odd percent growth in the category for next year. So that's it as far as Spreads is concerned.
Breakfast cereals, all looking good. That number of minus 3% that you're seeing, which is on Page 9, is really just an aberration because we had launched Masala Oats last year in this quarter, right? That's why you can see the pricing is much higher. The value is -- there's a debt of almost 900 basis points, right? Because obviously, oats sells at a much lower price than Center Filled Cereals or any external cereal for that matter. So Popz Center Filled Cereals continued steady growth. We have a lower volume index, as I said, for total cereals due to the launch of the Masala Oats in the prior year. Rewired architecture for Shells, which is the plain excluded product is now -- is working. We got a quarter 3 growth of 9%. That's good. And total cereals distribution now up to about 134,000 stores.
We've started to roll out muesli and that's good. I think we actually -- we probably underestimated the demand for it because we are also being very careful now. As we told you one of the points we have to address is that 1.9% obsolescence. So we just need to be careful without compromising on the quantum of innovation that our company has to do, and we'll be assessing the consumer acceptance of this in quarter 4. And we've also started the process of manufacture of Sweet Oats, which will be launched in Q4.
So I would say all good. And we hope that in the launches as we go forward, we continue to drive innovation very hard, but are also able to control any -- or the amount of obsolescence that is generated. And we are also -- Preparations for launch of Center Filled Coffee Variant, one more variant is underway, and this is scheduled for quarter 4 of this year. So overall, I would say on Breakfast cereals, strong momentum, very strong momentum. And both Ready-to-eat and Breakfast cereals is actually -- it's visible in the growth figure. It's also visible in our manufacturing cost per kilo, which are coming down dramatically as our volumes are increasing, which is a result of a reflection of operating leverage. Okay.
Last category in the food part, which is Chocolates. A little up and down you can see a plus 38%, plus 9%, plus 11% volume growth, but overall about, I would say, 17%. So I would say roughly, we give it about a 20% growth, which is the line also with the distribution increases that we've had over the last 12 months, right? But the level of volume growth, I would say, it's been lower than what we would have liked it to be, right? We'd like to be in 35%, 40% mark.
And I think the one piece that probably has not worked so well for us this year is that we had a moderate acceptance of the INR 5 pack. I think our INR 5 pack, we expected it to be bigger. But overall, I think the -- it's a very good pack, especially for smaller markets. But I would say it's performance has been lower than our expectations. But most likely cause is the size impression. It's a little smaller in comparison to either wafer chocolates at INR 5 or even large brands like 5 Star. The footprint -- the size impression of those is larger. So we'll figure it out. We have to work through this. We are obviously -- work is underway. It's not acceptable. I mean, the chocolate market is huge. So even if you get -- if it's acceptable to 20% or 10%, it's is still large enough for us, but still we need to -- it will take us a little while to crack it.
Meanwhile, in any case, we had a scheduled launch of a Paan variant, right? The Paan goes very well because we already have a coconut. So we've just started commercial production of that. And you'll probably start to see it in the market in the next month or 2, right? It's an outstanding product. And that will play to our strength in the INR 10 varient, and we will therefore be able to, I would say, increase our total addressable market of the consumer whom we are talking to because each variant develops its own loyal consumer base, right? How much exactly growth it can get, I'm not sure exactly. Let's see when the numbers come in, but it should add up. We have the bulk of our business today in the INR 10 business.
We are also continuing to work. We've told you earlier that the chocolate manufacturing process and supply chain is extremely complex. And therefore, product shelf life, product integrity, shelf life, they're all being addressed. We've done a lot of work in the areas of sanitation, humidity, handling of the products so on and so forth, sealing. And I would say we are -- we have, therefore, the new lines that remember we told you we are setting on line with the capacity of INR 100 crore plus in total. And those lines, therefore, are very, very close to, if you will, completion. So our plan right now in this quarter is that we will be transitioning to those new lines for manufacturing. They will address all the initial layout issues and production issues that we had in the existing lines, right? And then we will also migrate into the new hall, if you will. And so we are, I would say, addressing it in a good manner. And the size and price of this, as I've always said, is huge, and we, therefore, are finding all the -- addressing all the right points, I would say.
One point to note on quarter 3, I think we had a very successful introduction of the new Gift Pack range. We had 2 packs at INR 200 and 1 pack at INR 100. All of them did well, but the 1 at INR 100, which is normal pack that you see here, it just operates through. And we are close to -- 0 inventory of INR 100 pack post Diwali. Gift packs are always difficult to manage, particularly in the festive season, and it's not problem peculiar to us or to India, it is across the world, which is how do you forecast what's the right volume to sell.
One year you sell good, next year, you plan more and then suddenly you have inventory left over. So clearly, what we targeted to sell was less than what the market could sell through. But we didn't also want to get headaches with a lot of inventory and obsolescence in our book of accounts after that. So I think it's going well, and we are happy with it. Next year, obviously, we'll plan a bigger figure. And then we'll also see how to make this available through the year because most of the Cadbury gift packs at INR 100 they sell through the year. The INR 200, INR 300 sell more during festive season, but the INR 100 one sell great through the year. And we are the only other player at that price point along with Cadbury. Okay.
In terms of Staples, you can see volumes are lower in Premium segment by about 6%. Mass Staples about 9%, up 9%. Total minus 4%. Value is obviously reflecting the drop in prices. So overall, I would say, volumes are down 4% and Premium Oil partly offset by Mass Staples and adjacencies. Roll out of Oats & Almonds continue. We think we'll have estimated revenue about INR 10 crore plus or Oats & Almonds. So that's not equal to our Oil business, but it's not bad. And it helps from a distribution network perspective. It also helps us in terms of our buying of Oats, Granola, Museli so on and so forth. And I would say, therefore, the adjacencies support increased efficiencies in procurement and help in the distributor network. We've talked about this earlier.
In terms of competitive update, I would say, steady spends behind Act II. We estimate a marginally higher annual spending nature by about INR 4 crores to get to the 8% growth rate. So that is what we are planning and that is what we discussed with our Board of Directors earlier this week. In terms of Spreads, please go to Page 14. We've got very steady spends behind Sundrop. However, Kissan also continues to spend and trend at heavy levels. So let's see how long we're able to last out. And Hershey's, sorry for the U.S. there. It's basically the drop their spending significantly in FY '24. Okay.
So I would say long term, probably it's very likely that in Chocolates spread, we're not going to see competitive spending because Ferrero in any case they don't really spend and if Hershey's also doesn't spend, then our play will start to become stronger because we are putting all our money behind nut butters, and -- but we would still probably be able to get leadership of the chocolate spread category even without spending money. So let's see how that goes. In terms of Breakfast Cereals, we are maintaining a steady investment. You can see what is visible here is that Tata's have really reduced their investments, you can see Tata Soulfull. And I think that's consistent with what I've seen also wherever we've common distributors with them, it's starting to be a challenge. It's one of the challenges, I guess, of if you have a large like what we face, right, whether Edible Oil business that until the process food becomes a reasonably big part of it, the commodity side of it is always puts pressure on the system. That's the law of nature, if you will, and for [indiscernible]. So in terms of Chocolates, not much to report, really, it's the strong category margins. I've told you these numbers, you can check them yourself. Average gross margin in Chocolates is about 60%, so real, no delusion, and that's more closer to personal care than it is to any foods business. So it's obviously, therefore, given those contribution levels it merits that kind of spending. And it indicates we are in the right category in terms of our margin profile as we want to increase our gross contribution of foods from 46% to the 48%, 49% mark. And we are just working through this, how to build share in a large, but competitive Chocolates category.
In terms of Edible Oil, this is interesting because premium edible oil, turn to Page 17, so it's worth a look. If you look at it, Premium Edible spending has actually dropped to nil, right? So in quarter 3, it was nil and in quarter 2, it was nil, right? So if you see we had actually stopped spending. From FY '19 onwards, we didn't really spend any money, right? But it looks like the competition is also heading there. So we honestly can't forecast what will happen in quarter 4 and quarter 1 in next year. But if you look at this chart, it's indicated that whatever we did several years ago, our competitors are also going to have to do now, right?
Then overall, therefore, in terms of quarter 3 FY '24 summary, year-to-date foods volume growth of about 5%, right? Clearly lower than what we wanted it to be. But we are addressing the drag caused by Ready to Cook and Spread. And we believe there is some result when the action being taken and proposed, right.
Just to recap, I've told you in Ready to Cook, the key is getting Instant Popcorn to that 8-odd percent growth level, right. That's our algorithm. And that we are already at 5%. So we believe there's a little incremental investment in media. We should be able to do that along with distribution expansion. And in Spread, we've already taken all the necessary actions and our expectation is that by quarter 4 of this year itself, volume should be coming back, right, moving from negative to positive space.
Gross contribution level of foods stays at about 46%. So it's really close to best-in-class, right? Best-in-class defined as we've always told you is, Nestlé in the range of 48% to 52%. With sufficient capacity in hand, a lot of our focus now is on reducing cost. So we are focusing -- as we told you in our November analyst call meeting, we are focusing on labor, we are focusing on energy and we're focusing on obsolescence. These are the 3 really where we feel we have a large size of price in order to be able to reduce our manufacturing costs and obsolescence costs and therefore, improve our gross margin from this 436% contribution that we have today.
And it's not roughly sized, but we feel together with operating leverage, this will do the job. And the impact of lower edible oil prices of about 35%, give or take a bit, partly offset through growth in foods, adjacencies in premium staples and higher shipments of mass oils. So overall on a revenue basis, you can see in the quarter, like we -- our revenue gap is about 10-odd percent, right? And I think on a year-to-date it would be reasonable of over 8%. But if you take a weighted average revenue on an edible oil company would be in the 15% to 20% range. So I would say that's part of the benefit of having a portfolio now which is much better in terms of managing fluctuations in commodity prices, right? And the last point that I'd like to make on quarter 3 is, it's visible. We are making very strong growth inroads into smaller towns and mass markets, and that's critical. We will never be the kind of company we can say. We want to be the best performing most respected food company, which really means it should have $1 billion turnover at that point -- at some point in time. But we will never be able to do that if we don't have a mass market presence, right?
We are available -- not available properly across the country, INR 5 and INR 10 price points, et cetera, et cetera. So I think that part is working very well for us. It's visible in the revenue numbers as well also in the volume numbers. And once we are able to resolve this RTC and Spreads, which I've explained to you what we are doing, it will ensure that we return to a strong growth in 2024. Overall, on track to be the best performing most respected foods company India and we will now start to take questions. So Aditya -- sorry I think operator would request you to please come in and start the Q&A?
Yes, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Percy Panthaki from IIFL. Please go ahead.
A couple of questions from my side. On the Ready to Cook portfolio, could you give us some idea as to how many retail outlets are you touching on a direct and on a total basis? And where do you see these numbers going 2 to 3 years down the line? That's my first question.
My second question is that your raw material cost has declined by about 315 basis points. Given the lower edible oil cost, plus the mix shift, I would have expected this to be on the higher side, about 200, 300 basis points should have come just from the lower edible oil cost despite pass-through, I'm sure it's not a full pass-through. And then on top of that, the mix of the higher foods contribution. So why is it that the gross margin expansion is not higher than that? So these are my two questions, sir.
So yes, I would say, see, we've indicated to you on Instant Popcorn. So probably, we would have started this year at about close to about 280 thereabout stores, in the low 280s. And right now, would be clocking probably closer to the 295,000 mark. So we'll be closer to the 300,000 mark right now in terms of Popcorn. And it has a steady growth pattern. It grows steadily, right, every month, every quarter. And obviously, that's a continuing progress because it also needs to be supported by media, okay? That's your answer on the Ready to Cook.
In terms of gross contribution, yes, you called it out, see there are 2 parts to it. One is that there is obviously a pass-through pricing, which has to be done in the edible oil prices, right, or rather in the edible oil business? And the second also is that we -- when we -- when the commodity price of palm oil went up last year, we took up the prices. But when as they started coming down, we took them down as well, okay, right? So that is why you can see the value growth in Ready to Cook is less than the volume growth, right? You can see that difference. I think difference is about 300 or 400 basis points, right? So you can see you got about 3% growth in volume and a nill growth in value. So that reflects also the impact of wherever we felt it necessary, we took some pricing. And there'll be a third element on this, which is actually, if you are spending a reasonable amount of money, right? They would have spent more than INR 150 crores by now in spreads. So we don't have INR 150 crores to defeat them, right? But we do have very good products, and we have the option to price ourselves in a manner that they find it very difficult to believe, right? We have done that. In the big pack, we are actually -- I mean, it's like a closure, right? I don't think really they probably hardly sell the big pack any longer.
So in the mid size pack, once we've closed and brought their business to a state where clearly they will not be able to spend any more money, at that point in time, we will look to increasing the price. So in terms of pricing, these are the 3 elements which are governing the outcome that we're seeing today. Srini, is there anything else that I have to account, no? Okay. Okay, Percy. So those are the points. Thanks.
[Operator Instructions] Our next question is from the line of Vivek Kumar, an individual investor. Please go ahead, sir.
My question is on -- you can take it as on Spreads, in general, how to understand the other products where growth is not up to the mark as we have envisaged. So is it because of the -- is that -- let's take Spreads like is there scope to increase the distribution or is it market like spending on ads? Or is it product or pricing, which is -- what is the tough thing -- what are the things that we have to crack? Do you think like the competitive intensity? What are the things that we have to crack for us to see that sustained growth?
Like what are the 2,3 thresholds that we have cross, okay, boss, these obstacles are done or these things are done." Maybe obstacle is not the right word, but if these 3.4 things are done, then we go into a sustainable growth? Is it like -- are we facing tougher competition? Or do we have higher scope for distribution? I'm just trying to understand what are the levers so that we go into that path of -- because last 3 years, if you see, Spreads growth has been very volatile. So just to understand. On the same time, there has been huge increase in competition. So I'm just trying to understand the dynamics. What are you looking for to get confident that, okay, boss we are set for growth in Spreads, at least there is a stable market share.
Okay. Any other question Vivek or that's the one?
I think this one.
So first, if you go to a earlier presentation, I think in the last quarter or the quarter before that, we had indicated and I'll talk specifically for Spreads and I'll come to Ready to Cook again, okay, because these are the only 2 ones which are dragging the growth. Everything else is okay, right? You can see Ready to Eat doing very well. Breakfast Cereals doing very well. And Chocolates is doing less than we expected, but we are in the process of building the business model. So nothing unusual in that. Okay.
Now coming to Spreads. We've had a volume CAGR for the last 3 years before Hindustan Lever launched Kissan peanut butter was 17%, okay? So if you go pre-launch of our #1 competitor today, at least in spending terms, not necessarily in revenue, right? We have had a volume growth of about 17%, right? But there has been a reasonable amount of competitive activity, nothing unusual. At one point in time, we had some 35 or 40 brands in Instant Popcorn competing with us, right? That's a large number of brands, it was like more than 10 years ago. So every category goes through this phase. There's nothing unusual in that, right? And it's part of doing business.
So I would say, however, the comment is right that it has been up and down. If I look at the monthly chart, up and down like that, right? All we, therefore, need to do in Spreads is crack the mid-sized packs, right? We need to do with our number with HUL, what we did for them in large packs. We need to get new consumers to grow the category because that's critical, right? Any competitor can go to a retailer and try and offer a margin and get inventory on a shot.
But if the stock doesn't move, that's not a sustainable model, right? Critical thing is for us to be able to get the consumer with us. Once you own the consumer, you own everything. You own the currency printing machine, all right? And that's why we're in the process of it. So that's why I said, yes up and down points very well, very completely correct, but that is the consequence of so many people taking an interest in the category. As these people lose interest, we come back because we are winning with the consumer, we will have the ability to take pricing also and restore the margins that we have compromised on to be able to protect our volume share. That's all, nothing else, okay.
As far as -- if you will, Ready to Cook is concerned and that's the other category which we've called out that we are working on. We think the graph -- I don't show obviously those numbers here. But when I discuss it with the Board, I actually show cumulative monthly spend, monthly volume. And every month, there's 5% to 6%. So we know now as a management team, 5% to 6% growth is in the back with our current marketing mix, right?
In this case, again, we don't see anything, no need tweak anything. We think that 5% to 6% will get to 8%, but we need to increase our spending a little more. On a year-to-date basis, the spending is in line with prior year. But in quarter 4, actually, we'll be spending less than prior year why because we've also invested this year heavily upfront -- not heavily, but reasonable amounts by our standards in Cereals and Chocolates. And therefore in Quarter 4, it will be less than prior year. But after that, we will start spending and what we've agreed with the Board is that we'll go up, we will increase our spend to be able to fund that.
That, I think, should address the growth to 8% level. If that is 8, the adjacencies give us 200 basis points because they will start growing faster, their bases are normalized, the pricing is normalized, we'll get to 10% growth on RTC And if that is the case, then that 16% to 18% starts to become real for us and visible because all the other categories are going back much faster, okay? So that's simple. The business appears complex, but at its route, these are only 2 things that we need to do. Okay?
Our next question is from the line of Vimal Sampath, an individual investor.
So now my questions are basically on Breakfast Cereals and Chocolates. Now I'm quite disappointed that Breakfast Cereals, I mean last -- up to last quarter, the growth was there, but now we have come down. And if I see in modern trade, now I believe Hershey has also come with some products. And Tata Soulfull is very aggressive. So our presence in at least modern trade, big size stores, it is reduced. First, they used to be our Popz that first varient -- chocolate variant used to be there, but now that is reduced.
And second thing is Chocolates what I understand that our supply chain is still not geared up properly because if the product is sold out, they are not getting refilling fast, that refilling is not happening faster. And then they put some other products on the shelf, which I mean, then to -- for us to come back is difficult. So I'm telling this in a constructive manner. So I mean, how are you planning to address this? And second, now our CapEx on production capacity, is it over now? Or still we are continuing with CapEx?
See, on Cereals, in terms of big pack versus small packs, we are winning and have always been winning disproportionately in small packs, okay, not in big packs, right, okay? Our estimate is we probably have 3x the distribution of the market leader, which is Kellogg's in terms of Center Filled Cereals, right? We have never actually had a huge presence of large packs because that is where the role of advertising starts to become more important, right? And that is where, if you remember, we also started taking malls, addressing some of those, and we are doing that even today, right? So it is because as we -- what happens in Cereals in the smaller packs as you get automatic visibility, you take a ladi, you put it up, it is visible. And our Popz Breakfast Cereals are widely visible across the country, okay? So we are working and continuing will work, continuing to win in bigger stores well. So I'll give you a number. In Dehradun, we've a common distributor with Kellogg's. Our distributor is 3x the size of Kellogg's, but Kellogg's Center Filled Cereals in his business is 3x our size in value, okay. And that is all in big packs. It is all in big packs and it is all in big stores. So it will happen. We will be taking share from them, but it's going to be one step at a time, okay.
In terms specifically about Tata Soulfull, Hershey, I think is more of a collaboration, if you will, right. And in terms of Tata Soulfull, I think we've talked about this. You can see that their spending has come down. And I think it is -- in my view, and you've asked me this question probably several times, it is a real mountain of a task for a company which is focusing on staples to move up to process foods. It has been a mountain of a task for us also. It is only now that 55% to 60% of our revenues come from process foods. Even when you go into the market, the distributors that we get today are dramatically different from the distributors who would come to us 12, 13 years ago, dramatically different, it's Choc and Cheese. Today, we get the right type of distributors that we want to get. So I would say on Cereals, as I said, the number for the quarter might be low, not might be is low, but then it is only due to the launch of Masala Oats in the prior year. That's it. Other than that, business is doing well, excellent momentum, absolutely no problem, okay?
Coming to Chocolates, yes. We are, I would say, not so much -- you can call it supply chain, I suppose, right? But we have also just been very careful. The size of price in this business is huge. Every company in the world, every company and every Indian entrepreneur and others, everybody wants to get into chocolates, right? Because there is a promise of profit, okay? It's a 60% gross contribution category, which everybody would like to be in, right? But it's a difficult category to do. It's difficult because we need a lot of focus in production, lot of focus in transportation and storage, et cetera, et cetera, right? So I think we've made all the right moves. We are already, I would say, available in about 120,000-plus stores. So that means, what you call, the proof of the business model is there. You don't get to 120,000 stores in India with a INR 10 product if you're not making good product. Obviously, the consumer likes it, right? The scaling up of that will figure out.
And last part of that is also what I called out in the Chocolates slide in terms of the production process, sanitation, humidity, handling, sealing, all of those pieces, but it's working well. And if you go back to our charts, which we have shared last quarter or the quarter before that, we've shown you how businesses take time. If you look at our Ready-to-Cook -- Ready-to-eat Popcorn business, it was hovering around INR 4 crores, INR 5 crores for I don't know how many year. And then suddenly, boom, you're able to crack it, and obviously, the new products are doing that faster and faster, right? So there's going to be some up and down. I'm not fussed about that. But I'd rather ensure that we make a high-quality product where we win the customer. And if we do that, we will get our business will come and the growth is assured. Okay. And lastly, for CapEx. No, see we will continue to spend CapEx, but kind of not at too much variation from whatever is the cash flow that we are generating, we've always told you that, right? We don't want to borrow and spend a lot of money on interest for the sake of doing CapEx. So that's the model we followed and we'll continue to follow. The only difference now is we have a reasonable amount of capacity, I think, in hand. We don't need to invest so much now to do bid for a INR 1,000 crores business in terms of capacity. More and more of our spending. So like the CapEx proposal that yesterday, I would have put to the Board. All 3 proposals are related only to cost reduction, right? It could be automation, it could be energy, whatever it is, right? So our CapEx focus is shifting.
And that's correctly so, right? Because our base margin profile is fine. See, we are at 46% as we explained in the November Analyst week. We need 48% to 49%, 200, 250 basis points, not very far with scale, we'll definitely get it right, okay? The key for us to get to a 15% to 20% EBITDA margin is now to reduce the manufacturing cost by about 500 basis points. So we are going to invest CapEx in that area more than anything else. I hope that answered your question. Thank you very much, and thank you for the feedback.
[Operator Instructions] Our next question is from the line of Ajay Thakur from Anand Rathi Shares and Stock Brokers. Please go ahead, sir.
Just wanted to understand in terms of the Staples. So generally, wherever we see that we have taken a price cut or generally when the industry undertakes a price cut, the volumes actually start following with a lag. Now we have already taken almost quite a bit of a price cuts in Staples business, but the volumes are still negative in that segment. When can we expect the volumes to start recovering and stabilizing in the segment for Staples? Second question, sir, I also wanted to understand broadly in terms of your guidance for ad spend. So you had indicated a broad range of around 7-odd percent kind of ad spend during the analyst meet. So I wanted to check on that as well. Do we continue to hold at 7% kind of ad spend? And also which all segments we would be kind of targeting in terms of spending that by?
Okay. So I'll take the ad spend part first. We say, we've always told you over the years, we don't think the food business can get to 15% EBITDA margin with a 12% ad spend. So we've always told you and all investors that we are working in a model of an ad spend of 7% to 8%, and that's what we are even today, okay? So like I think I mentioned between one of the charts that when I was talking about RTC at a company level, we're probably at about 6.5% today and probably for next year, we'll be in the 7% to 7.5%, all right, okay? So that's what we are.
But we believe there is adequate ammunition for us to be able to deliver the growth rates, our historical growth rates, which are in the 16% to 18% range because half of our growth comes for advertising and half of our growth comes through innovation. In terms of categories, I would say the largest part will continue to be the current category. It's in order of the size for the business for us, right? So Ready-to-Cook Instant Popcorn will continue to receive the giant share of it, right? It will be followed by Peanut Butter. And then we'll invest in breakfast cereals and chocolates as much as we see is incrementally available. It is not that the new categories will come at the expense of the current ones, no. We will continue to spend in the new category -- I mean on the current category. And then whatever is the additional amount, we will see how to deploy that behind the new categories. That's the fundamental, right? Because we need to keep growing our current businesses while we build out the new business, okay? So on pricing, I think that's the question.
And on Staples. We have never said that we will be growing our oil volumes by 5% or 10%. We never said that, right? If you remember, I used to talk of a range, I think, between 98 and 102 or 104 on volumes. And kind of that's where it is. We need to have volumes in our Edible Oil business, which indicates or gives us confidence to believe that our edible oil gross margin that are earning every year is not going to dramatically drop, all right. So if you look at the last couple of years, it's still the INR 70 crore range, right? So last year, I think it was about INR 77 crores, they're about -- this year also, we are okay. I think we probably made about INR 59-odd crores so far, right? So we are a -- we are okay. Our judgment on this business is more that we need an x amount of margin so that it doesn't become a huge drain on our business, right? And that's how we would approach it, right?
So your point is correct that traditionally in classical terms, you'll say, "Okay, so you know your volumes are down now minus 4% and now you need to do -- what do you think -- will it come to plus 4%." I think our metric and the lens through which we see it is how much margin are making from this business. If that margin is adequate, that's okay. That's the first thing, irrespective of what is that exact volume delta that has happened. Obviously, we'd like more volume because it's more sustainable.
But we are looking for all the growth in the company to come from foods, right? And that's what we told you. When we said -- if you will, we want to have, let's say, a INR 1,000 crores business. We are not forecasting that there will be another INR 1,000 crores of edible oils. I think if you look at our SG&A calculation there, I think we showed a number of about INR 250 crores, something like that, right? So that's the lens through which we look at it. I know it's a little different, right? But that's what we believe is right. And many years ago, when we told all of you that edible oils is not a category we're spending, right? A lot of you used to say, a lot of you is, "Oh, but your competitor is saying the opposite." And I say we'll see in time that's the competitors, no, we can't assess what is right for the competitor. But the proof of the pudding is in the eating today. So yes, all right? I guess thank you. Thank you, Ajay, for that question. And I guess we're coming to the end of the Q&A now.
We have one question actually from Shirish, if you can just take that.
Our next question is from the line of Shirish Pardeshi from Centrum Broking.
I have three quick question. When I look at last year, our base was very benign and now we have taken some adjustment. So 3 questions, starting from do we need some pricing action downwards to lift the demand because now your comment is now skewed towards the rural part and rural is more price sensitive. So that's my first question.
Second, on the medium to long term, you did mention that the capacity is now enough. So when we see the sweating of the assets and maybe that growth is driven, what are low hanging fruits or what are the medium-term pains for the company? And third, steady state over the next 3 to 5 years. Now we have the decent contribution from food, 46%. Now once we targeted 50% contribution, we should have reached to 8%, 9% EBITDA, which has not happened. So what are the pain points there?
So I'll take the last part first, okay? So in terms of the pain points, I think the main thing is that you see during COVID, we got a huge lift in Ready to Cook, right? If you look at our business the way it was, it's almost double of what it was some years ago, right? But obviously, that we look at everything on a year-on-year comparison. The good news, obviously, for us is that we actually didn't have a drop in our Ready to Cook business after COVID. We had some quarters that it was impacted, but marginal and then we're coming back to growth. So I would say, broadly, at a high level, we managed to almost double our business, and they're holding it there.
However, if I look at the current growth, right? You can see all of the growth is being driven by Breakfast Cereals and Ready to Eat snack, right, the manufacturing -- cost of manufacturing these products is much more than the manufacturing cost, the manufacturing percentage that it would be for a product like a Ready-to-cook, right? That's a simple process. So that is what is driving up the total manufacturing cost as a percentage because it all depends on where your growth is coming from, right?
And the second part is that we also, as I called out, have a higher obsolescence rate. If you recall in our analyst meet we have presented, we had an obsolescence rate of about 1.9%. That's pretty high. Now I don't think it's going to come down in the near term to the 0.5%, with most FMCG companies work on, but we certainly wouldn't like it to be an excess of 1%. But we have a large amount dependent on innovation. So that's kind of the balancing act that we are doing in terms of the food portfolio.
And the last part is, remember, when edible oil prices fall, right? Then the allocation of SG&A, whatever is our allocation of SG&A also the foods business, it's hypothetical because we don't do segment-wise reporting, but we will increase, right? If a part of our business has a huge price decline, then the SG&A contribution even if on a low-store basis, if you assign it to foods will increase. So that is the other piece, which is therefore not working as we would have liked it to be. But then at the same time, it's fair to say, look, we took advantage also on the pricing when it was there from an SG&A percentage, but these are the 2,3 main change points that are visible in our system, okay?
In terms of medium to long-term, your point on capacity, look, it's not that we are not going to keep building capacity. We don't build capacity today for INR 1,000 crores and we have capacity actually close to maybe INR 800,000 crores, but we need to keep building capacity. But what we're trying to see is that the big ticket investments really don't need to made any longer, right? We've got a presence. We've invested in capacity in all the 5 food categories that, that we compete in. And our focus, therefore, to someone's question was that we will focus now on -- a lot of our capital will be focused on cost reduction because that's the other part of how we're going to bring the manufacturing cost down.
This relates to your the question I just answered, Shirish, for you, which is that it is a manufacturing cost, which are key now for us to be able to get to that 15% EBITDA mark. And I think that's what we highlighted in the November Analyst Meet also.
In terms of pricing actions, I think I'll repeat what I said earlier. I think there's obviously 3 pricing actions, which are underway. One is the pass-through pricing on edible oil that is going through. The second is on the Ready to Cook portfolio. The prices went up. Input prices went up. They came down. We passed that benefit right back to the consumer, right, which is why we are growing at whatever 4, 5 odd percent, mid-single-digit growth.
And the third is that in the Spread category, we chose to do some pricing actions because we felt that was the best way for us to withstand this threat from Hindustan Lever, okay? Let's face it. We're dealing with the situation where we are competing with India's largest FMCG company, okay? It is not a company to be trifled with. They're reasonably smart people, and they spend a lot of money, but they haven't made much progress, right?
So I think from that point -- standpoint, we've done the job, and I think executed to the best possible game plan that we could have chosen. And now it's a matter of time, we have to see how long they can keep spending, right? We'll see, right? But at this point in time, I don't believe that this level of spending with this current level of revenues for them is sustainable. Now time will tell when it is. I can't tell you that, okay?
All right. First, thank you, everybody, for all the questions. A very Happy New Year all of you, have a great day, great month, everything else and a great New Year. Bye, now. Thank you.
Thank you. Ladies and gentlemen, that was the last question for the day. I now hand the conference over to management for closing comments.
Ladies and gentlemen, on behalf of Anand Rathi Shares and Stock Brokers, that concludes this conference. Thank you for joining us, and now you may disconnect your lines.