Margins improving; rains to boost performance: Britannia

Britannia Industries reported a net profit of Rs 43.5 crore in the first quarter of FY13, a rise of 4% year-on-year. The company net sales also grew 11% to Rs 1221.6 crore.

In an interview with CNBC-TV18, Vinita Bali, CEO of Britannia said the margins have been improving consistently and the company's performance is going to depend on the monsoon and government policy actions. Besides, Bali considers an increase in consumer spending to be a challenge.  Below is the edited transcript of the interview on CNBC-TV18. Q: This time you have seen a top-line growth of about 11% year on year, can you tell us what kind of volume growth have you done this quarter and are you seeing any kind of pressure on volumes?
A: Let me put numbers in context. On a consolidated basis, in this quarter our top-line has grown by 12% and our net profit has gone up by 18%. On a standalone basis our top-line has grown by 11% and our profit from operations actually has increased by 120 basis points.
The increase from Q1 of last year to first quarter of this year in terms of profit from operations is about 45%. We are actually seeing a double digit growth which is what we have been talking about earlier. This is made up of a volume change of about 3 to 4%. The rest is coming from a mix which is really a higher proportion of the differentiated products that we sell and a little portion of about 2-3% is coming from pricing.
_PAGEBREAK_ Q: Your margins were little bit under pressure - are you seeing some sort of softening in terms of the raw material prices and where do you see it headed in the coming quarters?
A: If you look at our margins, we have seen consistent improvements in our margin profile. Last year, on a full year basis margins went up by 80 basis points. In the first quarter of this year, it is 120 basis points compared with the first quarter of last year.
To be quite candid I think a lot will depend on what happens to the monsoon, the rainfall, the drought and what that will do to commodity prices. Right now or at least up to three weeks ago, we had seen a very moderate increase in the price of wheat, sugar and dairy products.
But, now it is tough to say and it really depends on two things. One is what happens to the monsoons and the second is how the pricing gets impacted by decisions on whether to export or not. The government's decisions on exporting wheat or sugar will have an impact on pricing. Q: A couple of quarters of higher ad spends is what we have seen on your books - can you tell us how much do you plan to bring down your ad spends in the next couple of quarters?
A: It is not really a question of bringing down our ad spends. As I have said several times before, we believe brands are our business. Therefore, investing in our brands, in front-end which is through advertising, through quality, through packaging, through different kinds of offers that we make to the consumer is very much part of the growth story or the top-line growth story in our business. We are also investing significantly in the back-end to support this growth.
When we have a large number of new innovations coming into the markets like we have had with 50:50, Snackuits, Nutrichoice, single served dairy based beverages under the Tiger brand name and with the new launch of flavours in Pure Magic, with the launch of Bourbon Cappuccino, these are actually supported through advertising and promotions as far as the consumer goes.
On an average, our ad spends have hovered in the region of 7.8 to 8.1%. Order of magnitude across the year will continue to be similar.
_PAGEBREAK_ Q: Actually not just you, but many other companies have pointed out a slowdown that we are seeing because of the monsoon situation and the impact that it would have on volume growth. You said you did volume growth of about 3 to 4% this quarter. What do you think is the sustainable run rate of volumes that Britannia could achieve in FY13?
A; I have said many times before that we do not believe in giving any forward looking estimates. I am not about to give one now. It is sufficient to say that it will be a tougher year, it will be a challenging year. We heard the finance Minister speak, we are going to have to manage through as he said, drought in some parts of the country, floods in other parts of the country and the impact more importantly that is going to have on consumer discretionary spending.
Another thing we have to remember is that consumer discretionary spending is also impacted by things like interest rate etc. In a country like India where roti, kapda, makan for most people takes up anywhere between 65% to 85% of their total earning, I think what we have witnessed before and we are likely to witness again this year is a shift in the priorities and where the consumers spends.
It is not as though consumer stops buying bread or eating biscuits or anything like that. It is just that they shift to different varieties. The frequencies get impacted and therefore, part of the challenge for companies like ours is to continue to give consumers more and more reasons to buy bigger and bigger variety of products. That is really going to be the challenge that we are working towards. Q: You spoke about this, the continuation or increase in the discretionary spending but, as far as the rural market is concerned, would you be looking at some sort of a price differentiation where rural markets is left out of the purview of this price revision?
A: We actually sell at the same price all over the country. I think the difference is not just between rural and urban markets. There are some products or some brands which are regional.
Right now I am talking to you from Calcutta and there is a very large brand that we sell here called Britannia Top. It is hardly available in any other part of the country. So, what we sell is a mix. There are some larger brands sold nationally but, there are several other brands that have regional preference or have a rural preference. There are also brands that have a large presence or have a modern trade preference.
So, if I were to take a brand like 50:50, Tiger or Marie, it sells in the same proportion in rural as well as urban India. A brand like Goodday sells a lot in rural India as well. But, when I look at brands like Pure Magic or Bourbon, the skew is more not just towards urban India but more towards modern trade within urban India.
I think the mix with which we go to the market is really a function of the demand that gets generated in those areas. But by and large we have not seen any significant difference in the rates of growth between urban and rural India, only the mix is different.