Britannia Industries Ltd’s shares fell by as much as 4.9 percent on the National Stock Exchange on November 9. Investors were discouraged with the company’s margin performance during the quarter ended September.
Although the packaged food company’s margins were expected to contract due to a substantial rise in raw material prices, the extent of the drop was more than expected.
The gross profit margin contracted as much as 502 basis points (bps) year-on-year to 37.5 percent. One basis point is one-hundredth of a percentage point.
ICICI Securities said this was the lowest gross margin in more than eight years. This was also the third consecutive quarter of gross margin decline for the company.
Britannia’s overall input cost increase was about 14 percent in the quarter, with market prices of palm oil rising 54 percent from a year earlier, industrial fuel up 35 percent and packaging materials 30 percent higher.
The pressure on gross margins percolated to EBITDA (earnings before interest, tax, depreciation and amortisation) margins as well, which dropped by 428 bps year-on-year to 15.5 percent. To that extent, savings from flattish ‘other expenses’ were set off by higher staff costs.
However, Britannia did better on the revenue front vis-à-vis profitability. Operating revenue increased by almost 6 percent year-on-year to Rs 3,553 crore in Q2 of FY22. This was when the base quarter wasn’t particularly favourable, considering that revenue had increased 11 percent in Q2 of FY21.
During the quarter, Britannia launched Milk Bikis Classic in Tamil Nadu and Treat Stix and Marble Cake in the wafers and cake categories. The company has gained market share so far in this financial year.
What next?
To cope with rising cost pressures, Britannia increased product prices and more such hikes could follow. The company plans to increase prices cumulatively by 10 percent by the end of March.
One-third of the pricing is through changes in the maximum retail price of products and two-thirds through weight reduction, which typically takes time to become effective.
However, the extent to which price increases can bring comfort on the margin front remains to be seen, especially if cost pressures continue. Even so, expectations are not running high.
“While lower ad spends in FY21 have driven higher profit growth versus revenue growth, FY22 is likely to be a low-profit-growth year,” ICICI Securities. “Approach on price increases (inflationary RM) will be key.”
Britannia’s consolidated total operating revenue and net profit had increased by about 13 percent and 33 percent, respectively, year-on-year in FY21. The company also benefited from the rise in at-home consumption in the previous financial year as people spent more time indoors to protect themselves from the coronavirus.
The success of new segments will be worth tracking even as Britannia’s strong brand positioning helps. For investors though, margin worries may well cloud sentiment for the stock in the near future. Britannia’s shares have underperformed the Nifty FMCG index so far in 2021.
“Earnings delivery is currently lagging pre-pandemic expectations by a year but we expect FY24 to provide the re-balancing,” analysts from JM Financial Institutional Securities said in a report on November 8. “The stock is likely to be lacklustre over the short term but valuation is relatively reasonable and a deteriorated near-term margin-profile is by now well-known.”
ICICI has a target price of Rs 3,400 for the Britannia stock, while JM Financial has set it at Rs 3,980. Britannia’s shares were trading at Rs 3,614 on the NSE at 1.26 pm.
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