Britannia hits a sweet spot in June quarter

Better-than-expected results lift stock to all-time high on Monday

Britannia posted June quarter (Q1) results slightly ahead of the Street expectation. Indications that the growth outlook is positive improved the sentiment. Although the company also announced a big capex, analysts say it is too early to attribute a value to it. All these pumped up Britannia stock by about 5 per cent on Monday, helping it scale an all-time high. 

Revenues of India’s largest biscuit and confectionaries manufacturer grew 7.6 per cent to Rs 2,195 crore, led by a volume growth of 3 per cent. Compared to the expectation of flat volumes, it was a good show. Analysts point out that smaller packing of flagship range of biscuits such as Jim Jam, 50-50 and Marie Gold must have helped Britannia overcome the issue of muted volume offtake in Q1, and this trend should hold good. Operating profit grew by 4.8 per cent year-on-year to Rs 312 crore, again ahead of expectations of Rs 270-309 crore. Stand-alone net profit declined by 0.8 per cent to Rs 208.7 crore in Q1, and just met expectations. 

While all these are positives, it is not fair to entirely brush aside the cost pressures that were eminent in the quarter. For instance, while gross profit (revenues minus cost of goods sold including excise duty) expanded by only 3.7 per cent year-on-year (y-o-y) to Rs 818.5 crore, gross profit margin slipped from 38.7 per cent a year-ago to 37.3 per cent. Consequently, operating margin also fell from 14.6 per cent a year-ago to 14.2 per cent in Q1. Clearly, higher operating expenses (Rs 1,883 crore in Q1, up 8 per cent y-o-y) did weigh on its performance. 

Varun Berry, managing director of the company, states inflation in prices of key raw materials is at 6 per cent, indicating that the raw material cost pressures may not ease in a rush. Therefore, it is important that Britannia keeps up the costs rationalisation promise, as mentioned earlier. 

Also, while stand-alone results were promising, consolidated results were a laggard, with revenues growing at 6 per cent to Rs 2,301 crore, and net profit declining about 2 per cent to Rs 216 crore (slightly lower than estimates), suggesting that strong recovery remains absent in West Asia and African nations.

However, analysts say the outlook does appear good for Britannia, if costs are kept in check. The management’s commitment to introduce new product ranges every year should also revitalise its brand appeal. In addition, analysts say, revenues from the recently signed 60-40 joint venture with Greece’s Chipita SA would crystalise by mid-2017 and this would boost the top line growth by 1-1.5 per cent for Britannia. 

According to the JV, Britannia can produce and sell ready-to-eat croissants in India. Therefore, with the ingredients for growth rightly placed, the only concern is whether growth would be achieved at the expense of profitability. Management commentary, expected on Tuesday afternoon, would be important for the Street to make an assessment. Currently trading at about 35 times the FY18 earnings, the valuations are reasonable and in line with historical trends, say analysts.