Good days for Britannia Industries amid a slowing consumption environment

Growth in sales driven by better product mix and price hikes

While Britannia Industries’ September quarter (Q2) top line fell a tad short of analysts’ expectations, its profit before tax (PBT) beat estimates, helped by a 55 per cent year-on-year (YoY) jump in other income. 

However, a deeper look at the numbers suggest that the core business has put up a decent show amid a slowing consumption environment.

On a consolidated basis, the maker of popular biscuits and cookies such as Good Day, Marie Gold, and 50-50, among others, clocked 5.9 per cent YoY growth in net sales to Rs 3,023 crore and an 8.8 per cent rise in PBT to Rs 499 crore. Analysts, according to Bloomberg, had pegged these at Rs 3,041 crore and Rs 480 crore, respectively. 

A sharp 33 per cent YoY growth in net profit is not comparable, given it was driven by lower corporation tax rates. 

An estimated 3 per cent growth in volumes, price hikes, and better product mix contributed to growth in net sales in Q2. Though competitive pressure from local players and the rural slowdown restricted volume growth on a sequential basis, higher revenue share of premium products such as cookies (25-30 per cent of revenue), which continue to do well unlike low-end biscuits, augurs well for Britannia. 

As observed in the case of Nestlé, higher input costs, mainly of milk, impacted the company’s gross profit margin, which remained flat at the year-ago level of 40 per cent. However, cost efficiency measures (other expenses as a percentage of operating income were down 47 basis points YoY) besides price hikes and a better product mix, aided a 31-basis-point YoY expansion in Britannia’s Ebitda (earnings before interest, tax, depreciation and amortisation) margin to 16.1 per cent.

According to Vishal Gutka, vice-president of Philip Capital: “Demand challenges in the value segment and raw material inflationary headwinds are near-term worries for the company. However, Britannia is likely to see a revival from FY21 onwards, and has good long-term potential with its strong market position in premium segments and product innovations.” 

Some other analysts, though, believe that milk and related prices have started correcting, and will help margins further.

Overall, investors with some risk appetite can buy the stock. While its current valuation of 47 times its FY21 estimated earnings is 19 per cent higher than its long-term historical average valuation, it is at 10-20 per cent discount to multinational peers such as Hindustan Unilever and Nestlé.