Sustaining strong volumes amid high base, input costs crucial for Britannia

In Q2, revenues grew by 12.5% and net profit by 16.1%, led by double-digit volume growth

With strong volume growth in the September 2018 quarter (Q2), Britannia, too, walked the path of many of its fast-moving consumer goods (FMCG) peers. Britannia clocked double-digit volume growth of 10-11 per cent, according to analysts, which was on expected lines. This helped the company post in-line numbers for Q2 (announced on Monday). This allowed consolidated revenues to grow by 12.5 per cent year-on-year to Rs 28.5 billion in Q2, while net profit increased 16.1 per cent to Rs 3 billion. 

However, as the low base effect wears off, the question is: Will this strong volume show continue? 

Firstly, given that Q2 was the fourth consecutive quarter of double-digit volume growth by the biscuit manufacturer, some analysts expect the volume would rise at a slower pace going ahead. Since the December 2017 quarter, Britannia has been posting above 11 per cent volume growth, compared to low single-digit volume growth during the first two quarters of FY18. Thus, with such a high base, some analysts believe volume growth may slow to six-seven per cent going ahead. However, the faster growth anticipated for rural markets (30-35 per cent of Britannia's revenues) and new launches should restrict the down-side risk to volume growth. 

Secondly, high input costs, amid the implementation of minimum support price (MSP), and higher prices of milk/dairy products, among other factors, are expected to warrant price hikes for margins to sustain. The management, too, indicated that they witnessed marginal price inflation in key raw materials. The company's earnings before interest, tax, depreciation and amortisation (Ebitda) margin improved by 100 basis points year-on-year to 15.8 per cent, mainly due to a sharp 218-basis points expansion at gross level, in Q2. Although Britannia has strong pricing power, price hikes could weigh on volumes to some extent given the price-sensitive market. Cost efficiency could also provide support to Britannia's margins, but in a limited manner.

The jury is out on how the volume growth and margins will pan out going ahead. But, these are crucial given that the Britannia stock has outperformed the BSE Sensex, as well as many of its FMCG peers, in the past one year, aided by strong volume and profit growth.

For now, the Street seems to believe that Britannia will not disappoint. Post results on Monday, the stock surged to close flat at Rs 5,754 even as markets fell sharply.