Britannia Industries: Margin pressure

Higher ad spends and limited pricing power will continue to strain margins, which are already at trough levels.

Britannia’s net sales grew 27.2 per cent year-on-year (y-o-y) to Rs 1,097.5 crore during the September quarter. The sales growth has been improving for the past three quarters due to various factors — improved consumer sentiment, robust volume growth (over 20 per cent), a 5-10 per cent price rise in 2009-10, grammage reduction in select biscuits, launch of innovative products and premium biscuits at lower price points (Rs 5-10 pack) to improve realisations, and above all, a smaller base (two per cent revenue growth in the September 2009 quarter).

This is boiling down to better profitability, despite stiff competition. The company’s operating profit margin improved five per cent sequentially in the September quarter, in sharp contrast to an operating loss of Rs 43 crore reported in the March quarter (first in three years).

However, net profit margin, which rose sequentially in the June quarter, dipped 69 basis points (bps) to 2.9 per cent – the lowest in three years.

Despite sequential improvement in margins, analysts are not too optimistic about the company’s prospects, as competition turns intense from foreign (United Biscuits and Kraft) and domestic (ITC, Parle and Glaxo) players, in addition to the regional local brands. Domestic players are introducing premium biscuits at lower price points, besides launching new products or variants, which will challenge the company’s leadership in the category.

Though Britannia is expected to record double-digit sales growth, led by robust volume growth and higher realisation, margins will remain under pressure due to higher advertising expenditure and limited pricing power. The only relieving factor will be benign raw material prices (sugar and wheat that accounts for 83 per cent of raw material cost in volumes). At Rs 414.1, the stock trades at 23 times 2011-12 estimated earnings.