Britannia: Limited margin gains ahead

Amid firming input costs and slowing demand, margins are likely to remain in a tight band, say analysts

Britannia Industries has been clocking double-digit volume growth in the past few quarters, including during January-March 2016 (Q4). Fall in realisations, aided by lower input costs, has boosted volumes, and so has the company’s focus on innovations and firm ad spends. While the overall Q4 performance was good, the consolidated revenue growth of 7.8 per cent year-on-year at Rs 2,190 crore in the quarter was short of Bloomberg’s consensus estimate of Rs 2,243 crore.

This is largely because volume growth at around 10 per cent was lower than analysts’ expectations of 12 per cent. Nevertheless, the volume number is good in the wake of prolonged demand slowdown and intensifying competition in the domestic market, and given the low single-digit volume growth reported by most other fast-moving consumer goods companies.

Savings on input costs, as well as higher focus to drive cost efficiencies, led to an 85 basis point year-on-year expansion in earnings before interest, taxes, depreciation and amortisation (Ebitda) margin to 13.3 per cent. Ad spends as a percentage of sales at 9.5 per cent were down 50 basis points even as the company associated with events such as Filmfare awards and Asia Cup T20. At the net level though, a 46 per cent surge in tax expenses to Rs 93 crore restricted net profit growth to 13.7 per cent year-on-year. Thus, the figure of Rs 190 crore missed the Bloomberg estimate of Rs 219 crore by a huge margin.

Britannia’s Ebitda margin has grown from 6.8 per cent in FY13 to 11 per cent in FY15, driven by operational efficiencies, favourable input costs inflation, and emphasis on premium products. For FY16 as well, Britannia’s consolidated Ebitda margin surged 314 basis points to 14.3 per cent. However, margin gains will be limited from here on as input prices have started firming up and most part of cost rationalisation is achieved. Analysts expect Ebitda margin to expand by 50-60 basis points in FY17.

The company’s management, however, remains confident of maintaining growth momentum going forward and is re-staging its brands. The recent re-launch of Tiger brand of biscuits will aid growth in rural markets. A good monsoon will also push up rural demand this financial year. Increase in the salary of government employees along with one-rank one-pension provisions will provide some impetus to consumption demand. However, rising competition from the likes of Patanjali remains a key monitorable.

At Rs 2,934, the Britannia scrip is fairly valued at 34 times the FY17 estimated earnings, higher than its historical average one-year forward price-to-earnings ratio of 30 times.