Britannia: The cookie crumbles

Increased input costs, loss of market share and higher tax outflow have affected valuations.

The fast moving consumer goods player, Britannia Industries, continues to see tough times. The company managed to see strong revenue growth, but earnings and profitability deteriorated. Higher input costs, interest charges and increased taxation were the culprits.

Operating profits declined 30 per cent to Rs 43.6 crore. Higher interest cost (due to bonus debentures) and tax rate (due to completion of five years of Uttaranchal factory) dragged net profits by a whopping 55 per cent year-on-year to Rs 23.7 crore, say analysts at ICICI Securities. The tax outflow has been high, at around 25.8 per cent in the June quarter, as compared to 18 per cent in the corresponding period of the previous year.

Britannia reported revenue growth of 24 per cent, most of which was volume-led. While these are structural issues, the concern for analysts has been the 170-basis-point year-on-year decline in the company’s market share. Analysts point that a premium product portfolio might be taking toll on market share, as the the mid-price segment has seen the highest growth. Subsequently, the market share in the biscuits segment has also declined 500 basis points in the past two years, and stands 30.6 per cent currently. Operating profit levels may improve in the coming quarters, as raw material prices ease. However, they are not expected to rise (currently at four per cent), as competitive pressure in the segment could see higher ad-spend. The industry spends an average 14 per cent on advertisements, while Britannia has an ad-spend rate of seven-eight per cent, which could only rise from here.

The company’s valuations are amongst the cheapest in the industry, with an enterprise value of around 1.3 times its sales. A change in the earnings flow and restoration of market share could be the likely triggers for the stock. Till then, the dough would not get baked.