Britannia's Q3 far from crunchy, low consumer sentiment pull numbers down

While strategic initiatives helped improve profit margins, the 2-4 per cent volume and revenue growth was below expectations

Thanks to the deteriorated consumption sentiment, Britannia reported lower-than-expected revenue growth in the December 2019 quarter (third quarter, or Q3). Consolidated net sales rose by 3.8 per cent year-on-year (YoY) to Rs 2,936 crore, against Bloomberg consensus estimate of Rs 3,031 crore, with volume growth decelerating to around 2 per cent, from 3 per cent the previous quarter.

Analysts had pegged volume growth number at 3-4 per cent. This, along with worries over rising food inflation, dragged down Britannia’s stock by 3 per cent to Rs 3,155 — on a day broader market sentiment was muted. The biscuits-to-dairymaker had reported its Q3 numbers on Friday after market hours.

There is some silver lining though. Despite higher food inflation, Britannia’s earnings before interest, tax, depreciation, and amortisation margin expanded by 94 basis points (bps, or bips) YoY of 16.8 per cent — the highest in at least 20 quarters.

Britannia had hedged against higher prices of key raw material prices such as wheat, sugar, etc, which mitigated gross profit pressures. Gross profit margin was down 107 bps on a consolidated basis in Q3, and according to the management, it would have been another 100 bps lower (due to about 5 per cent input cost inflation) without the hedging initiatives.

Additionally, cost-efficiency measures led to a 134-bps YoY compression in other operating expenses, as a percentage of revenue, in Q3. The management expects these initiatives to yield another 210 bps in cost savings.

Although the hedging cover for some raw materials will not be available in the coming quarters, Britannia plans to take selective price hikes to offset rising input costs. While such a move would diminish hopes of near-term volume growth recovery, it would not hurt value growth, the company said.

Shirish Pardeshi, analyst at Centrum Broking, said, “Britannia’s steps in terms of selective price hikes, deepening distribution reach, and protecting its distributors seem to be in the right direction. This would keep Britannia as one of the biggest beneficiaries once the slowdown starts tapering.”

But, till then, investors will have to remain content with low single-digit volume growth, which may keep a lid on the stock price.

Britannia’s pre-tax profit grew by 6.7 per cent YoY to Rs 497.2 crore in Q3, better than expectations of Rs 479.3 crore. Net profit growth of 23 per cent was mainly driven by lower corporate tax, hence, not strictly comparable.

At 46x its 2020-21 estimated earnings, only medium- to long-term investors with some risk appetite may consider it on dips.