Britannia hit as local rivals return
Britannia Industries Ltd’s good run has hit a pause amid rising competitive intensity from local players, who have resurfaced with easing inflationary pressures. Britannia fought back by resorting to price corrections. This meant lower-than-expected consolidated total operating revenue growth of 8.4% year-on-year to ₹4,011 crore in the June quarter (Q1FY24). The margin performance was a letdown, too. Small wonder, Britannia’s shares fell by almost 3% on Monday.
The main problem is that volume performance has been underwhelming. In Q1, volume was flat year-on-year, and revenue growth was price led. But with pricing growth expected to taper, it is crucial for volume to gain traction. Here it does not help that there is sluggishness in its rural markets.
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In general, as local competition resurfaces with receding inflation levels, it is a threat for Britannia. True, it has widened the market share gap with the No. 2 company in the biscuit portfolio. But Britannia’s market share was largely flat in Q1 versus FY23 as local players captured more share. To remain competitive and drive market share growth, the company would deploy the necessary pricing strategies. Britannia expects FY24 to be flat from a pricing growth standpoint.
“Lower pricing should drive volumes higher going forward but as it stands today, H2FY24 looks challenging from topline (given price-cuts) as well as bottom line (higher margin would be in the base by then) perspectives, unless volumes offset the hit from lower pricing,” said analysts at JM Financial Institutional Securities in a report on 4 August.
However, there is a silver lining. The number of packs sold by Britannia in Q1 was up by 9% year-on-year despite flat volume. In view of this, it expects volume to recover gradually in terms of tonnage as well.
Coming to profit margin, the new year has begun on a somewhat dull note for Britannia. Recall that in FY23, Britannia saw gains from lower cost of wheat. This is not the case now. Britannia’s Ebitda margin in FY23 had expanded by 179 basis points (bps) year-on-year to 17.4%. One basis point is one-hundredth of a percentage point. In Q1FY24, while Ebitda margin at 17.2% increased by 365 bps, it has tapered from multi-qu-arter highs of 20% seen in Q4FY23.
Britannia expects the measure to roughly remain at the same levels. The price of commodities such as flour and sugar remain elevated. Britannia noted that production of flour has not been good this year and hence, prices need to be tracked closely. On the other hand, it helps that prices of other inputs such as palm oil and corrugated boxes are on a downtrend. Having said that, commissioning of new lines would lead to higher employee costs. In this backdrop, how Britannia manages to sustain margin levels through cost reduction remains to be seen.
Meanwhile, one needs to keep a close eye on performance of Britannia’s non-biscuit categories.
It is optimistic about its cheese business and is seeing some green shoots in cake category. Akin to the trend seen in biscuits, regional players have emerged in rusk too. The dairy business is on a strong footing.
All said, Britannia’s Q1 performance has triggered earnings cuts. For example, Nuvama Research has slashed revenue estimates by 3% each for FY24/25 yielding an earnings per share cut of 0.6%/1.2%.
To be sure, investors are sitting on handsome returns with Britannia’s shares rising by 26% in the past one year. To that extent, valuations are not cheap. Britannia’s shares trade at 43 times FY25 estimated earnings, showed Bloomberg data.
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Updated: 08 Aug 2023, 12:49 AM IST
