Shares of firms making consumer products, not unexpectedly, have underperformed by a large margin the stock market rally that started last year.
The bellwether Sensex index on the Bombay Stock Exchange (BSE) has risen by 120% from its low in early March. In the same period, the BSE FMCG index, which tracks consumer products firms, has risen by about half at 60%. Investors in Britannia Industries Ltd have been worse off, what with the company’s shares rising by only about 35% from its low in 2009.
The main reason for this is the rise in the prices of farm commodities such as wheat and sugar, which together account for 42% of raw material costs. Wheat and sugar prices have moved up sharply. The price of palm oil, another major raw material for the company, has risen by more than 50% compared with a year ago. This makes the firm the worst hit in this sector, since other firms have had some reprieve because of lower prices of derivatives of crude oil.
Graphic: Naveen Kumar Saini / Mint
Britannia’s costs have been under pressure from early 2009. According to an analyst with a domestic institutional brokerage, the price hikes taken by it to counter these seems to have affected volume growth. In 2008-09, the firm’s sales grew by about 20%. In the June quarter of this fiscal, growth dropped to 5.5% and in the September quarter, it fell to less than 2%.
The company has maintained margins and generated strong cash flow in the first six months of this fiscal year to 31 March, but in the process has lost out in terms of volume growth. The fall in volume growth in the past two quarters may cause it to hesitate passing on recent price increases in sugar and wheat to consumers. But this in turn may lead to a drop in margins, and hence, profit growth.
Besides, like other consumer products companies, Britannia is also likely to be affected by rising inflation. Anand Rathi Research says, “With spiralling food prices, the wallet share of consumers is expected to tilt towards food products and away from consumer products.”
While this is a concern the entire industry faces, Britannia’s higher exposure to farm commodities in its cost base is an additional worry. While some of this is already reflected in the stock’s underperformance, there could be a further correction if reported profit growth is below estimates, especially since valuations aren’t particularly cheap at around 18 times estimated earnings for fiscal 2011.
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