Britannia’s sales growth crawls, worries investors

Is inflation affecting consumption or is it competition that has affected Britannia Industries Ltd’s June quarter performance? The Wadia Group company’s stand-alone sales rose by just 10.8% year-on-year (y-o-y) to Rs 1,222 crore, compared with 16.7% growth in the March quarter.

Britannia has been driving sales growth through a combination of price hikes and increasing the share of premium products in sales. There was a time when price hikes by food firms became inevitable because of sharp increases in input costs. While the pressure from rising input costs appears to have abated, companies have retained the pricing cushion. In the near term, this strategy has added to margins, also providing a cushion to absorb another cost shock.

This is visible in the June quarter too, as Britannia’s material consumption costs rose by only 4.4%, compared with the increase in sales, and its conversion costs (incurred for third-party production) rose by 21.6%. It has reinvested the money in advertising and promotion, and on meeting higher other expenses. Still, its operating profit rose 39.5%, chiefly due to the cushion afforded by the decline in the material costs to sales ratio.

The company’s operating profit margin, as a result, rose by 1.2 percentage points y-o-y, but it declined by 19 basis points sequentially. One basis point is one-hundredth of a percentage point. A combination of higher depreciation, lower other income and a higher effective tax rate saw its profit after tax rise by only 4%. But this should not be a big worry as operating profit growth is more representative of a company’s performance, which is healthy in Britannia’s case.

The main concern is sales growth. There is a base effect at play here, since the year ago quarter saw a 21.4% sales growth. After that, subsequent quarters saw sales grow in the 15-18% range. But the biscuits market is also seeing slower growth, especially visible in the second half of 2011-12, and Britannia’s June quarter results may be reflecting that.

In its latest annual report, the company projected the bakery market’s growth at 12-13% in 2012-13, compared with an estimated growth of 15-18% in the previous year. Britannia said it is well-positioned to participate in this growth, with the challenge being to do so profitably. But the profitability challenge is not as overwhelming as sales growth, as the results show. This could be either due to the economic environment, the effect of price hikes, or even competition.

More promotions, advertising and even pricing action may be needed to boost Britannia’s sales growth. Analysts expect the company to post 17% sales growth in 2012-13, and 28% growth in profit, according to estimates compiled by Reuters. There are three quarters more to go (where the base effect will not be as pronounced) in the year which can change the situation, but the June quarter numbers do make these estimates seem optimistic. The share was down after the announcement of the results, reflecting investor disappointment at these numbers.

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