Britannia Q4 results: baking in slower growth

Britannia’s volume sales growth at 10% was lower than the previous two quarters and value sales growth came in at only 8%, indicating some pricing pressure or an adverse change in product mix

Photo: Bloomberg
Photo: Bloomberg

Britannia Industries Ltd’s March quarter results gave investors a fright; its shares fell by 8.61% on a day the S&P BSE FMCG (fast moving consumer goods) index moved up by 2.12% (thanks in part to ITC Ltd’s 5.29% rise).

One reason was that Britannia’s volume sales growth at 10% was lower than the previous two quarters. Second, value sales growth came in at only 8%. That indicates some pricing pressure or an adverse change in product mix.

Third, its material costs to sales ratio was flat compared with a year ago, and even increased by a bit sequentially. That hints that the windfall from lower raw material prices is behind it. But then, the numbers also show a separate conversion cost charge, which Britannia pays to get some products made by third parties. That declined substantially in the March quarter. Add that number to material costs and the resulting figure looks all right.

In a conference call, the company’s management said it is seeing material costs increase, and have penciled in 5% inflation as of now. Prices of its products will, therefore, increase to offset higher costs. The risk is that volumes may decline in the near term. Whether higher product prices compensate for slower volume growth is a worrying question for profitability. Already, profitability has dipped.

Britannia’s operating profit margin came in at 13.2%, lower than the December quarter’s 14.4% but higher than the year-ago figure of 12.2%. A higher tax outgo saw its net profit increase by 13.7%. For the full year, net profit rose 17%, indicating that the first nine months were much better.

The company is now exiting a period where raw material prices and demand were both low, to one where costs are rising, but demand may remain weak. Meanwhile, competition remains stiff with newcomers such as Patanjali Ayurved Ltd angling for a bigger share of the biscuits market. Sure, rising input costs mean higher prices and better margins, but it is unsustainable if consumers cut back on consumption.

The uncertainty that lies ahead, especially in the next few quarters, as this transition takes place is what could be worrying investors. Britannia’s longer-term track record inspires confidence that it can tackle these challenges. But there may be a few quarters in between when the numbers don’t look very comforting. This quarter also signals that profit growth may taper, unless consumption demand revives, even in the face of higher inflation. Given that backdrop, it becomes difficult to justify the valuation of Britannia, which trades at 40 times its FY16 earnings per share.

The writer does not own shares in the above-mentioned companies.