Britannia Industries Ltd ’s results highlight the fact that the food company’s sales growth trumped rising input costs.
Though the advertising and sales promotion costs rose sharply, the company’s sensitivity to input costs—materials consumed account for under three-fourths of sales—meant that the margins improved.
Britannia’s stand-alone sales rose by 18% year-on-year to Rs 1,296 crore, continuing the healthy growth rates seen in the earlier quarters.
The company has followed a strategy of focusing on volume growth rather than growth through price hikes. At the same time, it has varied its product mix to sell more of premium products to improve profitability.
The cost of goods sold rose by 16.7%, lower than sales growth; but its reported operating profit margin (OPM) saw flat growth.
File photo of Tiger brand cookies, made by Britannia Industries (Bloomberg)
The culprit was a Rs 15 crore charge for a voluntary retirement scheme, a one-time expense.
Excluding this, its OPM rose by 112 basis points to 6.1%, although advertising and sales promotion expenses rose by 30%. One basis point is one-hundredth of a percentage point.
Net profit rose by 18.8% year-on-year (y-o-y) to Rs 38 crore. The company gives only sales and profit numbers for its consolidated financials, which includes the effect of businesses such as dairy and overseas operations. Consolidated sales rose by 20% and net profit by 49.6%. Since the detailed results are not available, it is not possible to know if the profits were boosted by any one-time factors.
The outlook for Britannia appears good. It is straddling both mass and the evolving high-growth, premium product categories. Its pricing strategy shows that it is ever mindful of the competition. Inflation in raw materials such as flour and sugar has abated due to better output and government intervention. Palm oil prices, too, have come off the highs they had reached earlier during the year. Dairy products are facing rising input costs; but here, the private firms appear to have chosen to pass on the price hikes, so the effect on margins may not be much.
The combined effect of healthy sales growth and benign cost trends should allow it to maintain profit growth. Its present results are despite a challenging competitive environment.
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The only threat is from raw material prices suddenly changing course. The Britannia scrip has risen by 50% from its 52-week low of Rs 324 in May, and trades at a price-earnings (P-E) multiple of around 36 times its annualized and stand-alone earnings per share.
That appears to price in the good run in its performance. On a consolidated basis, its P-E multiple will be lower, but one will have to wait for its year-end results to get a proper picture.
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