Q2 results: Britannia short-changed in the near term

A fall in its margins left Britannia investors fretting, but a bigger worry is the effect of the currency exchange drive on consumption in the near term


Britannia stand-alone performance showed a 12.1% increase in sales while its costs rose by a significantly higher 17.7%. Photo: Priyanka Parashar/Mint
Britannia stand-alone performance showed a 12.1% increase in sales while its costs rose by a significantly higher 17.7%. Photo: Priyanka Parashar/Mint

Britannia Industries Ltd saw sustained volume growth in the September quarter and also reported a pickup in the biscuits market that augurs well for the future. A fall in its margins left investors fretting, but a bigger worry is the effect of the currency exchange drive on consumption in the near term. All told, its shares are down by 7.7% from a week ago.

The company’s stand-alone performance showed a 12.1% increase in sales while its costs rose by a significantly higher 17.7%. Sugar prices appear to be the main culprit although some firming up is visible in other key inputs too, such as oil and flour. Its operating profit margin declined by 70 basis points from a year ago and its net profit rose by 10.7%. A basis point is one-hundredth of a percentage point.

Taking across-the-board price hikes and passing on the full cost increase is difficult, given stiff competition and weak demand conditions. Britannia’s results’ statement hints as much, when it says its focus is to remain competitive and gain market share. The management expects the improvement seen in the biscuits market sales to continue, given the good monsoon and pay hikes for central government employees.

The company’s base business volume growth rose by 10% in the quarter, maintaining levels seen in the past two quarters. Its consolidated business, which includes the dairy and overseas segments, saw sales grow by 11% while costs grew by 17.2% and here, its operating profit margin narrowed by 92 basis points. Net profit growth was a mere 5.8%. Investors in the company are not accustomed to low earnings growth and would be hoping this is a blip. That explains the wobble in its share price.

What next? The increase in raw material prices is a trend that has sustained. If the uptrend in biscuit sales continues, companies will be more confident of taking price hikes to pass on higher costs. The current dip in margins should not be a long-term concern then. Consumers are likely to postpone discretionary/impulse purchases, which is likely to affect Britannia. That may keep the shares under pressure for some time till a clearer picture on the impact on consumption emerges. If the worry clouds over consumption blow away in a few months and biscuit market sales resume their upward march, Britannia is primed to take advantage of it.

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