Britannia Industries Ltd continues to pursue volume growth, by not hiking prices to adequately compensate for rising costs. In the December quarter, Britannia’s revenue rose 22.3% to Rs1,083 crore for its stand-alone business, chiefly comprising bakery products. The past two years have seen Britannia juggle rising costs as wheat and sugar flared up in fiscal 2010, while edible oil has taken over that role in the current fiscal.
Also See | Cost Pressure (PDF)
Britannia’s material consumption—including conversion charges—rose 25% to Rs800 crore, three percentage points higher than sales growth, indicating the extent to which the company absorbed costs. But employee costs and other expenditure rose by relatively lower levels of 14-15% each, and advertising and promotion (A&P) costs rose by just 6%, limiting the growth in total expenses. Hence, Britannia’s operating profit rose 38%. The company was thus able to report operating profit margins of 5.4%, compared with 4.7% in the year-ago period, and about 30 basis points higher on a sequential basis.
The absolute increases may seem minuscule, but more importantly indicate some stabilization of margins. If one assumes that the worst in commodity price hikes is behind us, margins would continue to consolidate and then improve. Edible oil prices continue to remain volatile, with palm oil prices shooting up again in the first week of February, up by 7% since end-January. Steady trends in wheat and sugar prices are positives. But rising crude prices are feeding into higher costs for plastic packaging.
Profit before tax and exceptional items rose by 30%, which is good. It appears to have managed the current volatility quite well. If A&P costs rise in future quarters, or commodity prices soar again, margins could be hit. Barring these, Britannia appears to be in a more comfortable position on the operational front. Abridged consolidated numbers show sales have risen 23% over the year-ago period, but net profit has fallen 21% to Rs91 crore.
This includes the contribution of its dairy products business, which is still in the growth phase and is also bearing the brunt of a steady increase in milk procurement costs. Investors would focus more on the consolidated earnings, which explains why the stock was down by 3% on Thursday.
Graphics by Ahmed Raza Khan/Mint
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