Slowing economy hits Britannia’s biscuits business

A combination of high inflation and slow economic growth is affecting discretionary consumption
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First Published: Mon, Nov 19 2012. 06 29 PM IST
Britannia’s improved product mix and price hikes enabled it to restrict the increase in material costs to 7.5%, over a percentage point lower than sales growth. Photo: Priyanka Parashar/Mint
Britannia’s improved product mix and price hikes enabled it to restrict the increase in material costs to 7.5%, over a percentage point lower than sales growth. Photo: Priyanka Parashar/Mint
Updated: Mon, Nov 19 2012. 10 52 PM IST
Britannia Industries Ltd’s shares fell by about 4% between 6-12 November after its quarterly results were declared, but they have regained ground after Diwali. The disappointment of investors was the result of sales in the September quarter rising by only 8.7% year-on-year, lower than the 10.8% growth seen in the June quarter. Analysts were expecting growth around 12%.
A combination of high inflation, which is eating into household budgets, and slow economic growth has been affecting discretionary consumption. This was evident in the results of other packaged food companies such as Nestlé India Ltd too. Britannia’s drive towards increasing the proportion of premium products in its portfolio has brought it benefits. Perhaps, that has also made it more vulnerable in a period when consumers are tightening their belts.
Britannia’s improved product mix and price hikes enabled it to restrict the increase in material costs to 7.5%, over a percentage point lower than sales growth. But it also had to spend on pushing its new products, especially when faced with slowing demand, and as a result advertising and sales promotion costs rose by 16.9%, nearly twice of sales growth. Other expenses rose by 16.1%, which may be attributable to rising fuel and freight costs.
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Despite all these factors, operating profit rose by 16.9%, solely due to the presence of a one-off separation cost in employee expenses in the year-ago period. Excluding this figure, operating profit declined by 5.4%, while operating profit margin declined by 82 basis points. A basis point is 0.01%. Similarly, while its profit before tax rose by 23.7%, adjusting for the one-off expense, it declined by 4.1%.
A snapshot of quarterly consolidated results shows sales rose by 9.5%, meaning that its dairy, cake and breads businesses could not compensate adequately for the slowdown in its biscuits’ business.
Britannia faces some challenges on the raw material front, as key inputs such as wheat, sugar and oil, all turned expensive towards the end of the September quarter. On the brighter side, they have stabilized in the December quarter, and palm oil prices have even fallen. A clearer trend in wheat and sugar prices should emerge in the next few months. If they remain benign, the company should benefit. But slower economic growth may still keep up the pressure on revenue growth.
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First Published: Mon, Nov 19 2012. 06 29 PM IST
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