Wheat, sugar and milk are some of the key inputs for Britannia’s biscuits and dairy businesses. Wheat contributes to 30% of raw material costs, fats and oils 19% and sugar 12%.

In the fiscal year ended 31 March, average realizations for biscuits increased by about 9%, in line with the rise in wheat and sugar prices. But there is a limit to which prices can be increased without hurting demand. In the June quarter, Britannia’s sales grew by 5% while sales during the previous fiscal year had grown by about 20%. Of course, this need not be the trend for the full year but is a slow start to the year.

Although inflation is a key concern for the company, its balance sheet is going to look healthier. In 2008-09, Britannia’s return on net worth (RONW) dropped to 22.6% from 26.1% in the previous year. This was not due to a decline in profits but due to a significant jump in its net worth.

Graphics: Ahmed Raza Khan / Mint

Hence, it is transferring Rs406 crore from reserves to debt, by issuing bonus debentures to shareholders. These debentures will be free and fetch shareholders 8.5% interest for three years, after which the principal amount of Rs170 will be redeemed. For the company, the transfer improves its RONW as reserves decline. And, there is no immediate cash outflow.

Notionally speaking, if this had been implemented in 2008-09, Britannia’s RONW would have increased to about 50%. Shareholders can also sell the debentures in the secondary market.

Shareholders would be happy with these debentures but would be more keen on seeing how Britannia does in the coming quarters. The current fiscal year is also the first in which it will own 100% of the dairy business, having bought out New Zealand-based Fonterra Co-operative Group Ltd’s stake of 49% in the venture.

The dairy business has potential but is intensely competitive, and incurs losses. It will require more support from Britannia and also depress profits. The business makes Britannia a more diversified foods company but adds an element of uncertainty to its financials.

All these concerns have weighed on the stock, with its price being lower by about 7% from its level a month ago.

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