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Business News/ Market / Mark-to-market/  Britannia delivers a margins surprise

Britannia delivers a margins surprise

Britannia's ability to improve its margins sequentially even as it keeps topline growth level has boosted investor confidence

Britannia’s consolidated sales rose by 8.5% over a year ago to Rs2,106 crore Photo: Pradeep Gaur/MintPremium
Britannia’s consolidated sales rose by 8.5% over a year ago to Rs2,106 crore Photo: Pradeep Gaur/Mint

Britannia Industries Ltd has managed inflation in its commodity prices without breaking sweat. That’s a considerable relief for investors who were preparing for a decline in profitability and even a possible dip in sales growth in the June quarter. That’s why its shares, which lost ground post-March quarter results, gained by 9.38% on Monday.

The company’s consolidated sales rose by 8.5% over a year ago to 2,106 crore. Sales had risen by 7.8% in the March quarter, but a shift to the new IND-AS accounting standards makes this comparison less accurate. The shift has meant a markdown in Britannia’s March quarter sales by 3.5%. Inflation is visible in its material costs, which rose by 11.1%, ahead of sales growth. However, it kept employee costs and other expenses to below sales growth levels.

A main component in other expenses is advertising. The company had said it will not chase growth through higher advertising. This is visible and is true for other consumer goods companies too. Consumer promotions too may have been cut due to rising material costs. Offering extra volumes at the same price is an instance of such a promotion. A better product mix too could be at work; in May, the management said premium products are holding ground better than value products.

Whatever be the reason, Britannia’s operating profit margin turned in flat compared with a year ago, when the Street had braced for a decline. In fact, sequentially margins have improved by 117 basis points, reversing the sequential decline seen in the March quarter. A basis point is 0.01%.

Higher margins contributed to a 14.8% increase in its profit before tax, but a higher tax provision led to net profit rising by a lower 13.2%.

Two main problems confront Britannia. One is food inflation. The increase in raw material costs is chiefly seen in wheat flour and sugar. The pace of increase in sugar is higher than in wheat. Edible oil and milk prices have been relatively benign. The company appears to be managing the increase in material costs quite well. The second and bigger problem remains one of weak consumer demand, with the firm saying this quarter too saw subdued market growth.

Britannia’s ability to improve its margins sequentially even as it keeps revenue growth level has boosted investor confidence. It is doing so in the face of stiff competition, not least from aggressive competitors such as Patanjali Ayurved Ltd. Monday’s increase in its share price puts it slightly above the level before its March quarter results caused a dip. That done, investors will go back to watch what happens from here on.

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Published: 08 Aug 2016, 02:55 PM IST
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