Britannia looking at volumes, shareholders seek earnings growth

Britannia looking at volumes, shareholders seek earnings growth

Investors in consumer food industries are unable to reconcile with the ground realities facing companies. After Nestle India Ltd’s results, Britannia Industries Ltd’s have dismayed shareholders, with the stock down 6% on Monday.

Consumer food companies are battling the effect of food inflation, on both input costs and demand for products. This has been made worse by rising competition in most key consumer categories, leaving no headroom to scale back marketing spend. Instead, they have been forced to launch new products and step up advertising.

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There is also a base effect at play, as the first half of last year was bad for consumer companies. Perhaps that’s why investors are not very impressed by the otherwise substantial 20% volume growth at Britannia.

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Value sales have risen by only about 25%, which means that price rises and product mix have played a small role. In the June 2009 quarter, sales had risen by just 5%, creating a low base. Even adjusting for that, volume growth is healthy. In fiscal 2010, for example, volumes rose by just 2.4%, while value sales rose by 9%.

Companies fear a slippage in volumes, as recovering lost demand is a difficult task. It is far better to keep prices steady, taking a hit on margins in the short run. Hiking prices is riskier when there are a number of players hovering to grab share, who can easily do so by keeping prices low.

Britannia chose to absorb some part of the 32% increase in its raw material costs, including conversion charges, in the June quarter.

That led to operating profit margins falling by nearly 4 percentage points over a year ago. Profit before tax and exceptional items fell by 32%, which perhaps explains the sharp fall in its share price, despite the smart jump in sales. Investor disappointment may have increased after noticing sales falling by 2% on a sequential basis.

Sequential growth comparisons are not recommended in consumer industries due to seasonality. But they can provide additional insights, given the volatile conditions of last year.

If sales growth is lower, operating expenses have fallen by a wider margin of over 6%. Prices of products such as sugar and wheat flour—key inputs for biscuits—have fallen in the June quarter compared with the previous quarter. They continue to remain low.

Britannia’s operating profit margin of 4.8% is against a loss at the operating level in the March quarter. If volumes grow at healthy levels and input costs remain low, margins will steadily improve and lead to better year-on-year sales and profit growth.

Companies are focused on retaining their market position, while consumers are worried whether a 20 times price-earnings multiple, based on fiscal 2010 financials, is too high for a company such as Britannia.

A definitive answer is still a few quarters away.

Graphic by Naveen Kumar Saini/Mint

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