Britannia investors crave the treat of consistent volumes

While Ebitda margin contracted almost 20 basis points to 19.3% in Q3, it was still higher than in previous quarters.
While Ebitda margin contracted almost 20 basis points to 19.3% in Q3, it was still higher than in previous quarters.

Summary

  • Volume grew at an estimated 5% year-on-year in Q3, well above the 0-1% growth achieved in the three previous quarters, but a good share of volume-growth benefits in Q3 vanished thanks to weak pricing.

Britannia Industries Ltd’s volume recovery in the December quarter (Q3FY24) has been quicker than anticipated. Volume growth is estimated at around 5% to 5.5% year-on-year in the quarter. For perspective, in the three quarters prior, volume growth was in the range of 0-1%. The management’s outlook on volumes is bright and it aspires to achieve high single-digit or double-digit growth over the medium term.

Investors were pleased, and the stock closed 1.4% higher on Wednesday, a day when the benchmark Nifty 50 only rose marginally. But the pace of volume growth from here on needs to be tracked. Britannia noted that consumption in rural areas was still subdued, although states on which it was focussed outperformed other regions on growth. This was helped by the company’s continued efforts to expand its direct reach and accelerate its rural journey. Britannia partnered with more than 29,000 rural distributors in Q3.

While this augurs well, a good share of volume-growth benefits in Q3 vanished thanks to weak pricing. The company undertook price cuts, leading to a 4% year-on-year drop in prices. Thus, Britannia’s consolidated operating revenue only grew by 2.2%, slower than volumes.

“Volume growth for the quarter was offset by lower realisations – down 2% to 2.5% year-on-year – owing to anniversarisation plus some reversals of the steep price hikes taken during FY23," said analysts at JM Financial Institutional Securities, adding that these were necessary to improve the price-to-value equation, given increased competitive intensity in the space.

While Ebitda margin contracted almost 20 basis points to 19.3% in Q3, it was still higher than in previous quarters. Ebitda is earnings before interest, tax, depreciation, and amortisation. Sequentially, the costs of key commodities such as palm oil, corrugated boxes and laminates were softer. As a result, Britannia’s Ebitda grew by 0.4% to 821 crore in Q3.

But further increase in margin from here on appears difficult. Price hikes are not around the corner, amid a benign commodity-cost environment and intense competition. One also needs to follow the geopolitical situation and its potential impact on commodity costs to determine whether Britannia can sustain its current margin. It is confident of a stable margin performance, given favourable raw material costs and the fact that this is an election year, which means “there will be checks and balances in place to make sure that inflation doesn’t happen to the extent that we have seen in the last two to three years," Britannia said in the earnings call. Cost-efficiency measures will also boost the margin, it said.

Against this backdrop, Britannia’s plan is to grow its revenue aggressively. This would be led by volume. It is encouraging that the company’s market share in biscuits is rebounding after facing challenges in the first half of FY24. “We expect volume-growth momentum to improve further but negative pricing along with peak margin base will mean that earnings growth will likely remain subdued in the very near term," analysts at Yes Securities (India) wrote in a report released on 7 February.

Meanwhile, Britannia’s adjacent categories such as cakes, rusk, bread and dairy products are on a strong footing. It expects these businesses to grow much more quickly than its core business.

Over the past year, shares of Britannia are up over 10%, lagging the 20% gain in the Nifty FMCG index. The stock trades a little over 50 times the company’s estimated FY25 earnings, according to Bloomberg data. This is no doubt pricey. But if Britannia is able to sustain margins and deliver on volume growth, investors may give it more brownie points.

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