Home >Markets >Mark To Market >Better profit margins aid Britannia’s Q2 results as covid-19 tailwinds wane
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Better profit margins aid Britannia’s Q2 results as covid-19 tailwinds wane

The deceleration in revenue is the result of regional player products being readily available after lifting curbs

Britannia Industries Ltd had benefitted immensely from rising at-home consumption when the lockdown measures were enforced earlier this year to contain the spread of coronavirus. The packaged foods firm’s consolidated operating revenues for the June quarter had increased by 26.4% year-on-year (y-o-y), the best performance among consumer goods companies at that time.

However, with the easing of lockdown, those tailwinds have diminished. September quarter revenues have grown by 11%, lower than the revenue growth of 15% and 16.6%, respectively estimated by Jefferies India Pvt. Ltd and JM Financial Institutional Securities Ltd.

The sequential deceleration in revenue trajectory is likely to be the result of products of regional players and other local snacking options becoming more easily available after the unlocking of the economy, according to JM Financial analysts. Britannia’s volume growth stood at 9% in the last quarter, while that of the June quarter was estimated at 22%. Even so, the September quarter revenue growth rate is much higher than pre-covid growth. In the nine months ended December 2019, revenue had grown by 5% y-o-y.

Britannia did well on the profitability front in the September quarter, despite slower than expected revenue growth. The earnings before interest, tax, depreciation and amortization (Ebitda) margin expanded by 361 basis points (bps) year-on-year to 19.8%. One bps is one-hundredth of a percentage point.

In the June quarter, the Ebitda margin had expanded by 634 bps to 20.9%. The degree of Ebitda margin expansion is lower sequentially, but has enthused analysts. “Despite production of full portfolio reducing manufacturing efficiency and mix gains versus Q1, margin expansion was higher than expected, which points to strong cost efficiencies that are likely to sustain," Emkay Global Financial Services Ltd said in a report on 19 October.

Overall, better profit margins helped Britannia’s net profit increase faster than revenue growth. Net profit rose by 23% to 495 crore, slightly lower than the Street estimates. Shares of Britannia slipped close to 6% following the results on Tuesday. Still, the stock is around 9% higher that its pre-covid highs seen in February. Bloomberg data shows that Britannia’s shares trade at nearly 43 times estimated earnings for FY22, suggesting that investors are factoring in the brighter picture adequately.

Inter-corporate deposits (ICDs) have been a matter of concern for investors and they have increased sequentially. “Overall ICDs to group companies increased marginally q-o-q from 600 crore in June 2020 to around 700 crore," said Jefferies analysts. It goes without saying that further moderation in revenue growth remains a key worry for the stock.

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