31 Jan , 2022 By : Kanchan Joshi
Britannia Industries Ltd had to battle a tough cost environment during the December quarter (Q3FY22) owing to persistent commodity cost inflation. While the packaged foods company’s gross margin was expected to drop year-on-year (y-o-y) in Q3, the extent of decline was more than expected. Last quarter, Britannia’s consolidated gross margin shrank as much as 518 basis points (bps) versus the year-ago period to 37.9%. One basis point is 0.01%. This is also the third consecutive quarter of y-o-y drop in Britannia’s gross margin. In Q1 and Q2, too, the company’s gross margin had dropped by 502bps and 296bps, y-o-y, respectively.
The company said it continued to see an increase in commodity prices in Q3, with inflation about 4% sequentially and about 20% y-o-y. “We actioned price increases ahead of competition. But the upward trajectory in prices of commodities and fuel impacted profitability, which led us to action further price increases and accelerate cost efficiency programmes," said Britannia.
It is somewhat comforting that the gross margin has improved sequentially, though below expectations. Further, a fall in employee costs helped curb the drop in Ebitda (earnings before interest, taxes, depreciation, and amortization) margin a bit. Ebitda margin dropped by 422bps y-o-y to 15.1%. The upshot: Ebitda in Q3 fell by 11.7% to about Rs540 crore. This is at a time when Britannia’s revenue performance beat expectations, with operating revenues increasing by 13.7% y-o-y to Rs3,531 crore.
“Strong growth in revenue was buoyed by volume growth of about 5% (we expected 4%) and net realizations being higher by about 8.5% (versus our forecast of 7.5%)," said analysts from JM Financial Institutional Securities Ltd in a report on 29 January. “Britannia’s ability to sustain volume growth at this level despite price hikes in the category is commendable, especially as nearly two-thirds of the price hikes (for price-pointed packs) need to be effected by grammage adjustments," the broker added.
In the past one year, Britannia’s shares have declined by 2.6% vis-à-vis the 7.6% gain in the Nifty FMCG index. Bloomberg data shows the stock trades at almost 43 times estimated earnings for FY23. While valuations may not seem demanding, near-term triggers for the stock appear limited. Hereon, investors would closely track the impact on volumes, owing to subdued rural demand. In general, easing commodity costs will bring much needed relief to consumer companies, including Britannia.
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