Britannia's margin cookie crumbles in Q1 as inflationary pressure weighs

Inflationary pressure and competitive intensity could impact the profitability of biscuitmaker

Britannia Industries’ April-June 2019 quarter showing was impacted by slowdown in consumption demand and inflationary pressure. The biscuitmaker reported a 5.9 per cent year-on-year (YoY) growth in consolidated net sales to Rs 2,677.3 crore, while its net profit fell by 3.7 per cent YoY to Rs 248.6 crore. Net profit also saw additional impact of a one-time cost of Rs 15.6 crore on account of voluntary retirement cost.

Notably, Britannia’s rural business, which was earlier growing 1.5x faster than urban, grew slower than its urban business in the quarter. The company, which has 32 per cent exposure to the rural segment, saw just 3 per cent volume growth during the quarter, though on a higher base of 12 per cent in the year-ago quarter.

Yet, the overall top line growth was also supported by smaller price hikes and faster growth of premium products (over 65 per cent of the total portfolio). The latter, too, protected the company’s gross profit margin, despite high inflationary pressure, mainly from milk.

Gross profit margin of Britannia expanded by 29 basis points (bps) YoY to 39.9 per cent. However, these benefits got negated amid higher employee costs and advertising spending (up by around 20 per cent). As a result, the earnings before interest, tax, depreciation, and amortisation margin contracted by 69 bps YoY to 14.6 per cent.

Expect inflationary pressure and higher advertising and promotional spending to continue as the company’s priority now is to scale up new product launches amid rising competitive intensity. This will mean margin overhang in the near term for the company. In fact, the management believes that selling premium products would be somewhat difficult after Amul’s recent premium launches.

According to analysts at Edelweiss Securities, the rise in competitive intensity, amid rising raw material prices and lower industry growth, remains a short-term concern. However, the company’s cost-efficiency efforts would support margin somewhat.

Overall, the trend in volume growth, profitability, and new launches in the ensuing quarters would be key for profit growth movement in 2019-20.

Also, investors should keep an eye on the company’s inter-corporate deposit exposure to group companies, which stood at around Rs 500 crore, say analysts.