Margin pressure to weigh on Britannia stock's near term prospects

Though valuations are reasonable, the stock lacks near term triggers

A muted operating performance in the September quarter of financial year 2021-22 (Q2FY22) due to the sharp rise in input costs offset the better-than-expected top line performance of India’s largest biscuit maker, Britannia Industries. Revenue growth at 6 per cent over the high base in the year-ago quarter was healthy, aided by price hikes, new launches, rural expansion, and revival in demand.

Growth is expected to remain strong as demand picks up, the out-of-home segments see traction and distribution is enhanced, but the Street will keep an eye out for the trend in margins.

Profitability at the gross level was down 485 basis points year-on-year (YoY) to 37 per cent due to the sharp rise in palm oil, laminates, corrugated boxes, and milk. The input cost inflation was in the 19-46 per cent range YoY.

Britannia raised prices by 4 per cent in the September quarter with a third of the pricing action coming from higher prices, while the rest was grammage reduction. The company indicated that lower size (grammage) packs take time to implement and should get reflected in the coming period. It is hopeful that commodity inflation will be offset by the end of the year as it plans to hike prices further.

The management also indicated that it is looking at countering inflation through steps such as forward contracts and cost efficiency programmes. The company highlighted gains of Rs 250 crore from the cost reduction programmes. 

Britannia is confident that operating profit margins, which were down 442 basis points in Q2, will recover from current levels, but it has warned that inflation will continue to be a key risk. Though the company has gained market share, there could be an impact on demand/volumes.

As a result of the margin worries, the stock was the biggest loser among Nifty companies shedding 2.6 per cent in trade on Monday. While valuations are not expensive at 46 times FY23 earnings estimates, when compared with peers, investors should await progress on the margin recovery front, due to lack of re-rating triggers, before considering the stock.