Non-biscuit portfolio key driver of Britannia Industries' growth

Britannia Industries reported revenue growth of 4 per cent year-on-year (Y-o-Y) in Q1FY25 and volume growth of 8 per cent implying price trends were adverse. Other operating income jumped 195 per cent, due to the incentive received for the Ranjangaon plant

The non-biscuit portfolio (rusk, cake, bread) remained key to growth and contributed 25 per cent of the total revenue. Rusk delivered double-digit volume growth, while cheese posted double-digit revenue growth. Management remains positive about the outlook of the non-biscuit portfolio and expects it to grow 1.5 times the biscuit portfolio.

The gross margin expanded 150 basis points Y-o-Y to 43.4 per cent while operating profit margin (OPM) improved 50 basis points Y-o-Y to 17.7 per cent. Operating profit margin increased 9 per cent Y-o-Y. These margins were somewhat below consensus expectations. It could improve to 19 per cent for FY25 versus 18.9 per cent in FY24.

The guidance is for double-digit volume growth in H2FY25, along with price hikes. Volume is healthy, and growth is expected to continue. The OPM is a key monitorable, since the Street expectation was missed in Q1.

The consolidated net sales (excluding other operating income) rose 4 per cent Y-o-Y to Rs 4,130 crore while other operating income jumped 195 per cent Y-o-Y to Rs 120 crore. The consolidated total sales rose 6 per cent Y-o-Y to Rs 4,250 crore - the four-year annual growth is 6 per cent.

The consolidated gross margin improved by 150 basis points Y-o-Y but contracted 150 basis points Q-o-Q to 43.4 per cent which was in-line. Employee and other expenses rose 7 per cent and 10 per cent respectively Y-o-Y. The operating profit margin improved by 55 basis points Y-o-Y to 17.7 per cent. The consolidated adjusted net profit grew 16 per cent Y-o-Y to Rs 530 crore.

The consumer sector posted value growth of 6.6 per cent and volume growth of 6.5 per cent in Q1FY25. Rural growth has started improving, driven by better monsoons and moderate inflation. Britannia has a higher market share in urban areas versus rural areas.

The company is focusing on consolidation and may only offer occasional promotions.

The overall commodity costs remained benign in Q1. Inflation in flour, sugar, cocoa and milk was offset by softening prices of palm oil, laminates, and corrugated boxes. Guidance is for raw material inflation of 4-5 per cent in the coming months, driven by increases in the prices of flour, sugar, and cocoa. The company’s direct reach now stands at 2.82 million outlets and the rural distribution includes 30,000 distributors.

Britannia will focus on expanding distribution, primarily in the rural/ semi-rural, as well as innovating in products, and scaling up categories. This is targeting growth rather than margin-accretion at the moment. 

Rural demand is reviving and this should start driving volume growth in FY25 and the volume recovery trend should continue. Margins are close to peaking through operating profit margin of 19 per cent plus could be achieved.

In the consumer sector, packaged food companies have outperformed personal care companies over the past two years, maintaining positive volume growth despite steep price increases. 

Like all listed consumer majors, Britannia is highly-valued. The expected earnings gains may already be priced in, unless there is a sharp upside surprise in terms of volumes, or some unusual gains in margins.