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Britannia’s growth gets soggy

LiveMint logoLiveMint 01-06-2017 Ravi Ananthanarayanan

A day after it spoke to investment analysts, Britannia Industries Ltd’s share perked up by 3%, recovering some lost ground since 25 May when it had declared its results. Its consolidated sales rose by 5.6% over a year ago, at a time when material costs rose by 8.1%. It squeezed savings from other expenses, which includes advertising and promotion, allowing it to scrape through with a 6.1% operating profit growth.

The company blamed a sluggish market post-demonetisation. The biscuits business did slightly better with 8% growth, while breads, dairy and international sales pulled it down. A sluggish sales environment prevented it from passing on full higher prices of key inputs such as flour, sugar, oil and milk. Net profit mirrored operating profit growth, rising by 6%.

What made investors less pessimistic after its conference call? Biscuits’ volume growth was 2% in the quarter, according to a note from Edelweiss Securities Ltd. Remember that sales grew by 8%, which means product mix and to a smaller extent, price contributed substantially to growth.

Also, lower volume growth leaves headroom to increase to more normal levels. Britannia is focusing on driving direct distribution reach. One reason for slow rural market growth, an important market for biscuits, was the breakdown in wholesale trade post-demonetisation. Direct distribution helps get around that problem to an extent.

The company said the premium and health category in biscuits is doing well but the value category is declining, according to the Edelweiss note.

Britannia plays well in the first two categories but the size of the third category makes it important for growth as well. It is launching more premium offerings and also lower-priced packs to encourage consumers to trade up.

In dairy, the company is lowering exposure to the commodity side where it finds it difficult to compete with the cooperatives.

Britannia’s growth is pegged mainly to higher market growth in biscuits. A good monsoon should be good for rural demand. Inflation is a problem but Britannia intends to hold prices till the introduction of the goods and services tax (GST). A disruption in near-term sales growth due to GST is expected.

If GST actually gives the organized biscuit market a leg-up over the unorganized market, it can be a turning point for Britannia. An expanded market size automatically results in higher sales growth. Of course, there’s no guarantee this will happen. Better rural demand and price increases are more immediate triggers to watch for. The GST effect is a longer-term event.

Meanwhile, Britannia’s share trades at 48 times its fiscal year 2017 earnings per share, a valuation that demands much higher earnings growth than was seen in the March quarter.

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