Britannia Industries Limited posted a strong margin performance for the second consecutive December quarter (Q3FY23). The recovery has been striking. What’s more, investors have given a thumbs up. Shares of the fast-moving consumer goods (FMCG) company hit a fresh 52-week high It closed at 4,596 on Thursday, a gain of nearly 5%.
“Britannia’s margin-recovery process started a quarter ahead of our expectation in Q2FY23; Analysts at JM Financial Institutional Securities said in a report on February 1, and this quarter (Q3FY23), the pace and extent of the reform that it provided was much higher than what could have been expected.
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Britannia’s consolidated gross margin was at a multi-quarter high of 43.7%, growing year-on-year (y-o-y) by 574 basis points (bps). Sequentially, the measurement was increased by 472bps. This was driven by pricing actions and cost efficiency measures.
Besides, softening commodity prices like palm oil also helped. Nevertheless, the year-on-year expansion at the Ebitda (earnings before interest, tax, depreciation and amortization) margin level remained relatively low at 438 bps, mainly due to higher staff costs and increase in other expenses.
While inflation in India is slowly coming down, it is still at a high level. In Q3, consumer food price inflation stood at 5.8%, compared to 7.7% in Q2. Wheat prices in India are still high. Another concern is the strengthening of the US dollar.
Against this backdrop, it helps that the company does not see an adverse impact on revenue and volumes from demand weakness in rural markets, the management said in the earnings call. Note that some other FMCG counterparts are feeling the heat from lack of demand in the rural economy. The growth in rural markets is driven by Britannia’s efficient distribution strategies. This is one of the factors that helped the company to gain market share on a consistent basis over the last 39 quarters.
However, given the competition, it remains to be seen whether the market share gains will continue. Margin levels need more attention, as Britannia expects margins to erode from Q3 levels going forward.
In addition, investors would do well to keep an eye on Britannia’s expansion into non-biscuit categories. As of now, the revenue share from the non-biscuit segment, which includes cakes and dairy products, is 23%. The company aims to increase the share to 45% in the next five years. It has entered into a joint venture with Bell SA to capitalize on the cheese business.
“The dairy portfolio is witnessing growth and is a key growth driver for Britannia. An expanded presence here reduces the company’s dependence on the biscuit business, which does not have the potential to grow at the same rate, said Amit Purohit, analyst at Elara Securities (India). Food company, he said.
Overall, an increase in volumes will be a major trigger for Britannia stock, as further price increases are unlikely.
In the third quarter, volumes are expected to increase approximately 3-5% year-over-year. The 17% revenue growth in Q3 was price-led, with the company raising prices to cover inflation in the first half of FY23.
For now, strong Q3 results should drive earnings growth. The stock has been re-rated in recent times due to better than expected earnings. The shares have gained about 26% over the last year. Valuations are looking bullish, and may limit near-term meaningful upside. Britannia is trading at around 52 times its FY24 estimated earnings Bloomberg Figures.
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