Britannia Industries Ltd’s shares closed more than 2% higher on Monday on the National Stock Exchange. One reason for this optimism is that the June quarter (Q1FY22) results were decent on the revenue front despite last year’s strong base. This is at a time when inflationary pressures gave grief, hurting margins.
Consolidated gross profit margins in Q1 dropped by 296 basis points (bps) year-on-year to 38.7%. One basis point is 0.01%. Gross margin is down sequentially, too, decreasing by 178bps. The company continued to see an increase in the prices of palm oil and crude oil.
“In view of the pandemic and the hardship to consumers, we were cautious with our price increases and aggressive on cost efficiencies," said Britannia in its earnings presentation. To cope with the cost pressures, it will take judicious price increases ahead, and continue to drive cost efficiencies. As such, Britannia was able to marginally increase its Ebitda margin vis-à-vis Q4FY21, although the measure was down almost 470bps compared to Q1FY21 to 16.3%. Ebitda is earnings before interest, taxes, depreciation and amortization.
Meanwhile, revenues declined by 1% year-on-year to ₹3,352 crore on a strong base given that Q1FY21 revenue growth was 26.4%. The company has exceeded analysts’ revenue estimates even as the tailwinds from the covid-19 pandemic were not expected to be as high this time around. Last year, Britannia reaped the benefits of a sharp rise in consumption at home as consumers spent more time indoors during the first lockdown. On a two-year compound annual growth rate (CAGR) basis, Britannia’s revenue growth for Q1FY22 stands at around 12%, which is nothing to sneeze at.
Even so, the Britannia stock has massively underperformed the broader markets in the past one year. To that extent, valuations are inexpensive. The shares now trade at about 40 times estimated earnings for financial year 2023, based on Bloomberg data. Unfortunately, triggers for the stock to outperform appear limited.
Going ahead, investors would closely follow Britannia’s strategy on price hikes to offset cost pressures. “We believe success of (at least few) new segments—Salty Snacks, Wafers, Croissants and ramp-up of adjacent categories—Dairy, Rusks, Cakes and now Milk Bikis in biscuits are imperative for re-rating," said analysts from ICICI Securities Ltd in a report on 1 August.
The broker further added, “While lower ad spends in FY21 have driven higher profit growth versus revenue growth, FY22 is likely to be a low-profit-growth year." Of course, a better-than-expected revenue performance would help improve sentiments.
