There is excitement around the packaged foods company’s volume performance for the fourth quarter of FY22 (Q4FY22). Even as steep price hikes were taken, Britannia said it reported a mid-single digit volume growth in Q4, which was better than expectations. This also comes at a time when rural demand is subdued. “Volume growth seems to be holding on despite sharp price increases of about 11.5%, driven two-thirds by grammage cuts in convenience price-point packs (about 40% of sales) and one-third from MRP increases," said analysts from Nomura Financial Advisory and Securities (India) in a report on 3 May. The analysts added, “Britannia’s Q4FY22 volume growth of about +4% year-on-year (three-year CAGR: +4%) was above our forecast and Bloomberg consensus estimate of about +2.5% and +1% year-on-year (y-o-y), respectively." CAGR is compound annual growth rate.
The effect, Britannia’s consolidated operating revenue rose by 15.5% y-o-y to Rs3508 crore. However, an increase in the costs of raw materials such as palm oil, packaging material etc. meant a drop in the gross margin by 243 basis points (bps) y-o-y to 38%. One basis point is 0.01%. However, on a sequential basis, the gross margin remained on the same levels as the period earlier, as it benefitted from long-term commodity contracts, point out analysts.
Nevertheless, Ebitda (earnings before interest, tax, depreciation and amortization) performance has been relatively better. Ebitda margins contracted at a lower pace of 66bps y-o-y to 15.5% supported by lower staff costs.
So far, so good. Cost pressures are biting and that means margin pressure would continue ahead. “Considering the further rise in commodity costs post-4QFY22 with veg-oil y-o-y price inflation likely >50% for the next two quarters and wheat prices also trending upwards, we believe the bad news may not have fully ended as far as margin-pressures go," said analysts from JM Financial Institutional Securities Ltd in a report on 2 May.
Note that for the year as a whole, operating revenues rose by 8.2% year-on-year to Rs13944 crore in FY22. But the drop in gross margin and normalization of ad-spends led to a 12% decline in Ebitda and margin by 353bps.
Going forward, Britannia is expected to resort to price hikes to tackle cost pressures. Its entry into new segments and growth trajectory in adjacent businesses would hold key for the stock, which has underperformed the Nifty FMCG index over the past one year.
