Britannia Industries stock price fell 4% after its December Quarter 2023 results were announced. While the street was expecting muted growth in Q3FY24, consistent low single digit revenue YoY growth over the past two quarters disappointed investors. Revenues came in at Rs 4,256 crore in Q3FY24 compared to Rs 4,197 crore, same quarter previous year, up 1.4% YoY.
Net profit stood at Rs 556 crore, down 50% YoY due to the high base of December Quarter 2022 which included exceptional gains of Rs 376 crore. Operating margins contracted marginally by 19 basis points (bps) YoY in Q3FY24.
Aggressive top line growth targeted amid low rural growth and high competitive intensity
Britannia has one of the best operating margins in the industry. Speaking on margins, Varun Berry, Vice-Chairman and Managing Director at Britannia Industries said, “My focus as we go forward is going to be to make sure that we grow the top line aggressively even if we don’t keep growing the margins at the rate that we’ve been growing in the last 10 years.” He further added that the company’s main objective is to grow the top line, increase volumes and pack growth for not just biscuits, but all its businesses. The company reported volume growth of 5.5% YoY in December Quarter 2023.
Speaking on rural vs urban growth in India, Berry said, “We’ve not seen rural growth the way we’ve seen them in the last 10 years, let’s put it that way. Urban growths are outpacing rural growths.” It’s not just slow rural growth impacting Britannia Industries revenue growth which has been falling over the past three quarters. The largest biscuit maker is feeling the heat from local regional players and high competition in modern trade.
Britannia undertakes price cuts as commodity costs fall and regional competition rises
High competitive intensity has taken a bite in the largest biscuit maker’s cookie. Aggressive modern trade promotional practices such as one plus one offers from both established FMCG companies and regional players are taking a toll on the revenue growth of Britannia Industries. “In modern trade, our profitability a few years ago had dropped considerably, We’ve got it back to an extent. In businesses, these challenges will keep coming up”, said Berry. Another major pain point are the regional and local manufacturers. Local players are operating aggressively as the commodity costs have reduced considerably over the past few quarters. Cost of palm oil, a major raw material ingredient declined 18% YoY and 2% sequentially in Q3FY24. In addition to this, cost of laminates and corrugated boxes fell 9% and 16% YoY respectively in Q3FY24. According to the management, flour is up 10% YoY and cost of sugar is up 8% YoY in December Quarter 2023. Local regional players operating on thin margins are not able to sustain in a high commodity cost scenario. But in the present landscape, with low commodity costs, regional manufacturers by giving high margins to whole-sellers capturing shelf space and giving competition to established players like Britannia. Speaking on high regional competitive intensity, Berry said that while Britannia is operating at 18-19% margins, regional players are happy making just 2-3% margins.
To battle high competitive intensity and rev up its volume growth, the bakery juggernaut has reduced its prices by 4% on a yearly basis. Sequentially, prices were cut 2-3% in Q3FY24. Speaking on regional manufacturers which have become a major discomfort for Britannia, Berry, “I think they are in that honeymoon phase at this point in time, where they are throwing in the product, I think it will be in a few months when the verdict will be out whether they’re successful.” Why can’t the biscuit major open its war chest and make some strategic acquisitions. But the biggest question is What? Britannia can also enter into new adjacent categories like Badshah Masala acquisition by Dabur.
