Suhani Adilabadkar
Britannia Industries reported highest volume growth of 8% in Q1FY25 over the past 13 quarters. The investors were happy with mid-single digit revenue growth and modest operating margin expansion, as volume growth moved closer to double-digit mark in June Quarter 2024.
Britannia reported revenues of Rs 4,250 crore in Q1FY25, a rise of 6% YoY and net profit of Rs 506 crore, a 10% YoY jump over the corresponding June Quarter 2024.
Volume growth assumes significance as the company has been cutting prices since June Quarter 2023 due to softening of commodity prices. Prices were reduced by the packaged food sector on the whole to drive subdued volumes especially in rural India and also to compete with regional competitors. Regional or local manufacturers come to the forefront at the time of lower commodity prices. And reduce product prices to garner higher market share.
As price cuts were implemented by Britannia from mid-2023, revenue growth was impacted in FY24 and also operating margins. While the company is presently going for price consolidation and halting rollbacks or price cuts, volumes currently at high single digits should be pushed to the next higher level. And for that, growth in adjacency business, focus markets and higher distribution in rural India is needed. But what if commodity inflation returns?
Rural Growth In Positive Mode, Rural Distribution To Increase Volumes
June Quarter 2024 delivered some good news along with stable results. Speaking on Q1FY25 results, Varun Berry, Managing Director at Britannia Industries said, “The rural growths are starting to come back, which have been lagging urban growth for some time.” He further added that, “Reasons are obviously better monsoons, moderate inflationary conditions, as well as employment.”
Britannia has achieved higher market share gain in rural India than urban in June Quarter 2024.
Predominantly, an urban focused company, Britannia Industries aims to achieve 50% revenue contribution from rural markets. Working towards this goal for the past three years, rural revenue contribution lies in the range of 30-40%. Aggressive distribution network in rural India is the need of the hour which is stagnant over the past 6-8 months.
The company’s focus markets Uttar Pradesh, Madhya Pradesh and Rajasthan have also not performed well in June Quarter 2024 due to stagnant distribution networks in rural areas. While urban areas are witnessing muted demand, lower number of product dealers in recovering rural areas impacts Britannia’s volume and revenue growth. Massive rural opportunity lies in the focus states or the Hindi belt which is more dominantly rural than urban. For the past 7-8 years, Britannia has been working on the Hindi belt which contributes 15% to its revenue base, whereas for the industry, revenue contribution stands at 35%. Thus a large area to be covered to get a stronghold in focus states or hindi belt. Britannia is the largest player in the Indian biscuits industry in terms of value but in volume terms, the company is still behind Parle Products which is a major volume player in the Hindi belt.
Britannia Industries has hired global consulting firm, Bain & Co for expanding its width in rural India, identifying and leveraging high potential outlets, depth in urban distribution and also technology up-gradation.
Adjacent Business Doing Well, Lot Of Ground To Cover
Adjacency business is the non-biscuit business which has two segments, bakery and dairy and is 25% of Britannia’s revenue base. Bakery business consists of cake, rusk and bread. Dairy segment constitutes cheese (Laughing Cow brand) and drinks business (lassi, shakes and flavoured milk under Winkin Cow brand). Speaking on bakery business, Berry said, “Cake and Rusk are in the double-digit margin territory. Rusk would probably be accretive to our overall margins. And bread, which used to have negative margins, is now almost touching a double-digit margin.” Going a step further with respect to dairy business, Berry disclosed that Cheese and Drinks business revenue is about Rs 460 crore and Rs 470 crore respectively annually. The company aims to grow its adjacency business, 1.5x its base biscuit business. And for that a lot of work is needed. Britannia has recently announced its new factory to manufacture 10,000 tons of cheese every year deepening its strategic partnership with Bel Group. In the Indian cheese market, while Britannia’s market share is in double-digits, Amul’s cheese market share is 6x higher than Britannia. In the drinks segment, Amul, Mother Dairy, Parag Milk are strong competitors. In the rusk category, Parle Products has higher market share compared to Britannia.
Prices Increases Back On the Drawing Board
Britannia is ready for price increases, in case the commodity costs surge. Sugar, flour, milk, cocoa, palm oil, laminates and corrugated boxes are major commodities utilized by Britannia Industries. While cocoa prices have risen significantly, sugar and flour prices witnessed moderate inflation balanced by lower prices in palm oil and laminates. “We expect 4% to 5% inflation in the coming months on the back of flour and sugar and cocoa. And if that happens, we will start to take slight price increases in the future”, said Berry. High commodity inflation witnessed in 2022 is not foreseen by the management. Thus, for moderate inflation of about 4-5%, price increases will also be moderate not to hamper volumes. As rural India growth recovery is still not complete and urban growth is subdued, price increases need to be strategic along with grammage increase.
