Britannia Industries Beats Peers, Slowing Rural Consumption In Q3
The maker of Good Day biscuits grew its market share in rural markets at twice the pace in urban areas.
Britannia Industries Ltd. said it has managed to buck slowing consumption in the rural market in the quarter ended December, at a time when business of its peers, including Hindustan Unilever Ltd., Marico Ltd. and Parle Products Pvt., declined in the hinterland.
The maker of Good Day biscuits' market share in rural areas grew at twice the pace in urban places even amid price hikes, its Managing Director Varun Berry told analysts in a post-earnings call. “This was because we have been driving efficiency in rural distribution, which has grown steadily post Covid-19 with total number outlets now at 22 lakh,” he said.
The company plans to increase direct reach in rural to 30 lakh outlets by the end of the ongoing financial year.
The biscuit maker, according to its investor presentation, has widened its market share gap with peer Parle. In FY21, Parle with its strong rural reach in north India was competing neck and neck with Britannia as the pandemic compelled migrants to return to their native states in 2020, spurring rural consumption. Income-related uncertainties also forced many to opt for low price, high-value products which benefitted Parle-G because of its affordable pricing packs of Rs 2.
Britannia, Berry said, is pushing Milk Bikis atta biscuits in the Hindi belt to ramp up its presence. The non-south market is growing over 40% year-on-year in revenues, he said, adding it's focused on driving growth in key states like Gujarat, Madhya Pradesh, Rajasthan and Uttar Pradesh. “Our focus states grew 1.3x faster than the rest of India.”
Overall volumes grew 5% in the third quarter on a base of 4%, which analysts said is “impressive”, considering 65% of the price hikes has been through grammage cuts.
“Britannia has posted the highest volume growth among consumer staple firms in Q3 of FY22 so far despite price hikes and grammage cuts,” Abneesh Roy, executive director of institutional equities at Edelweiss Securities, wrote in a post-earnings note. Berry said grammage cuts due to commodity inflation have had a 4-5% impact on volumes.
More Price Hikes Likely
The Wadia group-owned company had to battle a tough cost environment during the quarter ended December amid rising commodity inflation.
According to its presentation, key commodities like flour, sugar, refined palm oil and milk rose “ahead of expectation” both sequentially and over the previous year. Britannia said it also continued to face inflationary pressures on inputs because of fuel and packaging costs.
“Palm is on a complete boil… We didn’t expect inflation to move up so sharply even on a quarter-on-quarter basis,” Berry said.
The company saw a cost inflation of 20% year-on-year and 4% over the preceding quarter. As a result, operating profit fell 11.7% to Rs 540 crore in the three months to December, while operating margins dropped 422 basis points year-on-year to 15.1% even as consolidated sales grew 13% to Rs 3,575 crore. Operating margin was also down 38 bps sequentially as other expenditure shot up from Rs 641.11 crore to Rs 687.75 crore.
This is the third consecutive quarter of drop in Britannia’s gross margin. Gross margin shrank 518 basis points in Q3 as compared to the year-ago period to 37.9%. In Q1 and Q2, too, its gross margin had dropped by 502 bps and 296 bps, respectively.
“We actioned price increases ahead of competition. But the upward trajectory in prices of commodities and fuel impacted profitability, which led us to action further price increases and accelerate cost efficiency programmes," according to the company.
As against the year-on-year cost inflation of 4% and 14% in Q1 and Q2, respectively, the price hikes during this period were just 1% and 4%. In Q3, the price increase as percentage of revenue was 8% year-on-year while cost inflation was 20%. “The Q3 hikes essentially takes care of inflation up to Q2,” Berry said. The company has planned a 10% hike in the current quarter. “However, at least 12% hike is needed to combat the material inflation. On top of that, we are already looking at 2-3% inflation,” he said.
If input cost pressure sustains, the biscuit maker said it will take another 4-5% hike in the first quarter of FY23.
Berry expects operating margins to remain stable in the fourth quarter before beginning to normalise in FY23, if inflation bites further.
Other Highlights (YoY)
Net profit fell 19% to Rs 371 crore against the Bloomberg estimate of Rs 402.6 crore.
Total expenses rose 19% to Rs 3,123 crore.
Material costs went up 22% to Rs 1,818.26 crore.
Staff costs fell 2.9%.
The company saw 2x growth in dairy segment.
The cake segment hasn’t done well, but the company is confident of bouncing back.
Shares of Britannia Industries ended 1.13% higher on Monday compared with the S&P BSE Sensex's 1.42% gain.
