After nine months of moderate growth in FY20, Britannia finally started to pick up momentum in the first 2 months of Q4FY20. However, this was derailed by lockdown in March, which impacted revenue and net profit growth by ~7-10%. In this scenario, the company still performed better than peers and thus gained market share.

For Q4FY20, Net profit increased 26.3% over the previous year to Rs 375 as the company switched to a lower corporate tax regime. Its revenue rose 2.5% YoY to Rs 2,868 crore at a time when the coronavirus led lockdown to hurt consumption.

Britannia’s operating profit grew 3.9% to Rs 454 crore and its operating margin expanded to 15.8% as compared to 15.6% in the previous quarter ended in March 2019. Gross margin contracted by 150bps to 39.7%. That came despite a 1.2% dip in raw material costs over the previous year to Rs 1,363 crore. The biscuit maker’s raw material costs-to-revenue ratio stood at 47.5% against 49.3% in the same period last year.

Britannia has delivered around 20% and 28% YoY growth in April and May both of which mark a positive trajectory post-COVID. While it is expected that most food companies will see strong growth during the lockdown as consumers shift to in-house food consumption, the quantum of growth that Britannia delivered was much higher. This was despite April having severe challenges in manufacturing and logistics which all FMCG companies faced, which has led to a double-digit decline in sales of most companies in April.

The growth in April and May was also on account of disruption faced by local and unorganised players (35-40% market share in the biscuits category). Trade and consumer promotions may have reduced in this period leading to cost reduction and non-biscuit segments like bread and bakery products may have seen disproportionate growth.

The management expects rural demand to be much better than urban mainly due to higher government support and lesser impact of COVID-19. Keeping that in mind. Britannia has increased its rural dealers count to 21,000 in February 2020 from 18,000 in March 2019. This has led to market share gains in the Hindi belt regions of Uttar Pradesh, Madhya Pradesh, Gujarat, and Rajasthan. The company had a direct reach of 2.22mn outlets in February 2020 compared to 2.10mn as of March 2019.

In line with peers, Britannia has significantly increased its focus on cost savings to mitigate the impact of lower demand. On the raw material front, refined palm oil and dairy prices have started softening. The company has also been able to boost its supply chain as average distance traveled for a product came down from 370 km to 280 km in the last two months. While manufacturing resumption of multiple stock keeping units (SKUs) will normalise, management expects to keep part of the benefit in the longer term.

Apart from focusing on cost-saving, Britannia also plans to start looking at building its innovation funnel slowly once things start to improve post the lockdown. However, management expects it will take at least a year for normalcy to come back.

Looking at the balance sheet, the company has a total debt of Rs 1,500 crore of which Rs 720 crore relates to bonus debentures, Rs 500 crore relates to a working capital loan for buying commodities, such as wheat, and Rs 280 crore relates to borrowings at the subsidiary level. Debt to equity at 0.34 remains minutely high compared to the larger FMCG players.

Final Thoughts:

Britannia is expected to outperform the industry growth led by a strong innovation pipeline and distribution expansion.Intense competition in the FMCG industry along with muted growth in demand during the last couple of years remains major concerns for the company. However, it is focusing on reducing the gap with Parle by improving the supply chain in the traditionally weak areas.

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