Stock Review: Britannia

Competition eating into co's pricing power

BRITANNIA'S profitability suffered during the June 2010 quarter even though its topline continued to grow in double digits. This reflects the difficulty of the bakery and dairy products maker in passing on the impact of higher raw material costs to its consumers. Some other food companies such as Nestle and GSK Consumer Health Care have reported a similar trend earlier.

A stiff competition has forced food companies in the FMCG space to absorb majority of the impact of higher food inflation during the June quarter. In the case of Britannia, new players such as Unibic and McVitie's are competing at the premium end and ITC and Parle remain aggressive at the lower end. This has weakened Britannia's pricing power in its category. Its June quarter performance is reflective of this.

Britannia's revenue rose by 25% year-on-year during the June quarter. But the impressive growth is more a function of the low base a year ago. Furthermore, despite 20% volume growth, net profit was disappointingly down by 30% due to higher input costs, higher advertisement & promotion spend and much higher interest expense.

It has become tougher to protect and grow market share for the FMCG biggies such as Nestle, HUL and Britannia given the intensifying competition from the new domestic as well as international entrants. Most of these companies have chosen to keep product prices stable thereby taking a hit on their profit margins in the short term. Another strategy adopted by them is introducing new products to maintain their market share. These efforts have resulted into pushing up selling costs. For in-stance, selling and marketing expenses went up 50 basis points to 7.5% as a percentage of sales from the year-ago level. Britannia's stock has fallen by more than 11% during the two sessions post results. The question in front of investors is what could drive stock prices up if they are to stay invested in these FMCG scripts.

 

In case of Britannia, investors can look forward to two factors:

 

First, the trend in prices of raw materials including flour, sugar and milk. Of these, sugar and milk prices after inflating so much in last few quarters are easing out. This may take away some pressure on margins.

 

Another factor is the company's strategy to focus on new differentiated products that would attract premium pricing.