Britannia’s margin miss in the spotlight amid management’s cautious commentary

Reasons for the disappointment: Profit margin is below expectations, and the management commentary pointed to subdued demand conditions, especially in urban metros.

A sharp rise in the prices of key commodities, such as wheat, palm, and cocoa, hurt the consolidated gross margin, which fell 136 basis points (bps) year-on-year to 41.5%. 

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However, Ebitda (earnings before interest, tax, depreciation and amortization) margin fell at a faster rate of 290bps to 16.8% as staff costs rose as much as 45% to ₹232 crore. In effect, Ebitda has declined 10% on-year to ₹783 crore when total operating revenue growth stood at 5%.

The steep jump in staff costs is due to phantom stocks being revalued on the basis of the closing price of Britannia’s shares at the end of Q1 and Q2. Since the share price appreciated during this period, an impact of ₹50 crore is included in staff costs, hurting margin. Excluding this impact, Ebitda margin is down 183bps to 17.9%, which is still lower than expectations.

Price hikes

The company is considering 4-5% price hikes in the second half of FY25. It will do so strategically in stock-keeping units, or SKUs, where it has not hiked the prices for some time. This move can offer some cushion on the margin amid inflationary pressures, but at the same time, if demand does not pick up adequately, volume growth in the future may take a hit.

Britannia’s direct reach expanded to 2.85 million outlets by the end of September, up from 2.79 million six months ago. The rural distribution network is at about 30,000.

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Volume growth in Q2 was at 8%, while pricing fell. The management pointed out that subdued urban demand is being led by metros. Urban metros contributed about 30% to total FMCG demand but contributed the maximum to the slowdown. 

The management highlighted key factors hurting urban demand were lower income growth in general and possibly a steeper increase in rentals in metros than in the rest of urban.

“Britannia management was relatively guarded on its outlook at its Q2FY25 results call, unlike the strong commentary it had shared in the past two quarters," said a 13 November report by Nomura Global Markets Research. 

The stock’s 22% decline from its 52-week high of ₹6,469.90 apiece on 3 October suggests investors are factoring in near-term stress about the demand environment.

Estimate cuts 

After Q2FY25 results, many analysts have cut their FY25 and FY26 earnings estimates.

Nomura has valued Britannia at a price-to-earnings multiple of 50x on twelve months ending September 2026 forecasted earnings per share (EPS), in line with its five-year trading average. “We arrive at a target price of ₹ ₹5,470 (versus ₹5,800 previously), forecast an EPS CAGR of 10.5% over FY25-27," it said.

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While volume growth trajectory would be crucial for investor sentiment, there are eyes on margin, too. “We note that Britannia utilized the previous inflationary cycle to improve profitability (about 200-300bps expansion in gross margin and Ebitda margin over FY20-24) and gain market share," said analysts from Kotak Institutional Equities. 

For more such analysis, read Mark to Market.

Britannia’s gross margin and Ebitda margin were 43.4% and 19% in FY24, respectively. “It would be interesting to see how the current cycle plays out for Britannia," added Kotak’s analysts.