Britannia investors get more shock than expected amid cost inflation

Responding to earnings, shares of the company fell nearly 3.5% on the NSE on Tuesday.

Higher prices of key inputs such as palm oil and packaging materials drove overall crude material inflation to 14%. However, the company’s management believes that margins should improve due to recent price increases in the portfolio and cost-rational measures.

Higher than expected cost inflation has impacted some other positive aspects of Britannia’s September quarter earnings performance. For example, analysts at JM Financial Institutional Securities Ltd note that this is Britannia’s second quarter in a row, positively surprising on growth on a tougher basis, the business’s ability to navigate through near-term growth challenges. But it gives rest. The JM Financial report further stated that, “There may be more price additions, but if the intensity of cost pressures persists, it is unlikely to help bring margins back to recent levels in FY23E as well. “

Analysts at ICICI Securities Ltd note that while lower advertising-spending in FY2011 has driven higher profit growth versus revenue growth for Britannia, FY2012 is likely to be a low-profit-growth year. The domestic brokerage house said in a report that the company’s outlook on price hike would be critical amid inflation in raw materials.

Furthermore, analysts cautioned that Britannia stock is likely to remain short in the near term, given concerns over cost inflation. In the past one year, its shares have gained just 2.5%, much lower than the Nifty FMCG index, which has gained 28% in the said period. As far as valuations are concerned, the stock is trading at around 50x the one-year forward price-to-earnings ratio, which is lower than its peers.