Britannia’s solid Q3 margin takes the stock to a new high

Driven by pricing actions, softening raw material inflation, and cost efficiency measures, Britannia’s Q3 consolidated gross margin rose by as much as 521 basis points (bps) year-on-year (y-o-y) to 42.3%. Gross margin was close to all-time high, and was the key driver for earnings beat, said analysts from Jefferies India. One basis point is 0.01%. Sequentially, gross margin was up 401bps.

Even so, the expansion in Ebitda (earnings before interest, tax, depreciation and amortization) margin was curbed due to rise in staff cost and employee expenses. The metric expanded 358bps y-o-y and 217bps sequentially to 17.6%

Analysts estimate Britannia’s Q3 volumes to have risen by about 3% y-o-y. This compares to a mid-single digit volume growth in Q2. As such, the 17% revenue growth in Q3 was price led. The company said that it has been consistently gaining market share over the past 39 quarters. It widened its footprint in adjacent categories such as croissant and cakes. Further, new products which include Biscafe, Golmaal, and Marble cake are seeing increased traction among consumers.

Going ahead, it remains to be seen if margins sustain in the backdrop of a gradually recovering demand environment. An increase in competitive intensity would lead to rise in advertising and promotion expenses, which would weigh on Ebitda margins.

In the last one year, shares of Britannia have risen nearly 26%. The stock has seen re-rating in recent months on the back of better-than-expected earnings. Britannia trades at about 51 times its FY24 estimated earnings, according to Bloomberg data. Valuations appear steep, and could limit meaningful near-term upsides.