Britannia's cost-cutting efforts may not impress the Street without a volume growth rebound

Mint

13-05-2025

Britannia Industries Ltd's consolidated revenue growth of 9% year-on-year in the March quarter (Q4FY25) to ₹4,432 crore was primarily led by higher price realisation, given that volume growth was tepid at about 3%.
The biscuit maker did not see any additional volume boost from the Mahakumbh mela in the quarter. It's worth noting that Britannia's volume growth rate has been decelerating. The measure was 8% in the first two quarters of FY25 and then slipped to 6% in Q3FY25.
Raw material hit
Q4FY25 gross margin contracted sharply by 480 basis points (bps) on-year to 40.1% due to a steep rise in raw material prices. Sequential trends indicate that the raw material pricing pressure has not eased. Wheat flour, forming almost 30% of the raw material costs, rose 9% quarter-on-quarter and is unlikely to decline soon, thanks to a higher minimum support price for wheat. One basis point is one-hundredth of a percentage point.
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Palm oil, another key input accounting for 30% of the raw material costs, was up 7% on-quarter. The only respite was sugar prices, which stayed flat sequentially and yearly. Sugar constitutes about 20% of the raw material cost. Sugar price is likely to rise going ahead because sugarcane prices were recently raised by the government and sugar output is expected to fall about 15% on-year in the sugar year ending September 2025.
The key
Still, higher realization meant sequential gross margin expansion of 140bps and nearly the same quantum of rise in Ebitda (margin to 18.2% in Q4FY25. A positive surprise on the margin front can be ruled out as the management is satisfied operating at the current level of Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin. Thus, it is critical that Britannia clocks double-digit volume growth to boost profit.
Management does not intend to take substantial price hikes unless there is further inflationary pressure. It would rather focus on cost-cutting initiatives to aid margin and expect cost savings of about 2.5% of revenue in FY26.
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The company sees the non-biscuit segment growth rate outpacing the biscuit segment by 50% in FY26. However, the non-biscuits segment forms only 30% of total sales, and the remaining comes from biscuits. As things stand, one can hope for about 5% volume growth in FY26 and early double-digit sales value growth, aided by price hikes taken in FY25.
This may not be enough to entice investors. With single-digit volume growth over the last four quarters, investors have every reason to worry about the stock's rich valuation at 53X price-to-earnings multiple based on Bloomberg consensus estimates for FY26.
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