3 days ago
Britannia investors may have to wait longer for pure magic growth amid margin pressures
Britannia Industries Ltd's shares have beaten the Nifty FMCG index so far in 2025, gaining 12% versus a 3% drop in the sectoral index. But incremental gains in the stock may be tough for two main reasons. First, valuations aren't enticing enough, keeping significant near-term upside at bay. Second, the recently declared June quarter (Q1FY26) results offered no triggers for the stock, with lacklustre volume and margin.
The stock trades at 46 times estimated FY27 earnings, as per Bloomberg. Emkay Global Financial Services finds it 'fairly valued" at current levels. The broking firm's analyst Nitin Gupta believes Britannia's Phantom Stock Option Scheme could weigh on near-term performance, as any stock price appreciation from strong execution would be rewarded back to management, impacting the company's reported financials.
Britannia's phantom option plan is an equity-linked cash incentive scheme for its top management. The phantom stock amount depends on the company's share price, making it lumpy in nature with the potential to have a meaningful impact on the operating profit margin. For instance, the hit from this in Q1FY26 was ₹52 crore, making it a key contributor to the 20% year-on-year rise in employee costs to ₹242 crore.
Higher staff costs meant consolidated Ebitda margin contracted 135 basis points (bps) to 16.4%. Still, the 3% fall in other expenses helped soften the blow a bit, given the larger 310 bps drop in gross margin to 40.3% owing to elevated commodity prices. This marks the fourth consecutive quarter of decline in both Ebitda and gross margins.
Falling prices bode well for margins
The price of flour rose 8% year-on-year in Q1FY26, while refined palm oil increased 45% and cocoa was up 35%. Sequentially, the prices of flour, refined palm oil and cocoa were down. Sugar and laminates remained within manageable limits. The sequential easing in some commodities is encouraging, setting the stage for margin expansion in the coming quarters. Price hikes taken should also aid margin. The sequential improvement of 21 bps in gross margin in Q1FY26 lags expectations.
Mihir P. Shah and Riya Patni, analysts from Nomura Financial Advisory and Securities (India), raised their FY26-28 earnings-per-share forecast for Britannia by about 2-3% to factor in price hikes and lower raw material prices.
Price increases drove most of the 9% year-on-year growth in Britannia's Q1FY26 total operating revenue to ₹4,622 crore. Volume growth decelerated sequentially for the third quarter in a row to 2%, coming in below estimates. However, transaction growth, a measure of how many consumers are interacting with its brands, was at a sturdy 12%.
Rural outpaces urban
Britannia saw strong double-digit growth in rural markets, while urban areas posted high single-digit growth. Its four focus states: Uttar Pradesh, Madhya Pradesh, Gujarat and Rajasthan, clocked 2.7 times the growth other states.
Overall market share was largely flat in Q1FY26, though the East saw some turmoil due to Britannia's distribution restructuring. Adjacent categories such as rusk, wafers, and croissants saw good traction and premium products such as Pure Magic Choco Stars, Harry Potter Pure Magic Choco Frames performed well.
With a demand pickup seen in overall FMCG consumption, Nomura's analysts expect volumes to start improving from here and price hikes undertaken in Q1 to propel overall sales growth to double digits in FY26. Note that Britannia expects the gap between volume and revenue to stay in the range of 6-8% over the next two or three quarters. What matters for investors now is the pace of recovery in volume and margin.
