This time last year, packaged food companies were in a fix. With the national lockdown announced, supply chain issues erupted and reverse migration from urban to rural areas meant a labour shortage. Yet, most packaged food companies ramped up production, strengthened distribution lines and stocked up on supply.

In April 2020, Varun Berry, the managing director of India’s largest biscuit maker Britannia Industries (Britannia) said the company is “better poised” than its competitors to tackle the challenging situation. At the time, its 15 manufacturing plants were operating at 65% capacity allowing it to increase volume during Q1. This aided its top-line growth in the quarter, but it was an anomaly as in the subsequent quarters, demand dropped.

As the economy began opening up, and people began venturing out, packaged food consumption dropped. This was evident in its Q4 results which pointed to revenue and net profits decline. But as lockdowns are announced again, packaged food demand will rise. How will this affect Britannia in FY22?

Revenue on a steady decline since Q1

Britannia Industries’ revenue in Q4FY21 managed to grow by 10% in Q4FY21. But the demand for packaged foods has been declining in FY21. 

Net profits fell by 11% YoY and 20% QoQ to Rs 360 crore. This was the first time net profits declined on a YoY basis since June 2019. The reason for the decline in net profits in the June 2019 and March 2021 quarters was the rising price of milk and other raw materials. 

Milk and milk-based derivative products are a key raw material for Britannia’s biscuits, and dairy products (cheese, butter, ghee, yogurt, and flavoured milk). Although the price of liquid milk has dropped by 10% MoM in April to around Rs 27 per litre, it’s up by nearly 30% against the year-ago period. Another key raw material that is seeing rising prices is palm oil, up by 13% on a YoY basis to Rs 1,140-1,400 per 10 kgs.

Due to the elevated prices of milk and palm oil, Britannia’s operating margins shrunk in Q4 by 320 basis points against the previous quarter. While the price increase in raw materials affected all packaged food players, Britannia’s competitor Nestle India managed to improve its margins. 

Advertising spend to increase

In FY22, Britannia is looking to put its weight behind the milk and glucose biscuit segment, Milk Bikis and Tiger. The cream biscuit Milk Bikis was predominantly sold in Tamil Nadu and Kerala only till 2019. Now, the company is looking to re-launch it under a wheat flour based variant in Madhya Pradesh, Jharkhand, Chhattisgarh, Bihar, Haryana, and Rajasthan. 

While the management was fairly certain its dominance in the milk biscuit category will continue (26% market share), the glucose market will be a challenge. But it’s a market with “potential,” said Berry.

Britannia holds a 4% market share in the milk plus glucose biscuits category in which Parle is the leader (through Parle G and Nutricrunch) and ITC’s Sunfeast range is a close competitor. Try as it may, Britannia will be unable to dethrone the number one player. Berry said, “Parle G is too large for us to target,” but he maintained that Britannia will look to make inroads into the glucose market.

The challenge for Britannia lies in the pricing of its products. Parle G has a grip on the market because of its price point, at Rs 7 per 100 grams glucose biscuits. Sunfeast and Milk Bikis are priced close to Rs 10 per 100 grams. Berry said the “premium” that Britannia has will not be lowered to win market share. 

To increase its market share, the company has instead relied on advertising in the Hindi belt. This is why it’s advertising spends have been higher by 1.5% in FY21, and will only increase going forward. Brokerages expect this to eat into the earnings before interest and tax (EBIT) margins which have been falling in FY21.

Steady capex and expansion boosting volume

Britannia is also going to step up its capital expenditure (capex). This is being done to shore up its domestic production and expand to foreign markets. In FY21, it incurred a capex of Rs 242 crore. Like most FMCG companies, it kept capex low in H1FY21 (Rs 94 crore) and increased capex by 58% in the second half of FY21. 

The capex was to increase its production capacity in Ranjangaon, Maharashtra and set up new facilities. In FY22, Britannia will invest Rs 550 crore to set up a plant in Tamil Nadu and Rs 300 crore for a plant in Uttar Pradesh. Both plants will be used to produce biscuits. These investments amount to 52% of its free cash flows in FY21.

Britannia is also expanding overseas. It will set up two factories in Egypt and Uganda on a contract manufacturing basis. These will act as “hubs” through which it will expand operations in the African and Middle Eastern markets. Each factory is expected to generate an annual turnover of $11 million (Rs 83 crore). 

In addition to this, Britannia will enhance its export model in FY22. The export expansion is in light of the recent approval of the production-linked incentive (PLI) scheme for the processed food sector, at an outlay of Rs 10,800 crore. Britannia presented a draft proposal for the PLI scheme in April 2021.

The expansion in production lines in H2FY21 has already paid dividends. In Q4, Britannia reported an 8% YoY volume growth after a poor show in the previous quarter. With the production expansion and the setting up of new plants and international hubs, volumes are expected to grow, pushing up revenues.

Q1FY22 - off to the same start?

Britannia expects FY22 to start the same way FY21 did. Lockdowns have been announced in major cities, and in Q1, it expects packaged food demand to increase. The company’s main packaged food items are deemed essential goods, incurring no restriction on production or distribution. This will aid its quarterly revenues, which are expected to grow by 10-15% on a QoQ basis. However, because of the high base in Q1FY21 (Rs 3,420 crore), revenue in Q1 is likely to fall YoY.

Since Britannia is entering a new market and competing with major players - Parle and ITC, margins will take a hit due to advertising spends and higher input costs. Profits, which have decreased in every quarter of FY21, might not bounce back especially if packaged food demand wanes towards the end of Q1 as lockdowns are lifted. The expansion will be financed by adequate free cash flows preventing the company to take on any debt (long-term debt of Rs 748 crore), and the PLI benefits also loom if the company’s draft plans are approved.

Britannia’s volume growth on rising demand for packaged food is unlikely to benefit investors in the short term. This is because the growth in volumes and hence revenue will only be realized in FY22, and brokerages expect the upside has already been priced into its trailing 12-month price to earnings ratio of 45 times