Dear Firstname,

While western India reels under a heat wave, the eastern coast saw a storm. It's dark clouds for the stock markets as well, as the US indices experienced "carnage" and Indian stocks fell sharply. Outside stock markets, bad weather has also ravaged a key agri crop, adding to the woes of a major FMCG company.

In this week’s Analyticks:

• India’s wheat harvest wilts in the heat wave, could add to Britannia’s pain in H1FY23

• Top scorers in a bad season: Companies, sectors which delivered growth in a difficult economic environment

 Let’s get into it.

Global wheat shortage, damage to India’s wheat crop add to Britannia’s woes in upcoming quarters

Amid the intensifying Russia-Ukraine conflict, India in April was hoping to ‘feed the world’ with a record wheat output. Cut to May 2022, and wheat production is set to fall for the first time in eight years. 

The hottest March in 122 years has played a part in this, as it has affected both the quality of the wheat crop as well as the output per hectare (yield). What could be the impact of this for biscuit makers like Britannia? 

Britannia beats volume growth expectations in Q4  and sustains margins

Analysts like Motilal Oswal originally expected flat sales volume growth for Britannia in Q4FY22. Aggressive price hikes and resulting impact on rural demand were the underlying causes of flat volume growth.

The company increased the prices of its products by nearly 13% in 9MFY22 and by 10% in Q4FY22. Britannia undertook these price hikes primarily by reducing the grammage of its products.

This definitely impacted the price sensitive rural consumer. But Britannia reported a 4-5% sales volume growth in the quarter, despite sluggish rural demand. Expansion of its distribution channels, higher demand for biscuit brands like Tiger Krunch and Milk Bikis, drove volume growth. 

However, will Britannia will be able to sustain volume growth in H1FY23? Varun Berry, Managing Director of the company, said that even if commodity prices stay at current levels in the near-term, Britannia will have to take additional price hikes of 10% in Q1FY23 to protect its gross margins. It might be challenging to maintain meaningful sales volume growth in coming quarters. 

Britannia’s gross margins fell nearly 250 bps YoY to 38% due to steep cost inflation in inputs like palm oil, wheat, sugar, cashew and milk, which rose 17% QoQ on an average in Q4FY22. Still, the company managed to protect its margins on a QoQ basis aided by its long-term commodity contracts.

Britannia to encounter high inflationary pressures in H1FY23

Global wheat prices jumped 35%+ ever since the Russia-Ukraine war broke out. Russia banned wheat exports to protect its domestic supplies, while Ukraine’s wheat harvests have stalled. Another key reason is the disruption of wheat shipments in the Black Sea region due to the war - ports have closed along this route, and ships have been blocked.

Interestingly, prices in India didn’t rise rapidly, since it is a wheat-surplus nation.

The severe heat wave starting mid-March have killed India's hopes of being the world's saviour in wheat supplies. The Indian government's initial forecasts were of a record wheat output of 111.3 million tonnes in 2021-22. But wheat is extremely sensitive to high temperatures, especially when it is ripening in the month of March. As March 2022 witnessed a hot spell, the wheat kernels shrivelled i.e., reduced in size. 

In fact, according to Bloomberg, the crop yield could fall anywhere between 10%-20% in 2021-22 (Crop yield basically means the amount of agricultural production harvested per unit of land area).

Now, farmers are staring at a crop damage of at least 10-20% of their harvest in 2021-22, according to the Food and Agriculture Organization, a United Nations agency. They are trying to make up for the loss by seeking better prices for their produce. There are reports of farmers withholding their produce to sell their output to private traders or export it at a better price, in line with global market rates. This is why the government's wheat procurement may also fall by half to 19.5 million tonnes.

With India expecting a fall in production and wheat supplies constrained globally, prices will head further north. And with Indonesia restricting palm oil exports, there is more pain in store for food companies like Britannia and Nestle. Even though analysts forecast a 14% YoY profit growth for Britannia in FY23, the real impact of spiralling commodity costs may become apparent in the coming months.   

Screener: Companies seeing a big jump in net profit growth, operating margin improvement and revenue growth in Q4FY22

As we are halfway into the current result season, some companies showed good earnings growth, while others didn’t. This screener throws-up a set of 60 stocks in total who are beating the averages, out which 31 are part of the Nifty 500.

Notably, around 10 stocks are from the banking and financial services sector. Banking heavyweights like ICICI Bank and Kotak Mahindra Bank saw their net profits rise 50%+ on a YoY basis in Q4FY22. However, their revenues rose 11.7% YoY on average. Reversal of Covid-related provisions played a bigger part in the earnings growth here. Provisions also fell on account of better loan recoveries and lower bad loans in the quarter.

Meanwhile home loans, personal loans, loans against property and credit card loans drove the overall net interest income growth for most banks. Financial performance of leading NBFCs like Bajaj Finance and SBI Cards also stood out in Q4FY22.

Agrochemical and fertilizer companies like Astec Lifesciences and Gujarat Narmada Valley Fertilizers witnessed over 80% YoY growth in their Q4 net profits. Higher sales realizations and volume growth in the exports segment worked in favour of this sector. 

The hotels and realty sector put forth a commendable performance in Q4FY22. Hotels like Indian Hotels Company, EIH and Mahindra Holidays witnessed nearly 3X YoY rise in their net profits on an average driven by robust demand in the leisure travel segment. Operating revenues for Godrej Properties and Mahindra Lifespace Developers skyrocketed 3X YoY backed by robust sales bookings in value terms.

The other major sector which saw profit growth in Q4FY22 was electric utilities. Favourable merchant power prices on higher electricity demand worked to the advantage of power generation companies like JSW Energy and Adani Power.

You can find some popular screeners here.

Signing off this week,

The Trendlyne Team