Biscuits major Britannia Industries has been stunning the Street with margin expansion over the past few quarters, while its FMCG peers kept reeling under high cost inventory. But, this trend might not sustain too long, according to foreign brokerage CLSA.
Britannia's margins will come under pressure due to rising milk and wheat prices. CLSA has downgraded it from 'underperform' to 'sell' and has cut the target price to Rs 4,060 from Rs 4,525 apiece.
At 9:45am, the stock was quoting at Rs 4,319.10 apiece on the NSE, down by 2.1o percent. It was the top loser on the Nifty 50. It has appreciated over 36 percent over the past one year, compared to Nifty FMCG index that has gained 30 percent in the same duration.
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The stock's rally is also keeping CLSA at bay. "Long-term outlook is positive and revenue growth will now be led by volumes rather than price hikes. But, a more than 30 percent run-up in the stock over the past year and margin pressures are negative," it said in a recent report.
While palm oil prices have cooled significantly from all-time highs, milk and wheat prices remained elevated. These make for Britannia's key inputs.
"Wheat is one commodity that remains on the boil," Britannia Industries Managing Director Varun Berry said after Q3 earnings call. "After the April–June quarter, we have seen a drop in the wheat prices. However, in India, which is a fairly insulated market, the prices have been only going up."
On the back of this, CLSA has cut the FY23-25 earnings by 1-11 percent.
Over the past few quarters, Britannia has been gaining market share which has helped the company protect its margins. At the end of September quarter, its market share stood at a 15-year high. It has been gaining market share for 39 quarters now.
For the December quarter, the company reported a consolidated net profit of Rs 932.39 crore, up 151.19 percent from Rs 371.18 crore recorded a year back. This included one-time gain of Rs 375.60 crore.
The revenue from operation came in at Rs 4,196.80 crore, up 17.39 percent from Rs 3,574.98 crore in the corresponding quarter last year. Operating margins improved over 350 basis points to 19 percent.
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