[T.S.R:17099] FMCG-Costs Eating Up The Margins Of Consumer Staple Producers

While the revenue growth momentum remains intact, the high raw material costs and rising competitive pressure from MNCs, some new to India, is eating up margins.

 

n       Margins to remain under pressure. Management indicated that margins of the overall biscuits industry will remain lower, owing to higher raw material prices, as price hikes are not easy. Further, increase in excise duty by 100bps, higher transportation and labor costs are driving up overall costs.

n       Entry of MNCs intensifying competitive pressure. Strong players such as ITC (with brand Sunfeast) and Unibic have entered the biscuits market in the past 6-7 years. This and international players such as United Biscuits (McVitie's) and Kraft-Cadbury (Oreo biscuits) having recently made a foray into the biscuits market have led to competition further intensifying, thereby reducing pricing power.

n       Revenue growth momentum intact. Management, however, indicated that it remains confident about the revenue growth momentum. Biscuits is one of the cheapest packaged foods distributed across India. The increase in ad-spend on account of higher competition and launch of various segments is buoying the revenue growth momentum.

n       Our view on Britannia. With higher raw material prices, increase in interest costs and rise in taxes, we expect Britannia's earnings growth to remain muted and, hence, maintain our Sell rating on Britannia with target price of  Rs 313/share.
 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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