Why Declining Margins Don’t Always Mean a Weak Stock: The FMCG Secret
Introduction:
- Inflation is not just a problem for consumers. It is also a major challenge for companies.
- When inflation rises, the cost of raw materials, packaging, fuel, freight and other expenses increases. For a food company, this can directly impact the cost of production. Interestingly, when inflation starts cooling, the company’s margins can improve.
Let us understand this in simple language with the example of Britannia Industries Ltd., one of India’s well-known listed FMCG companies in the food space. Britannia sells biscuits, bread, cakes, rusk, dairy products and snacks. For such a company, important costs include wheat flour, sugar, milk, edible oil, packaging material, fuel and logistics.
The Basic Concept:
- - Suppose Britannia sells a biscuit pack for ₹10. If the cost of making and distributing that packet is ₹8, the company earns ₹2 as profit before other expenses. Now, assume inflation rises. Wheat, sugar, milk, edible oil and packaging become expensive. The cost of making the same packet rises from ₹8 to ₹9.
- - But Britannia may not be able to immediately increase the price from ₹10 to ₹11. This is because biscuit packets are very price-sensitive. Customers may not accept frequent price hikes. Also, competition from regional and local players can limit pricing power.
- So, in the short term, the company absorbs part of the cost increase. Its profit reduces. This is why inflation first hurts margins.
Timelines:
Ø FY24: Margin was strong as the cost environment was manageable. In FY24, Britannia’s consolidated revenue from operations stood at around ₹16,769 crore. The company’s cost of materials consumed was around ₹8,547 crore. Britannia’s profit from operations margin was around 17.3%.
- This was a strong margin year for the company. The cost environment was relatively better compared with periods of high inflation, and the company was able to protect its profitability. In simple terms, Britannia was able to sell its products profitably because the gap between selling price and cost remained healthy.
Ø FY25: Cost pressure came back and margin reduced in FY25; Britannia’s consolidated revenue from operations increased to around ₹17,943 crore. But the cost of materials consumed increased sharply to around ₹9,859 crore. This means the raw material cost increased faster than revenue. As a result, the company’s profit from operations margin reduced from 17.3% in FY24 to 16.4% in FY25. This is the impact of inflation.
- Even if sales are growing, profit margin can come under pressure if input costs rise faster. A company may sell more products, but if the cost of making those products rises sharply, the benefit of higher sales does not fully reach the profit line.
Ø FY26: Margin improved again as cost control and stable commodities helped. In FY26, Britannia’s consolidated revenue from operations increased further to around ₹19,152 crore. The cost of materials consumed increased to around ₹10,350 crore. Importantly, the company’s operating margin improved to around 17.0% in FY26, up from 16.4% in FY25.
- So, what happened? This is where cooling or stabilising inflation helps. When commodity prices become stable or start cooling, the company gets breathing space. It does not face the same sharp cost pressure as before. At the same time, the company may have already taken earlier price hikes, improved sourcing, reduced wastage, optimised logistics and improved packaging efficiency.
What Investors Should Learn:
- For investors, this concept is very important. A temporary fall in margin does not always mean that the business is weak. Sometimes, it may simply be because raw material prices have increased sharply.
- Similarly, margin improvement does not always mean that demand has suddenly become very strong. Sometimes, margins improve because input costs have cooled.
- So, while analysing any FMCG or manufacturing company, investors should ask:
A. Is revenue growing?
B. Are raw material costs rising faster than revenue?
C. Has the company taken price hikes?
D. Is volume growth healthy?
E. Is competition increasing?
F. Are margins improving because of better demand or lower costs?
G. Is the company improving efficiency?
Final Thought:
- Inflation first hurts companies because production costs rise quickly, but selling prices cannot be increased immediately. This creates pressure on profit margins.
- But when inflation cools, the company benefits because raw material costs become stable or lower, while earlier pricing actions and cost-efficiency measures continue to support profitability.
For investors, the key lesson is simple: while analysing an FMCG company do not look only at sales growth. Always look at raw material costs, pricing power and margins. That is where the real profitability story lies.
