Britannia likely to sustain double-digit volume growth, say analysts

After a robust September quarter show and a continuing of 10-12 per cent volume growth in the past four quarters, some brokerages had been sceptical about the ability of Britannia Industries to maintain the current run rate. However, despite the high base, others believe new product launches and capacity expansion are likely to support volume growth in the coming quarters.

Analysts at Edelweiss Securities indicated the company had readied at least 25 launches, including product enhancements in some categories, over the next two years. Abneesh Roy of Edelweiss Securities expects these to support close to double-digit volume growth. The company is also focusing on product innovation to suit recent health trends, such as baked salty snacks. The biscuit maker is also in the process of setting up a salty snacks plant. Britannia expects its non-biscuit business, 23 per cent of its revenue in the September quarter, to be at par with its biscuit business (now 70 per cent of revenue) over the next few years.

Analysts believe these are steps in the right direction. The contribution of innovations has rise to five per cent of revenue, from three per cent two years earlier. The management aims to scale it further to 8-10 per cent. Further volume support stems from capacity addition. A unit at Ranjangaon (near Pune) would come on stream in two years. This would augment annual manufacturing capacity by 130,000 tonnes. All these should help propel overall volumes, given the improving consumer demand and rise in distribution reach, say analysts.

The company has been adding 200,000-250,000 outlets under direct reach. As of September, the count of direct outlets was 1.99 million, about 2.7 times its March 2014 level. The company is expected to create more in distribution systems for new categories. Investor sentiment, thus, is likely to be in favour of the stock, as volume is one of the key performance parameters for a fast-moving consumer goods company. With good volume traction, analysts foresee 14.5 per cent annual growth in revenue over FY18-20, outpacing the 8.6 per cent yearly rise over FY16-18.

New product launches, however, could lead to an increase in some expenses such as advertising to some extent. Along with some inflationary pressure on inputs such as wheat, which the management had highlighted during the September quarter earnings announcement, this would weigh on profit margins.

In the quarter gone by as well, despite a 218 basis points expansion in gross profit margin, the earnings before interest, tax, depreciation and amortisation (Ebitda) margin, pegged back by higher costs, improved only by 100 basis points to 15.8 per cent. However, premiumisation and cost efficiency, beside pricing power, are likely to protect profitability. Analysts estimate the Ebitda margin at around 16 per cent in FY19 and 17 per cent in FY20.

Investors, however, should be cautious. With the recent rally (the stock has risen eight per cent since November, compared to a five per cent increase in the S&P BSE FMCG index), the stock is currently trading at around 50 times its FY20 estimated earnings. This could cap the near-term rise and one should perhaps await a better opportunity to take an exposure to the stock and benefit from its long-term growth.

“While the stock has run up sharply and the near-term upside is limited, we structurally remain comfortable with the business and its potential,” say analysts at Edelweiss Securities.