Britannia's prospects promising on improving demand, lower input prices

While brokerages are positive on the stock, any resurfacing of inflation or increased competitive intensity are potential risks

Fast moving consumer goods (FMCG) major Britannia produced good results for the fourth quarter of the 2022-23 financial year (Q4FY23) and the outlook seems promising with the whole FMCG sector seeing some demand revival.

Britannia’s consolidated Q4FY23 revenue increased by 11 per cent year-on-year (YoY) to Rs 4,023 crore and earnings before interest, tax, depreciation and amortisation (Ebitda) margins improved significantly to 19.9 per cent from 15.5 per cent a year ago, aided by price increase and favourable forward cover on wheat futures.

Cost of raw materials to revenue stood at 55.1 per cent (62 per cent a year ago and 56.3 per cent in Q3FY23). Ebitda grew 45.7 per cent YoY to Rs 800 crore. Reported profit after tax or PAT grew by 47.5 per cent to Rs 557 crore. Adjusted PAT grew by 47 per cent YoY to Rs 558 crore. 

Management guidance is that volume growth is expected to improve in FY24 while the strategy will be to hold or gain market-share with Ebitda margin target of between 16-19 per cent. Capex is expected to moderate after FY24 but for the ongoing FY, it is expected to be between Rs 500 and Rs 600 crore, largely for the dairy business.

If necessary, price will be held to guard market-share gains in rural/ semi-urban areas and the company has already initiated price cuts in tandem with lower inflation. Volume growth was flat -- around 1 per cent in Q4, YoY. Rural market-share gains were much higher than overall India. 

The product mix remains around 77 per cent biscuits. The entire business is split into three parts –biscuits, cake and rusk and other adjacencies like breads, new categories (contribution of 11.5 per cent of total sales). 

Inflation may be cooling off now, but milk was up 20 per cent quarter-on-quarter (QoQ) and up 55 per cent YoY. Palm oil, laminates, boxes all saw QoQ price reductions. In FY24, management hopes for 3 per cent inflation, down considerably from FY23 (above 6 per cent). The direct distribution reach was around 2.7 million, up by around 2 lakh. New products launched in last 24 months contributed around 3.5 per cent to FY23 revenues. 

In general FMCG, analysts believe formalisation is more visible in foods space, given the unorganised sector is also struggling with supply chain challenges. There’s clear consumer preference for trusted, well-known brands. Economies of scale, via integrated manufacturing facilities could raise margins, and better distribution infrastructure will aid penetration. Britannia is looking to partner domain experts in croissants and cheese space, etc. and targets 35 per cent revenue from non-biscuits in three years, expanding it to 40 per cent in five years and to 50 per cent in ten years. 

The major risks to achieving the aims could be sustained inflation in key wheat flour and other raw materials, high competitive intensity (especially at the premium-end), possible hiccups in adjacencies, and continued slowdown in rural demand.

Britannia has issued non-convertible debentures to shareholders, who can opt to monetise with a separate listing. This is an interesting move as the company has also been offering ICDs (inter corporate deposits) to corporates, including to group companies. The firm has a policy of utilising about 25 per cent of cash flow for capex and about 70 per cent for dividend payouts.

The stock has gained over 10 per cent in the last month but it could still have an upside, with valuations between Rs 5,200 and Rs 5,700 from several analysts and strong ‘buy’ consensus.