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Britannia has had a strong run in the recent past at the bourses on the back of significant improvement in its profitability which has supported its financial performance in the current slowing demand scenario. The company’s strong brands, improving sales mix (in favour of premium products) and healthy cash generation are its key positives. Most analysts remain positive on the company and expect 15-18 per cent from current levels.
“Britannia is trading at 23.3 times FY14 estimated earnings and at 15-25 per cent discount to listed peers ITC, Nestle, Marico & GSK Consumer, largely due to low operating margin. However, due to on-going structural changes in company’s revenue and product mix, the operating margin will improve and this discount could narrow down gradually”, says Ruchita Maheshwari, FMCG analyst at Nirmal Bang Securities.
Margin expansion to continue
Despite witnessing sales growth of 16 per cent over the last five years, Britannia’s EBITDA margins contracted from 12.3 per cent in FY’05 to 5.8 per cent in FY’13. However, over the past two quarters, the company has witnessed strong traction in its EBITDA margin which stood at 7.8 per cent and 8.3 per cent in the March 2013 and June 2013 quarters respectively.
While stable input costs environment have aided this improvement, the company’s cost rationalisation efforts across the value chain have started bearing fruit. In addition to increasing premiumisation, company has worked on saving energy and distribution costs, improving revenue per employee and better manufacturing technology in its bid to improve profitability. Britannia will continue with its focus on improving margins and the management expects to maintain margins going forward as well. Stable input prices (led by a good monsoon) will also support margins.
“We expect gross margin to expand 220 basis points over FY13-15, led by favourable base and premiumisation benefits. We build in 160 basis points EBITDA margin expansion over FY13-15 to 7.4 per cent”, says Gautam Duggad, FMCG analyst at Motilal Oswal Securities.
The margin expansion is significant given the slowing down biscuits segment (in sync with overall consumption slowdown). In the June 2013 quarter, biscuits category growth stood at one-thirds of that witnessed in June 2012 quarter. Thus, focus on profitability will enable Britannia to minimise the impact of the slowdown.
Rural focus
Britannia is stepping up its rural presence as well as expanding its food and snacks portfolio to drive long-term growth. Notably, rural markets have remained fairly stable as compared to urban markets during this slowdown and hence, company’s strategy of increasing rural penetration seems to be appropriate. Improved financial health of its Dairy and International businesses will also aid growth. While an unprecedented rise in input costs remains the key risk, monetisation of its land assets at Chennai and Bengaluru will act as key stock price catalysts.
