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BS Compass

HLL and ITC's entry into biscuits will affect Parle and Britannia

After testing the waters with niche offerings in untapped segments of the biscuit market, heavyweights Hindustan Lever and ITC have now forayed into the mass biscuit market.

While ITC has launched its glucose brand, Sunfeast, HLL has decided to differentiate its product, Modern 'Energy' Biscuits, by using wheat and soya as ingredients.

Importantly, both ITC's and HLL's new offerings are priced at Rs 4 for a 100 gram pack, the same level as Parle G and Britannia's 'Tiger' glucose biscuits.

Given HLL's and ITC's massive distribution reach, this new development would clearly have a significant impact on the market shares of both Parle and Britannia.

In case the taste of the new products do not go down very well with consumers, the already established players may get some breathing space, but it will be only a matter of time before that gets corrected and the pressure will soon be back on.

Structurally, the entry of players such as HLL and ITC in the mass biscuit market is bound to affect the dominance of Britannia in the biscuits market.

What's more, competition from regional players such as Surya Foods, known for its 'Priya Gold' range of biscuits, has also increased. It certainly doesn't help that the company has just had a change in leadership.

Further, since the company has hived-off its dairy division, overall growth rates would clearly be lower than what investors have been used to for a while.

As far as profitability goes, much depends on the company's ability to further reduce costs, unless there is a further reduction in excise rates. Given the increase in competition, taking price hikes may still be some time away.

In such a scenario, Britannia's long-term growth rate would turn out to be much lower than earlier estimates. It's no wonder then that the stock has underperformed the market and peers in the FMCG sector by a huge margin during the current rally.

The stock still gets a discounting of around 14 times FY04 earnings, which, considering that growth rates will drop, gives the feeling that the stock's underperformance will continue.

Widia India

The machine tools sector has attracted a fair share of investor interest in the current rally. For instance, the stock price of Widia India has appreciated by over 130 per cent since the rally began in mid-May.

Once in the boondocks following the slump in industrial activity in the last few years, the company is now on its way back to profitability.

While on the one hand business outlook has improved, on the other, Widia has gone through restructuring in the last few quarters. The main part of this restructuring was a write-off of Rs 65 crore in FY03 for bad debts and obsolete inventory and a reduction in manpower.

Compared to the corresponding period in the previous financial year, the company has lowered its staff costs by 30 per cent last quarter. This, coupled with a revenue growth of 31 per cent led to a turn around in operations with operating margins of 27 per cent.

There has also been a change in the ownership of the company. Earlier, the company was a subsidiary of Widia (Germany), which was bought over by Kennametal (US) last year. The change in ownership is expected to result in greater outsourcing of machine tools to the Asian market.

Kennametal would have a cost advantage for exporting to the high growth Chinese market. The extent of growth can be gauged from the fact that against a declining trend in output of machine tools globally, the share of the Chinese market increased to 20 per cent of total global production.

Apart from the growth is the Chinese market, the growth in the auto sector in India will also provide a boost to top line, since the auto sector contributes around 40 per cent of its revenues. However, the company faces stiff competition from players like Sandvik Asia and Batliboi.

Widia gets a discounting of around 9 times, which is lower compared to other engineering majors which trade in a PE band of around 10-13 times.

The discount could partly be explained by the company's low floating stock (Kennametal holds 88 per cent of Widia's equity), but with the company's financial performance expected to improve, the discount to peers may come down.

With contributions from Mobis Philipose and Sameer Ranade