Business Standard

Positives already baked into Britannia Industries shares

High valuation, rising competitive intensity in the business will restrict of the stock?s good performance

Vinita Bali
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Despite healthy performance for the (also meeting analysts’ expectations) and the dividend announcement of 425 per cent (Rs 8.5 per share) last Monday, Britannia Industries’ stock has lost almost four per cent since then to Rs 518 currently, as against the Sensex’s 2.6 per cent fall. The Street’s concerns stem from slowing top line growth and rising competitive intensity.

Britannia has seen the growth momentum in its top line dip below 20 per cent since the September 2011 quarter (against 20-28 per cent in the previous six) and the recently concluded one was no different. Net sales grew 17.2 per cent to Rs 1,322 crore compared to the year-ago period. Positively, in comparison with the quarters prior to December 2011 and with the exception of the March 2011 quarter, the company has been able to improve upon its profitability.

Going ahead, too, analysts expect margins to perk, due to the company’s innovation drive. However, they do not rule out downside risks, thanks to intensifying competition and rising trend of input costs. Says Shirish Pardeshi, analyst at Anand Rathi, in a post-result note, “Higher costs would continue to whittle profitability. With rising competitive pressure, Britannia’s pricing power could be curtailed.” More, valuation at 24 times FY13 estimated earnings appear stiff after outperforming the Sensex and in the past three months, and factor in the company’s innovation and product premiumisation drive.
 

IN GOOD HEALTH
In Rs crore FY11 Q4’FY12 FY12
Net sales 4,223.5 1,322.0 4,974.0
% change y-o-y 23.7 17.2 17.8
Operating profit 231.5 80.5 279.0
% change y-o-y 37.8 15.5 20.5
Adjusted net profit 145.3 53.0 187.0
% change y-o-y -11.3 22.7 28.7
E: Estimates                                                       Source: Company, Analyst reports

Steady operational performance
Sales growth in the March quarter was driven by innovations, including new offerings in Good Day, as well as product launches in the snacks category. Price rises in the past four quarters helped. However, operational performance was a bit disappointing, though year-on-year operating profit margins have been maintained (down just seven basis points) at 6.14 per cent. A hundred basis points is one percentage point.

A cumulative rise of 315 bps to sales in advertising, conversion cost and other expenditure more than offset the gains from a 300 bps drop in raw material cost. The latter was consequent to benign prices of wheat and sugar, which together form 45 per cent of total raw material cost for Britannia. The company, however, managed to improve its net profit margin, helped by stable fixed costs and a marginal fall in tax outgo, resulting in faster net profit growth.

STIFF VALUATIONSOutlook
Competitive intensity, especially from ITC, has increased in Britannia’s core business of biscuits and snacks, which account for a little over three-fourth of its revenue. Says Amnish Aggarwal, analyst, Motilal Oswal Securities, in a preview note, “Players like Parle, and Cadbury are trying to increase market share in the high-margins premium creams and cookies segment. This will keep growth and margin (of Britannia) under check.”

Another issue for Britannia, as well as others, is the recent ban on non-standard pack sizes. Britannia has been resorting to grammage reduction across products for maintaining margins. However, this is going to be difficult to undertake with the new packaging law prohibiting non-standard pack sizes from July. This is likely to hurt volumes as the company was focusing on lower priced points (of Rs 2/5/10 each) to push sales growth.

Finally, raw material costs, mainly edible oil and heating oil, will continue to pose a challenge, though sugar is expected to provide some relief. Says Aggarwal, “Input costs remain a concern, as prices of palm oil and wheat have increased by 10 per cent in the last three months. Oil prices have been firm, while sugar prices have remained benign.”

While there are pressures on input costs and the competition front, the company’s dominance in the industry and its deep consumer insight stand it in good stead. The focus on innovation in the core business (biscuits) and the increasing share of the non-biscuit portfolio (dairy, bread and others) to the current 15 per cent of total revenue, are key positives. In fact, introduction of new products is expected to help the company counter rising raw material costs and improve margins, though top line growth is likely to be steady (at 15 per cent) since biscuits is a deep-penetrated category in India. Says an analyst, “Britannia is launching various value-added products and is driving premiumisation.”

Having said that, most of the positives are already priced in and the above-historical average valuation indicates that near-term upsides are capped. Any attempt to grow inorganically, though, could provide some trigger.

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