Britannia back on investors' radar after sharp correction in past 3 months

Improving demand for cookies, intact structural growth story and attractive valuation augur well for the stock

After a sharp correction in the past three months, some factors currently seem to support Britannia Industries’ stock, in which investor sentiment is reviving. The stock has gained about seven per cent in the last two trading sessions, sharply outperforming the Nifty FMCG index that inched up 0.4 per cent during the same period.

The recent trigger is led by reports suggesting that good demand for cookies, at a time the biscuit industry is facing slower growth, could augur well for the company, which has an estimated 25-30 per cent revenue share of this segment.

“The slowdown is mainly in rural areas, which is impacting the offtake of lower-end biscuits. However, premium products such as cookies are receiving good response. This should help Britannia,” says Nitin Gupta, analyst at SBICAP Securities. In fact, the 65 per cent revenue share of premium products for Britannia indicates volume and margin support, with likely good customer demand in the forthcoming festive season.

Apart from the festive season, good progress in monsoon and increase in spending by the central government are expected to get the consumption demand on track in the later part of FY20, say analysts. This, along with a strong pipeline of new premium products and a mission to become a complete food company, keeps the structural growth story intact for Britannia, which saw a sharp correction in its stock price (down 12 per cent in last three months against 4.5 per cent fall in the Nifty FMCG), making valuations relatively attractive.

Britannia currently trades at 43 times its FY21 estimated earnings, which is not only 22 per cent lower than its peak level of 55 times in August last year but also a nine per cent discount to its much larger peer Hindustan Unilever. The latter had also faced some earnings downgrades like Britannia, albeit lower, due to slowdown in consumption sector.

However, issues related to group exposure in terms inter-corporate deposits and input cost inflation (wheat, sugar and milk) have made the situation a bit more difficult for Britannia. Though higher input costs would lead to some gross margin pressure in the near term, inventory management, cost savings, rising dependence on in-house manufacturing and select price hikes would provide margin support.

Overall, at present, the risk-reward equation for long-term investors in Britannia looks favourable.