Britannia: Correction a good entry point

Continued expansion in rural markets, emphasis on premium products bode well for company

Strong expansion in the earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin has fuelled a re-rating of the Britannia stock since 2013. The company's Ebitda margin has grown from 6.8 per cent in FY13 to 11 per cent in FY15, driven by operational efficiencies, benign input costs, inflation and emphasis on premium products. For FY16, the Ebitda margin is expected to expand 324 basis points to 14.2 per cent, according to Bloomberg consensus estimates. However, the margin gains will be limited from here on as input prices have started firming up and most part of cost rationalisation is achieved.

The company’s Ebitda margin is, thus, pegged at 14.8 per cent in FY17, or a gain of 52 bps. This is a key reason behind the scrip's underperformance versus peers in the past six months. Notably, Britannia has fallen 15 per cent in the past six months versus a one per cent fall in the S&P BSE FMCG (fast-moving consumer goods) index and three per cent in the S&P BSE Sensex. The stock now trades at 31 times FY17 estimated consolidated earnings, slightly higher than its historical one-year forward price/earnings (PE) ratio of 30 times, but lower than 32-35 times FY17 estimated PE ratio of peers such as Nestle, and GSK Consumer, among others.

Part of this fall could be attributed to concerns around intensifying competition from Patanjali in the biscuits segment even as most analysts believe Britannia would not be hit significantly. Analysts at Spark Capital believe the biscuits segment is not a key focus of Patanjali right now and, hence, would not hit incumbents such as Britannia much. Additionally, Britannia's expansion in rural India will enable it to continue garnering market share and deliver healthy growth.

“Britannia's market share in the Hindi belt is only 11 per cent against an all-India value market share of 33 per cent. This region continues to offer opportunity for Britannia to gain market share and distribution,” says Gautam Duggad of Motilal Oswal Securities.

While the prices of most of Britannia's inputs have risen in recent months, the company can ease some of this pressure via price rises as it has not raised prices in the past two years. Higher share of premium biscuits in Britannia's revenues will aid its pricing power and margin. Against this backdrop, most analysts are positive on Britannia. Their average target price indicates upside of 28 per cent from current levels.