Britannia investors see 'Good Day' after strong Q2, stock surges 9%

FMCG major has been gaining market share for 38 consecutive quarters now, stands at 15-yr high

Excellent September quarter results for the 2022-23 financial year (Q2FY23) for Britannia Industries, has led to a big up move in the fast-moving consumer goods (FMCG) stock, which hit a 52-week high of Rs 4,189.95 on the BSE before closing almost 9 per cent higher, at Rs 4,142.20, on Monday.

The consolidated sales rose by 21 per cent year-on-year (YoY) to Rs 4,380 crore (up 19 per cent quarter-on-quarter or QoQ), while earnings before interest, tax, depreciation and amortisation (ebitda) rose by 27.5 per cent YoY to Rs 710 crore. The profit after tax or PAT (adjusted for extraordinary items) was up 28.5 per cent to Rs 490 crore. Lower staff costs (down 50 basis points or bps YoY) led to 80 bps expansion YoY in the ebitda margin (it was up 270 bps QoQ after a somewhat weaker Q1). All the numbers were higher than consensus. 

Britannia has been consistently gaining market share for the past 38 quarters and at present, it stands at a 15-year high. The company’s direct distribution is via 2.6 million outlets with over 28,000 rural dealers which has boosted reach.

The long-term debt has risen due to capex of Rs 1,000 crore to fund a dairy project, and greenfield plants in Uttar Pradesh and Tamil Nadu. After redemption of Rs 720 crore of bonus debentures, the borrowing costs are at around 5.8 per cent, which is less than the yields on its treasury portfolio. The company has warned that its group entity, Bombay Dyeing, has gone to the Securities Appellate Tribunal in appeal against a Securities and Exchange Board of India.

The company has launched products like Treat Croissant, NC Seeds & Herbs, Biscafe, Potazos, 50-50 Golmaal, Marble cake and Rs 5 Muffills across regions and channels. This appears to have contributed to the strong performance but it may have caused a 30 per cent YoY rise in ‘other expenses’ due to the media and marketing costs. 

But the company warned against inflation in flour and dairy products. Despite price hikes of around 17 per cent YoY across most of its product range, there was a unit volume expansion of 5 per cent. This could be specific to the biscuits segment or it could indicate better overall rural demand for the FMCG sector. However other FMCG majors are guiding for soft demand so the Britannia performance looks to be counter to the general sector trend. 

Analysts have increased earnings per share estimates by around 12 per cent for the FY 2022-23 period and consensus is for ‘buy’ even after the share price surge. There could be upside surprises if the revenue growth rates in biscuits are sustained. However, sustained weakness in consumption could also mean downside risks. Gross margin expanded 205 bps QoQ. Stabilising or falling input costs, especially softer palm oil prices, should lead to sequential improvements in margins in the second half.

Valuations for the stock range upwards with strong consensus. One analyst is offering a relatively conservative DCF-based target price of Rs 4,200, while other analysts have higher valuations. One valuation of Rs 4,300 implies PE ratios that discount FY 2023-24 estimated earnings growth at 48x. Other analysts offer Rs 4,500-Rs 4,530 targets.