Growth triggers, valuations drive Britannia stock; Covid impact subdued

Market share improvement, uptick in margins to sustain gains over the medium term

Britannia Industries has gained 10 per cent over the last couple of weeks, driven by a rebound in demand, expectations of steady performance in the March quarter, lower impact of the second wave of Covid infections, and attractive valuations.  

Analysts, led by Amnish Aggarwal of Prabhudas Lilladher, highlighted in a recent report that demand in the biscuit segment had returned to pre-Covid levels. While there has been a shift in favour of large packs in metros and tier-I cities, out-of-home consumption has driven sales of affordable packs. 

Though the second wave of infections and the resulting lockdowns/restrictions will curb the out-of-home market, analysts at Motilal Oswal Research believe the company will be less impacted by this, thanks to gains expected from in-home consumption and lower trade discounts. The near-term trigger will be the Q4 results and outlook.

While volumes and revenues for 9MFY21 grew 11-14 per cent, analysts expect sales growth in the March quarter to come in at 9 per cent. This will be led by volumes as there has not been any significant increase in product prices. Volume growth, moderate input costs, and higher efficiencies are expected to help improve operating profit margins by over 200 bps year-on-year (YoY) to 18 per cent. 

Though crude palm oil and packaging material costs are up sharply YoY, it has been partly offset by the deflationary trend in wheat, sugar, and milk. 

In the near-to-medium term, the key revenue growth drivers will be product innovation, recovery in urban markets, strong growth in adjacencies (cake, rusk, dairy products), and the potential for market share gains in the Hindi-speaking belt, according to Sharekhan.  

Despite the growth outlook, the stock has underperformed the benchmarks and its peers over the last year. 

At the current price, the stock is trading at 41x its FY23 earnings estimates, which is at a discount to its 3-year and 5-year average valuations. 

Any weakness in share prices could be a buying opportunity from a long-term perspective.