Packaged food firms may witness growth rebound soon, say analysts

While reports of slower sales growth in August pulled down share prices on Monday, analysts say medium term outlook remains healthy

Investor sentiment towards packaged food majors — Nestlé, Britannia Industries (Britannia), and ITC — has taken a hit, following reports and notes by brokerages on slowing sales growth of packaged/read-to-eat products in August.

The impact was relatively sharper on Britannia and Nestlé, given their pricey valuations. While ITC fell 2 per cent on Monday, Britannia and Nestlé shed over 4 per cent each. The benchmark Sensex also lost 2.1 per cent. Analysts, however, do not see this as a major concern and believe corrections could be bought into.

Sachin Bobade, vice-president of Dolat Capital, says: “Volume growth in the June quarter for many packaged food companies was supported by panic buying, given the lockdown. However, supply chains have now been restored. Therefore, the volume offtake is normalising.”

Consequently, he added, top line growth would decrease sequentially but remain better than the year-ago level.

After clocking 21.5 per cent volume growth in the June quarter, the Britannia management indicated that such a high growth rate may not sustain. Therefore, many analysts have already factored in the tapering of volume growth. In other words, for firms like Britannia, a high base will optically drag growth in the near term.

Even as consumption of outside food has picked up in recent weeks and could impact demand for packaged goods, it is still far below pre-Covid levels. 

Shirish Pardeshi, analyst at Centrum Broking, agrees. “There will be some decline in volume growth vis-à-vis the June quarter, with higher consumption of outside food. However, demand for packaged foods is unlikely to fall.”

Hemant Malik, divisional chief executive (foods division) at ITC, says: “There is growing preference for trusted, high quality, and safe and hygienic brands. At an aggregate level, demand for ITC’s packaged food brands is showing an uptrend.”

Though ITC’s non-cigarette FMCG business contributes 24-25 per cent to the top line and just 2 per cent to operating profit, its share could rise thanks to the focus on this fast-growing business.

The pandemic has also paved the way for organised food players, given the stress being witnessed by local/unbranded players. Analysts at IDBI Capital said: “Large players (like Nestlé, Britannia, and ITC’s food segment) will gain market share on account of distribution efficiency and the switch by customers from un-branded to branded products.”

Agricultural reforms may also benefit food manufacturing firms, though clarity on exact gains may take a while to emerge.

“The changes could enable a pick-up in the food processing sector and reduce cost of procurement of agri-commodities,” said JM Financial analysts.

Firms with existing farm-level procurement infrastructure like ITC are already benefiting, while Tata Consumer Products, Nestlé, Britannia, and organised firms that have staples as a raw material requirement can benefit in the medium term. Pratap Snacks, down 4 per cent on Monday, is also expected to benefit.

Overall, while there may be minor blips, growth potential of organised packaged food players remains good. 

Valuations are also a concern for Britannia and Nestlé, which are trading at 45x and 60x their estimated FY22 earnings, respectively, compared to 28x of the Nifty FMCG’s FY22 price-to-earnings. Corrections, therefore, could offer a good entry point.