Premium products, cost-saving steps key triggers for Britannia's transition

Premium products, cost-control initiatives key triggers for company transitioning from being a biscuits maker to a bigger player in food

A lot went right for Britannia Industries over the past  year. The maker of Marie and Good Day biscuits has been a standout performer over the recent quarters, trumping its peers in the fast-moving consumer goods (FMCG) space, both on volume and operating profit growth. 

While volume growth for some of its peers in recent quarters was patchy, the company reported improving growth in every quarter since the note ban in November 2016. Compared to the single-digit growth in the past four quarters, better than peers, Britannia reported a 13 per cent volume growth on a favourable base in the recently concluded December quarter.

The performance on operating profit growth, according to Naveen Trivedi and Siddhant Chhabria of HDFC Securities, was even better with Britannia recording 14 per cent for the nine-month period ending December. Dabur, Emami and Marico have posted operating profit growth between -6 and 4 per cent. 

In the December quarter, the company’s operating profit grew 26 per cent year-on-year, twice the pace of growth in revenue, led by the biscuits category where Britannia gained market share. While the industry grew in single digits, Britannia’s growth in the December quarter was an attractive 15 per cent. 

The market share gains are important, as premium biscuits account for 75 per cent of Britannia’s revenue mix as against 55 per cent for the sector.  Operating profit margins hit an all-time high of 15.6 per cent, up 170 basis points year-on-year, aided by improved product mix, stable input prices and cost-saving programmes. 

According to analysts at Ambit Capital, there is room for margin expansion of 300-400 basis points from current levels. This, according to them, will be led by premiumisation in non-glucose biscuits, higher pricing power provided by impulsive/indulgence-based products and continued internal efficiencies.

Britannia's revenues are expected to grow faster. While revenues in the December quarter were up 13 per cent year-on-year, the rate of growth should improve on the back of higher volumes, premium products and new launches. 

The company indicated that its brand investments, rapid growth in weaker states and higher rural market demand helped revive volumes. The volumes had been impacted over the past year by demonetisation and liquidity issues with channel partners. 

Analysts expect the double-digit growth trend in volumes to continue in the March quarter, led by the company’s initiatives on distribution expansion, innovation and a lower base. 

In addition to existing products, incremental growth will come from new categories and regions. The company has planned launch of 50 products over the next 15-18 months, including category extensions for biscuits, cakes, rusks and dairies as well as entry into the croissants category. 

It will be spending about Rs 10 billion over the next two to three years at the Ranjangaon plant, which will support the new products and help scale up its dairy business. While the amount is equivalent to its estimated annual net profit for FY18, it will add 65 per cent to its gross block (assets) of Rs 16 billion, which currently helps generate annual turnover of Rs 100 billion.

Britannia is also looking at Nepal to increase its geographic footprint. Given a strong long-term prospect for the business and the company’s initiatives, analysts believe there is scope for good growth in top line and the bottom line fronts. The transition of the company from a biscuit maker to a full-fledged food and beverages player with increasing presence in both India and international markets will add to the sales growth. Its dairy business too has immense growth potential. 

Most brokerages are bullish on the company though it trades at a 20 per cent premium to the FMCG sector with a valuation at over 50 times its FY19 earnings estimates.