Britannia Industries: Munch more cookies

Sector leading growth, improving profitability should help achieve healthy growth in earnings

Britannia Industries, which scaled to its all-time high of Rs 3,435 a share a fortnight ago, has corrected to Rs 3,000 levels. The Street is bullish on the company; analysts at Sharekhan and IIFL have given price targets of Rs 3,650-3,960. Among key reasons for the bullishness is the firm’s ability to post industry-beating growth and identify new opportunities.

Britannia’s strategy to grow its business profitably by improving supply chain, cutting costs, focusing on premium products and expanding reach, has worked wonders for it. Declining commodity prices have also provided support. During FY13-15, while sales is up 28 per cent to Rs 7,176 crore led by double-digit volume growth, PBIDT margin is up from 7.5 per cent to 11.25 per cent in FY15. Thus, net profit has risen 167 per cent. Even in the June 2015 quarter, margin was up at 15.2 per cent and profit surged 56 per cent year-on-year. This is commendable given the subdued demand environment.

Britannia’s strong performance is seen sustaining. Among the reasons is its direct reach increased to one million outlets from 730,000 at end of March 2015, which will be scaled up further to 1.25 million outlets by FY16. Unlike many of its peers, Britannia still derives 60 per cent of sales from urban areas. While distribution expansion will help drive up market share in value segment, Britannia has also got its strategy right on new premium products. Analysts say Britannia is gearing up to get a strong foothold in the super-premium biscuits space where competition is minimal, and this will drive volumes, market share and profits. Its strategy to introduce new products by extending existing brands has also proved cost effective. A new innovation centre along with a plant is being set up at a cost of Rs 60 crore.

Analysts at Sharekhan note: “Britannia has chalked out an aggressive growth strategy to sustain double-digit volume growth in the biscuit segment by enhancing its product portfolio and distribution reach. Britannia is also striving to expand to other categories like dairy (market size Rs 75,000 crore) and adjacent snacking categories (Rs 30,000 crore).” This should help it grow ahead of industry.

Britannia’s profits are seen growing by 25-30 per cent annually in the next three years driven by the domestic business as well as sustainable turnaround of its international operations.

High stock valuation leaves little room for error. Any reversal in commodity prices or surge in competitive intensity could hurt performance and sentiments. At Rs 3,009, the stock is trading at 27 times FY17 estimated earnings.