Britannia’s rally to continue on demand revival

Its stock price is up 20% since the beginning of August, against 10% rally in Sensex

Biscuit maker Britannia Industries’ stock has been one of the top performers in recent weeks. The price of its shares has risen up 20 per cent since the beginning of August, outperforming the benchmark BSE Sensex and the BSE FMCG index, which have risen

10 per each.

Britannia was an outperformer on Thursday, too, closing the day with gains of 1.8 per cent, against a 0.9 per cent rise in the Sensex. The stock closed at a new life-time high of ~4,088 apiece, while the company’s market capitalisation is now less than two per cent shy of the

~1-trillion mark.

The recent rally in the stock has come after nearly a year of underperformance. The stock was almost stagnant between May 2020 and

June this year, ranging between ~3,350 and

~3,450.

However, the question is whether it can sustain the rally, given the continued weakness in consumer demand in the country and a steady erosion in

Britannia’s operating margins due to a mix of higher commodity prices and poor volume growth.

Britannia’s quarterly net sales was down 1 per cent year-on-year in the first quarter of financial year 2021-22 (Q1FY22) — its first decline in at least 15 years. At the same time, the company’s net profit shrank 28.6 per cent YOY in Q1 — its worst show in a decade.

More importantly, the company took a hit on its margins as operating expenses grew faster than revenues. Its Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin was down nearly a quarter to 17.7 per cent in Q1 to the lowest in eight quarters.

The company’s strong show in recent years was largely driven by the sharp rise in operating margins. Its annual profits have doubled in the last five years, even though net sales have risen only 50 per cent cumulatively during the period. Going forward, if margins shrink or remain at the current levels it may be tough for Britannia to report strong double-digit growth in earnings to justify its rich valuations. With a price-to-earnings multiple of 57x, Britannia Industries remains one of the most expensive index stocks, though it’s cheaper than peers such as Hindustan Unilever and Nestle India.

Analysts, however, say it’s not fair to look at Britannia through the prism of its financial performance in recent quarters. “Most FMCG companies, including Britannia, will see an improvement in margins in the forthcoming quarters as commodity prices, including cereal and cooking oil, cool down from record highs,” says Dhananjay Sinha, managing director and chief strategist at JM Financial Institutional Equity.

The Street also expects Britannia to gain from a consumption-led economic recovery in the second half of FY22 after a decline in consumer demand in Q1.

Analysts expect this trend to reverse. “We expect a robust incremental improvement in private consumption in the next two quarters that will translate into strong revenue and earnings growth for food-related companies such as Britannia Industries,” says Shailendra Kumar, CIO of Narnolia Securities.

Analysts are not too worried about the company’s record high valuations. “The valuations mean little in the current environment of abundant liquidity and a dash among investors for equity assets. What matters is incremental growth in earnings and we believe that Britannia can deliver that,” adds Sinha.