The stock is currently trading at an elevated multiple of 54x FY20 estimated earnings compared to its own history and FMCG universe.
Britannia's Q3FY19 consolidated sales grew 11 percent year-on-year (YoY) helped by the domestic business which continues to benefit from a ramp-up in the distribution network, new product launches and higher growth in northern states. Volumes grew 7 percent, while price and a favourable product mix contributed 2 percent each to the growth.
Sequentially, however, sales were flat.
The company continues the emphasis on extending distribution reach with the focus on rural geography and a foray into the northern states. Current direct reach is about 2.08 million outlets versus 1.55 million in FY17. It is expected to add about 0.5 million outlets in the next two years with a major chunk of the distribution expected to unfold there. It’s noteworthy that major distribution reach gap between Britannia and the market leader Parle is in the northern states.
Rural distribution is expanding rapidly – rural preferred dealers count stands at 17,900 compared to 14,400 at the start of FY19.
The company faced moderate inflation (4 percent) in the prices of key raw materials with a higher cost of flour and palm oil offsetting the decline in sugar and milk inputs. The lower reported change in raw material cost was also due to change in business model for bread product line (2 percent impact) and cost efficiency measures (3 percent impact)
In the quarter gone by, the company witnessed volume growth of 7 percent which was lower than expected. Despite the slowdown in the market place in recent months, high single-digit volume growth is still one of the best displayed by the FMCG universe (average: 6.6 percent YoY).
EBITDA margin, while benefitting from gross margin expansion was partially offset by higher employee cost and other expenses.
The company updated on its capex plans which include commissioning of additional cake & biscuit lines at Ranjangaon plant. It’s noteworthy that at full capacity, this plant is expected to contribute about 10 percent of total revenue.
Additionally, the Greenfield project in Nepal is on track and is expected to be commissioned by end of the current year.
The product strategy remains bridging portfolio gaps in the bakery business and other adjacent macro snacking business opportunities. In this context, the company has already launched new cake/ Swiss rolls formats and in the current quarter, the Croissant product line will be launched. In the dairy segment, the milkshakes segment (Brand: WinKin) grew in double-digits.
Overall quarterly result underlines a steady run rate with benefits so far from the increasing distribution reach, addressing gaps in product portfolio and geography and cost-saving program. We take note of the fact that there has been a demand moderation after Diwali. However, we expect government’s rural-focused policy measures and company’s corporate strategy measures - distribution, new capacities and geographies (Northern states, Nepal) – should help in maintaining a high single-digit volume growth in medium term.
Further, as indicated by the management, we expect about 4 percent pricing growth to follow in FY20. Along with better product mix advantage this should help in about 15 percent topline growth next year.
Additionally, the company’s cost-saving programs, moderate food inflation outlook and improving product mix should remain supportive for the margins. Higher other expenses and employee costs this quarter due to new units would start moderating on benefits from operating leverage.
In the medium-term, Britannia remains a beneficiary of distribution reach catch up with the segment leader Parle and other FMCG players. Its rural exposure remains in low 20 percent of sales but expanding rapidly – 24 percent increase in the dealership in current fiscal. Further, it is witnessing a supernormal growth in northern states – double-digit sales growth in the last three years.
However, the stock is currently trading at an elevated multiple of 54x FY20 estimated earnings compared to its own history and FMCG universe. Therefore, though we are enthused about the growth strategy it should be accumulated only on declines for a long term investment horizon.
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