Anubhav Sahu
Moneycontrol research
Britannia’s double-digit volume growth is primed by expansion of its distribution reach in rural and northern states. At the same time, improving portfolio range, focus on premiumisation and effective cost control aces its margin profile. The company’s expanding manufacturing footprint is in sync with its enlarging distribution reach and portfolio.
Double-digit volume growth in Q2 FY19 Consolidated sales in Q2 grew 12.7 percent year-on-year (YoY) aided majorly by low double-digit volume growth in the domestic business. The latter continues to benefit from ramp-up of distribution network, with a focus on direct reach, improved demand in rural market and higher growth in northern states.
Gross margin expanded 240 basis points (100 bps = 1 percentage point) on benign commodity cost (price decline for sugar and milk). Commodity inflation was reined in at 4 percent due to inventory and tactical management through forward covers. However, the 15.8 percent improvement in earnings before interest, tax, depreciation and amortisation (EBITDA) margin was restricted to 100 bps on higher other expenses (advertising spend: 20 percent).
Improved retail reach and innovation Britannia has a current direct reach of about 2 million outlets (versus 1.55 million in FY17) and is expected to add about 0.5 million outlets in the next two years, with a major chunk of distribution expected to unfold in northern states. The company has a major distribution reach gap with market leader Parle in northern states.
The FMCG major has a series of new product innovations and launches on anvil. It has entered the cream wafers category, wherein market size is expected to be around Rs 450 crore. In case of croissants, a joint venture with Greek-based baker Chipita is expected to be launched by 2018-end. It has begun commercial operations at its Ranjangaon plant with the production of Marie biscuits and cakes. At full capacity, this plant is expected to contribute about 10 percent of total revenue.
Foraying further into the dairy segment, the management has launched dairy whitener jar and milk shakes (tetra packs). In terms of new plants, its Nepal unit is expected to operationalise by Q4 FY19.
Outlook Overall takeaway for the snacks industry is positive as double-digit growth in rural areas continue with the accelerated growth seen in northern states. While the management’s attempt to expand its portfolio and focus on high margin products is commendable, increasing competition in premium biscuits and cheese categories needs to be watched carefully.
It is noteworthy that unlike southern states, wherein the company has significant market share (over 50 percent), its share in the northern states is in teens. Hence, the current expansion in distribution reach and growth in northern markets holds promise.
The management outlook on operating margin remains positive. As far as the company is concerned, commodity cost is covered till the middle of Q4 FY19. It is also aiming at a price increase of about three percent in Q4. Bulk of its cost saving target (Rs 250 crore) is expected to unfold in the second-half. Strategic changes in businesses like bread is a positive, wherein the company is now providing raw materials to vendors unlike earlier. This step is expected to remain margin accretive.
Given the improved operational performance, project execution and recent correction in the stock (15 percent from its 52-week high), we are now constructive on the stock. Valuations are still elevated (46 times estimated FY20 price-to-earnings), but higher growth emerging from new launches and increasing distribution reach is a positive.
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