A worker stands next to a production line at the Britannia biscuit factory in New Delhi. (Image: Reuters)
Analysts were quick to dismiss Britannia after its Q1 FY23 earnings announcement, when the company reported a profit decline of 14 percent year-on-year (YoY). In July-end, the stock had 24 ‘buy’ calls, which dropped to 20 by August-end.
With 16 ‘hold’ calls and 4 ‘sell’ ratings, one could say 50 percent analysts were bearish on the stock for the months of August, September and October. As per Moneycontrol’s analyst tracker, the biscuit maker came in sixth in the list of ‘Stocks with Maximum Pessimism’.
Then came the Q2 surprise. While all fast-moving consumer goods (FMCG) companies reported margin decline in the September quarter due to high cost of inventory, Britannia’s EBITDA margins expanded to 16.3 percent from 15.5 percent in the same quarter last fiscal. The stock jumped 10 percent in the next trading session as the company’s market share climbed to a 15-year high.
What did the company do right?
In its earnings press release, the company said that it had added 28,000 rural preferred dealers, which led to consistent market share gains. According to analysts at Nuvama Research, biscuits is one of the few categories that is seeing revival in consumption, and Britannia earns over 70 percent of its revenue from this segment.
“Biscuits’ resilience is confounding in an environment where inflation is hitting demand for low-priced goods rather badly. Well, who said it’s easy to predict consumer behaviour anyway,” said JM Financial in a note.
Also Read: Britannia surges 9% on healthy Q2, market cap hits Rs 1 lakh crore; should you buy, sell or hold?
Meanwhile, margin expansion was driven by better factory productivity, wastage reduction and cutting distance to market, said the company in an investor presentation.
“We have developed packaging initiatives from a sustainable standpoint and have brought costs down. We are also reducing commitment charges paid to contractors, by optimising the capacities we take from them,” said top boss Varun Berry in an analyst concall.
Eating their words
Analysts are now again turning bullish on the stock after the resilient Q2 FY23 performance. Japanese brokerage Nomura has upgraded the stock to a ‘buy’ rating with a target of Rs 4,600 per share.
"The firm is demonstrating strong pricing power/brand strength in a challenging environment, with heightened innovation, (and) new launches seeing significant sales shift. We have increased FY23/24/25 earnings per share estimates by 4/7/10 percent respectively," it said.
ICICI Securities also upgraded the stock from ‘hold’ to ‘add’ with a target price of Rs 4300 per share. “Going forward, success of new segments like croissants, marble cake and ramp-up of adjacent categories is imperative,” it said.
As of November 11, the number of analyst ‘buy’ calls on the stock stands at 26, while ‘hold’ calls are 12 and ‘sell’ calls at 3.
Mutual funds devoured the stock in Q2
In July, mutual funds held 12.3 million shares of Britannia. In August, the number rose to 13 million. In September, it shot up to 14 million. It was among the most bought index stocks in each of these months.
SBI Bluechip Fund, ICICI Pru Balanced Advantage Fund and Mirae Asset Large Cap Fund were some of the buyers.
The stock currently trades at a trailing 12-month price-to-earnings ratio of 62.
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