Britannia's focus on cost efficiency, capacity expansion to give it more bite

Anubhav SahuMoneycontrol Research

In a sector weighed down by massive destocking and resultant volume de-growth, Britannia’s Q1 results stand tall with a positive volume growth. Though GST did impact the company’s financials, what caught our attention were the initiatives it took to increase capacity expansion and expand the direct reach in distribution.

Q1 2018: Despite GST, volume growth was positive

Britannia’s Q1 2018 consolidated sales grew by 6 percent, aided by topline growth in domestic business (92 percent of Q1 2018 sales) but was partially impacted by international business. Domestic business benefitted from about 3 percent volume growth despite GST related destocking and witnessed a 7 percent sales growth. International business was impacted by a difficult geopolitical situation in the Middle-East similar to what was reported by other FMCG players.

EBITDA margin for the India business declined by 28 bps impacted by higher raw material and employee costs, partially offset by cost efficiency initiatives and lower advertisement spends.

Britannia’s standalone financials

Increased cost efficiency targets to protect margins

In the recent conference call, the management revised the cost efficiency target for FY18 to 60 percent higher than FY17 savings (from earlier 40 percent). This is expected to result in about Rs 250 crore of savings in FY18. We expect this to help in protecting margins in an environment of intensifying competition.

The management further guided for a double-digit volume growth post GST transition.

Capacity expansion: 16 percent capacity addition expected by end of CY 2019

The company elaborated on its ongoing expansion plans. It is undergoing a capital expenditure of about Rs 400 crore for the current fiscal year mainly for its plants in Mundra (SEZ) and Guwahati.

Both plants are expected to be commissioned by the end of current fiscal year. Capacity expansion on account of these two plants would be about 60,000 MT which is 6 percent of the current in-house capacity.

Britannia has recently announced a mega food park in Ranjangaon, Pune, wherein, capacity addition in the first phase is expected to be 1 lakh tonnes to be completed by end of CY 2019.

Hence, by end of 2019, with the new capacity additions, production mix of in-house to contract manufacturing would change to 65:35 from the current 55:45.

Among other new initiatives, a joint venture with the Greek-based baker, Chipita is likely to fructify in the proposed food park in Pune with the investments to the tune of Rs 85 crore.

Improved retail reach and innovation

Britannia has embarked upon an ambitious distribution expansion. Its direct reach has more than doubled over the past three years. Currently, the direct reach is about 1.56 million (33 percent of total) outlets. The company plans to add 0.2 million more in the current year.

Post GST, there has been a sector-wide increase in the direct distribution channel. Though direct reach was catching up in the sector, the reluctance of the wholesale channel post GST due to their historical lower tax compliance has aggravated the trend.

We feel positive about Britannia’s first quarter performance. Relative smooth GST transition and resultant volume growth have helped in the company snatching market share from national and regional players.

Increased emphasis on cost efficiency along with the continuing premiumisation help in maintaining margins in the backdrop of intensified competition. Further, expansion in international markets and production ramp-up in domestic business is supportive of volume growth.

The stock is currently trading at a multiple of 39x of 2019e earnings which is not cheap and close to the sector average. However, company’s positioning on value (premiumisation) and volume (capacity expansion) is positive which makes it a fit candidate for accumulation.

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