The Hindu Business Line : Britannia Industries: Hold

SHAREHOLDERS can hold the Britannia Industries stock, given its relative low valuation vis-a-vis other FMCG players. At its current price-earnings multiple of about 15 times its trailing 12-month earnings, the stock valuation is at a discount to other FMCG peers, which are hovering at 20-22 times. However, significant price appreciation on the stock is unlikely in the near term. The company's numbers for the June quarter display a continuing trend of decelerating sales growth, suggesting loss of market share to rivals in the biscuit business.

Profit growth has been outpacing sales growth due to cost savings. This is likely to continue as the company ramps up production in the newly-commissioned manufacturing facility in Uttaranchal and reaps tax savings. The company's ongoing buyback programme may also provide a stable underpinning to the stock price.

Sales growth losing steam

Britannia Industries' sales growth for the just ended June quarter was at 2.7 per cent, indicating that the company grew at a much slower rate than the sector, which posted double-digit growth. Sales growth has also been on a steady downward spiral since the December quarter of 2004, decelerating from 12 per cent in September 2004 to the present 3 per cent. The skidding sales growth could be a sign that competitors such as ITC's Sunfeast are eroding Britannia's dominance in the biscuit market.

ITC has been steadily adding to its biscuit portfolio, with products such as Marie Light, Sunfeast Milky Magic, and rolling out a wide range of cream biscuits under the Sunfeast banner. This enhances competition for Britannia at the premium end of the market, which it has so far dominated with its `Treat' range of cream biscuits. In the mid-priced segment, with regional competitors such as Surya Foods (Priyagold) expanding distribution reach, there has been a significant erosion of pricing power, with product prices remaining unchanged for over two to three years now. These appear to have taken a toll on Britannia's market share and, thus, sales growth numbers.

The long-term outlook for Britannia's business will hinge on a revival in sales growth. This will depend, for now, on the success of product launches such as Duet Treat, and buoyancy in rural market growth — a key market for the Tiger brand.

Profit growth robust

While sales growth is winding down, profit growth at Britannia continues to be robust. Net profits for the June quarter rose a healthy 22 per cent, after adjusting for exceptional items that magnified the previous year's numbers and suppressed this years'. This is notable given the inflationary trend in prices of inputs such as sugar and wheat in this particular quarter.

The significant expansion in the company's profit margin suggests that the restructuring measures put in place over the past year are paying off. Over the past year, Britannia has closed its manufacturing facilities at Mumbai, reduced its workforce through a VRS and streamlined its procurement and supply chain. As a result of such measures, cash flows from operations have risen about 80 per cent in 2004-05 and debt has been trimmed to negligible levels.

Likely to outpace sales growth

Profit growth could continue to be robust in the coming quarters, as the company shifts a substantial portion of its biscuit manufacture to its new facility at Uttaranchal, a tax-free zone. Though this unit was commissioned in April, the company expects the facility to ramp up to full capacity by the third (December) quarter of this year. Given that Britannia's excise and tax outgo has been almost flat in the June quarter, one can assume that the benefits from the excise and tax savings at the new unit are yet to reflect in a big way on the company's numbers. This offers promise for a further expansion in profitability over the next couple of quarters, if the company manages to keep a tight rein on input costs.

The superior cost-efficiencies in the new unit could also help relieve some of the pricing pressures on Britannia and help it offer better value on its brands.

Triggers

Investors should also watch for a couple of additional triggers to the Britannia stock price. The company has been steadily shrinking its equity base through buyback of its shares from the open market. The fourth tranche of the latest buyback programme was concluded in 2004-05, at a maximum price of Rs 650 per share. Announcements on the next tranche of buyback, if any, are awaited.

If Britannia decides to continue with its open market buyback programme, it would be a positive for the stock, as buybacks have proved to be good tools to protect against downside in stock prices for other FMCG stocks.

Second, Groupe Danone, one of Britannia's overseas co-promoters, has recently been the object of speculation about a possible takeover. Though nothing concrete has happened, any possible consolidation of Danone's food business at the global level with another strong FMCG player could have implications for Britannia Industries. Shareholders need to watch out for developments on both these fronts, so that they can be factored into the investment decision.

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