Britannia: Corrections may be good entry points for long-term investors

Besides higher off-take of high-margin products, benign input costs and cost control fuelled Britannia’s operating margin
While the food category is in a sweet spot amidst the coronavirus-led disruption, Britannia Industries' June quarter (Q1) results beat the already high Street expectations on Friday. 

The maker of Good Day brand, in fact, delivered results that were ahead of expectations on all fronts and raised the bar for peers like Nestle.

Besides brand loyalty, Britannia's strategy to push high-margin products at a time when product availability was more crucial in the current Covid-19-led environment as many small/unorganised players are struggling, coupled with increased focus on rural markets, which are less affected by the pandemic, were the key drivers of its Q1 performance.

The management, during the earnings call, alluded that it emphasised on 20 per cent of its product portfolio, which gets 80 per cent of its revenue.


It helped boost Britannia’s net sales, which grew by 26.4 per cent year-on-year (YoY) to Rs 3,384.5 crore in Q1, led by 21.5 per cent volume growth. According to Bloomberg, analysts had pegged net sales at Rs 3,265 crore. The firm, after its March quarter results, had highlighted that sales grew by around 24 per cent during April and May. Therefore, the 26.4 per cent sales growth in Q1 indicates further acceleration in sales in June.

The beat was sharper at the bottom-line level. Its profit before tax and exceptional items, which was up 81 per cent YoY to Rs 737 crore, was 36 per cent higher than consensus estimate of Rs 543 crore. This was mainly for a 634 basis point expansion in Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin to 21 per cent, the highest-ever for Britannia.


Besides higher off-take of high-margin products, benign input costs and cost control fuelled Britannia's operating margin. Its employee cost and other expenses (mainly advertising spend) as a percentage of net operating income fell by 46 basis points and 464 basis points, respectively, YoY.
Shirish Pardeshi, analyst at Centrum Broking, says: "Though such high growth rates may be difficult to sustain, Britannia would continue to report good numbers given the double-digit growth of biscuits category and further market share gains by the company. So, there is strong re-rating potential for the stock."

However, on Friday, in an overall bullish market (the Sensex was up 1.5 per cent), Britannia’s stock was down 1.8 per cent after the result announcement. This can be attributed to profit-booking after a 77 per cent recovery from March lows. Moreover, the stock’s one-year forward valuation of 54 times is also 21 per cent higher than its five-year mean. Thus, corrections could be good entry point for long-term investors.

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