Stock Pick From FMCG Industry

Here is why:

• Strong brand recall and increasing reach

• Expanding business by turning into a snack and food company

• Margins not only sustainable but improving every year

• Considerable attractive valuation.

India is one of the bigger consumer markets for fast moving consumer goods (FMCG). However, the multinational FMCG company Nestle’s stock took a considerable beating over the ban on its flagship product Maggie due to higher lead content. Similarly, another domestic FMCG company ITC also faced similar kinds of issues for some of its products. These regulatory issues created considerable bearish sentiments over these FMCG stocks and led to corrections. However, FMCG player Britannia outperformed its peer companies during this drama. Interestingly, the valuation of the stock too looks attractive after a considerable sell-off across the overall market.

Britannia is a part of the Wadia Group, a major player in the Indian food market especially in the snack segment with a strong position in the domestic biscuit segment and a considerable presence in other bakery and dairy products. The company is the second-largest player in the domestic biscuit market and commands about 30 per cent market share.

Britannia is implementing an aggressive growth strategy to sustain the double-digit volume growth in the biscuit segment. It is planning to increase its reach by applying the hub-and-spoke model for its product distribution in rural markets. The company is now present in almost all villages across the country with population of over 10,000. The company has also implemented a strategy of launching five rupee packs for its largest selling brand ‘Good Day’ in these rural markets.

With its biscuit portfolio of leading brands such as Good Day and Tiger posting strong volume growth over the past four quarters, the company is now focusing on dairy products. The company is planning for ‘new to India’ products. For the current fiscal the total investment would be around Rs 400 crore for these launches. Apart from this, the company is also planning to expand to other categories such as snacking. The company is even planning to re-enter the breakfast market with relevant product offerings.

On the financial front, Britannia posted outstanding annual results. Its total income rose by 13.68 per cent to Rs 7,858 crore in FY15 as against Rs 6,913 crore in FY14 due to higher value growth on account of traction from its premium portfolio as well as increase in distribution network. Interestingly, its EBITDA increased by 37.74 per cent to Rs 864 crore in FY15 and the EBITDA margin expanded by 192 basis points to 10.99 per cent on a yearly basis. Furthermore, the net profit in FY15 stood at Rs 689 crore compared to Rs 395 crore in FY14 - growth of 74.18 per cent due to higher operating performance and 162 per cent growth in other income.

Over the years, Britannia’s operating profit margin has improved; it was 14 per cent in FY15 while it was only 7 per cent in FY13 because of improving revenue mix in favour of high-margin products, operating efficiency through increased in-house production, and falling commodity prices. Considering the company’s growth strategies, we expect further scope for improving the operating margins in the near future. After considerable correction in the overall market, the Britannia stock is trading at price to earnings ratio of 45.96x its trailing 12-month earnings per share. Considering factors like better operational performance and expected improvement in operational efficiency, we recommend buying this scrip.