Stock Pick From The Food & Beverages Sector

Here Is Why:

• After Topline, now focus shifts on margin expansion 
• Consistent dividend payment for last 10 years
• Better positioned in its strategy of using price hikes and a richer product mix

Britannia Industries, the name needs no introduction to the Indian consumers. This company enjoys one-third share in the branded biscuit segment of the country whose market size stands at USD 2.2 billion. With the renewed consumption expenditure trend emerging from the urban markets as well as from the rural markets, the company is well poised to witness growth going forward. In the past seven years the focus of the company has been on increasing the topline where it has been successful. The topline has grown at a CAGR of 14% since FY07 till FY13.

But, after FY13, rather from the last quarter of FY13, the company has again moved its focus towards improving the margins. If we look at the margins operating levels are at 5.28 per cent for Q3FY13, but it has improved substantially to 8.54 per cent for Q2FY14. With new CEO at the helm, the company has guided its focused efforts to drive efficiencies in back-end through cost management program, improvement in the product mix towards high value-added products and price increase taken by company.

Also, the company has decided on the manufacturing strategy, where it will focus more on expanding its reach to the consumption markets through in-house manufacturing especially for its premium products. The management aims to push up the proportion of in-house manufacturing from the current levels of around 45 per cent to 65 per cent in next few years. This is surely a positive step towards a big leap forward.

Britannia appears to be positioned better in its strategy of using price hikes and a rich product mix (new and premium products) to combat rising costs. Compassionate commodity price and change in sales mix will drive the margin and will help the company maintain its margins going forward. Apart from this Britannia enjoys strong operating cash flows, consistent dividend payouts and healthy return ratios which is a positive point.

Coming to the financial front, in September 2013 quarter the topline of the company grew by 13 per cent on YoY basis to stand at Rs 1594 crore. This is mainly due to the superior product mix and higher price realisations. Volume growth is estimated to be in low to mid single digits. OPMs rose by 435 basis points on YoY basis to 8.6 per cent on account of higher gross margin and tight cost controls. The advertising expenditure as a percentage of sales too was down by 16 bps on a yoy basis. The bottom-line grew by 113% yoy to Rs 96 crore aided by a strong operational performance. On the valuation front the stock trades at a TTM PE of 32x which is cheaper than its peers like HUL and Nestle India. The renewed focus on margin expansion is likely to augur well for the company and we may see valuation expansion. We recommend a ‘Buy’ on the counter with a price target of Rs 1010 for one-year time horizon.