Britannia’s consolidated revenues for FY20, FY19 and FY18 had increased by about 4.3%, 11.6% and 9.7%, respectively
Based on Bloomberg data, the stock currently trades at 48 times estimated earnings for financial year 2022
When the Street started to factor in the impact of covid-19 on consumer goods firms in February and March, shares of Britannia Industries Ltd were among the worst hit. In the markets’ recovery phase since end-March, that view has changed completely. Britannia is now the top-performing consumer goods stock, rising by almost 15% from its pre-covid peak. Shares of Nestle India Ltd, a close comparable because of its large foods portfolio, have been flat.
Within essential items, food is at the top of the pecking order. Both companies derive their revenue from selling food products and, increased in-home food consumption, puts them in a sweet spot. For now, Britannia appears to be ahead in the race among companies having a foods portfolio.
Last week, a plethora of brokerages released their June quarter preview for FMCG companies. Britannia is expected to see the strongest year-on-year revenue growth in the pack. For instance, JM Financial Institutional Securities Ltd and Jefferies India Pvt. Ltd estimate Britannia’s June quarter revenue growth at 22.6% and 22%, respectively. These are extremely impressive growth rates, especially at a time when most industries are grappling with a sharp decline in revenue.
It is also striking that these growth rates are far better than the company’s pre-covid show. For perspective: Britannia’s consolidated revenues for FY20, FY19 and FY18 had risen by about 4.3%, 11.6% and 9.7%, respectively. Krishnan Sambamoorthy, analyst, Motilal Oswal Financial Services Ltd, said: “About 80% of Britannia’s revenue comes from biscuits where demand would be resilient in covid-19 times, as Indians spend more time at home. Higher in-home food consumption doesn’t benefit Nestle as much in segments like infant nutrition, chocolates and confectionary."
The run-up in Britannia’s shares shows that investors are cognizant of the changing operating environment. While the Britannia stock is almost 15% higher than its pre-covid highs seen in February, shares of Hindustan Unilever Ltd and Dabur India Ltd have dropped by about 3% and 9%, respectively, from their February highs.
While these trends are heartening, valuations of the Britannia shares have become expensive. Based on Bloomberg data, the stock currently trades at 48 times estimated earnings for 2021-22. And it’s not as if all is hunky dory. Even as analysts expected Britannia’s fiscal year 2021 to end relatively better than many other firms, it remains to be seen whether these trends will sustain when the covid-19 impact starts subsiding. As mentioned earlier, the firm’s revenue growth was subdued in the past three years.
There have been concerns on capital allocation for Britannia as well. Last month, analysts from HDFC Securities Ltd said in its March quarter results update, “We remain cautious due to rich valuations coupled with group company investments (via inter-corporate deposits), rising gross debt and non-current investments."