Demand momentum could stay for 6-9 months – Britannia

Update on the Indian Equity Market:

On Tuesday, Nifty ended 1.3% higher at 11,170. The top gainers for Nifty 50 were Power Grid (+6.4%), IOC (+5.7%), and BPCL (+5.4%) while the losing stocks were Bajaj Finance (-4.0%), Bajaj Finserv (-3.5%), and Britannia (-2.4%). Sectoral gainers for the day were PSU Bank (+2.1%), Bank (+2.1%) and Financial Services (+2.0%) while the losers were Pharma (-1.5%) and FMCG (-0.8%).

Edited excerpts of an interview with Mr Varun Berry, MD, Britannia Industries Ltd; dated 21^st July 2020 from Economic Times:

• Britannia started completely on the back foot. They were not sure where they were going because factories were closed, and distribution systems were in a disarray.
• It was everyone with their shoulder to the wheel, executing at a rate which was outstanding.
• The demand for food that human beings eat is about the same. It is just that there was no out of home or on-the-go consumption happening during this time. It was all home consumption and that gave them an advantage, he added.
• There was some amount of larder stocking but that was at the beginning of this pandemic. Thereafter, it has been regular consumption for most consumers.
• The demand momentum is going to continue, albeit at a slightly slower pace as they go through the year.
• In the last seven years, Britannia has done a lot of work in rural areas and that is keeping them in very good stead as far as the numbers are concerned. The rural trends are a lot more aggressive than urban trends. Even the pandemic has not hit the rural consumers as much as what they are seeing in the urban centres. From 21,000 rural distributors in February, they have been able to take this up to 22,000 distributors in June.
• He doesn’t think that 21% margin is sustainable but they are going to make sure that they try and see whatever they can get out of it, there will be almost 50% of this will go right back because advertising and sales promotion will get back to normal as soon as they have a full product out in the market. Similarly, there are certain other costs which will get back but Britannia is looking at every possibility of getting as much out of this period so that it can get as many savings out of this.
• Britannia is not seeing inflationary trends as far as the raw materials are concerned. On all of the raw materials, it has been a very reasonable level of inflation at about 3% and Britannia sees that to continue through the year.
• The distance travelled by Britannia’s biscuits has come down from 370 km to 320 km during the last quarter so shortening supply chains, getting products domestically all of that is becoming important.
• There was a huge surge in modern trade in the past three-four years, modern trade was growing at almost 2-2.5 times the growth of the traditional trade business but during this pandemic, people are depending more on their neighbourhood stores and hence traditional trade has started to see a huge rebound. Britannia has to make sure that it takes that into its plans as well.
• Their bread business has outgrown its overall bakery business, not just in terms of top-line but also in the bottom-line sense. Similarly, their cheese business has grown almost two times the overall growth. He is of a strong opinion that these are not sustainable growth numbers because they are one-off, but it is just giving them a very clear outlook about the opportunities and areas they can concentrate on.
• There is down-trading happening as people are not going out and eating in restaurants. Biscuits are the cheapest form of the snack and it comes from a highly trusted company and a highly trusted brand. Within the category, for Britannia, there has been no downgrading. He has heard from a competitor that there is serious down-trading in their portfolio but from Britannia’s product portfolio, it has been the premium products which are holding sway.
• The R&D centre is working overtime on the kind of products that the consumers are looking for. The first objective for Britannia was to match the core but beyond that, they have gotten into categories and a lot of work is happening in those categories. Market research, insights work, could not happen during the four-month period of lockdown and that has delayed the rollout of some of their products. But they are going to be back with a bang as far as category growths and new innovation of products are concerned. Britannia is also working on some immunity products and is doing research to make sure that it brings in absolutely the right products which give the consumers the genuine results they are looking for.

Consensus Estimate: (Source: market screener website)

• The closing price of Britannia Industries was ₹ 3,883/- as of 21-July-2020. It traded at 50x/47x/41x the consensus EPS estimate of ₹ 78/82/95 for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 4,064/- implies a PE multiple of 43x on FY23E EPS of ₹ 95/-.

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