Britannia eyes 50-50 biscuit plan

Analysts who recently visited Britannia’s largest manufacturing plant in Ranjangaon, Maharashtra have come back pleased. The facility has 15 manufacturing lines out of which nine are for the biscuits business, which contributes 10-12% of volume. The rest of the production lines cater to cakes, croissants, rusks, snacks and dairy.

“The Ranjangaon facility is an essential ingredient in Britannia’s transformation journey, from being a biscuit-maker to a total foods company,” said analysts at Nuvama Research in a report on 19 June. In FY23, the non-biscuits portfolio formed about 23% of revenue. Britannia aims to increase this share to 50% in the long run.

The Ranjangaon factory offers Britannia several cost advantages. For one, it has reduced freight cost by lowering the distance required to travel to market. Secondly, the overall wastage is low in the biscuits category. Also, the saliency of own manufacturing is moving up and that would further provide an upper hand on the cost front. The Ranjangaon plant would further see addition of 3-4 new biscuit lines. The contribution to volume may inch up to 14-15% in the near to medium term. While there is scope to expand operations at the facility, one needs to watch for any capacity concentration risk.

Analysts at Nomura Financial Advisory and Securities (India) who visited the Ranjangaon plant note a few value-added products such as JimJam have been running on three shifts for some time. Britannia’s non-biscuits category is gaining traction. New products like croissants have moved up to two shifts from one, showing consumer acceptance, said Nomura analysts.

Further, to capture cheese market in India, Britannia entered a joint venture with Bel SA. The commercial launch of the cheese line through this joint venture is expected to be at the end of FY24.

However better execution could aid the share of non-biscuits segment. “We believe factors such as robust opportunity in core biscu-its, Britannia’s limited domain knowledge in adjacencies and negative margin mix have hurt its diversification agenda,” said Emkay Global Financial Services analysts in a 14 June report.

Coming to capital expenditure (capex), Britannia expects FY24 capex to be ₹500-600 crore, which would be largely investment in dairy. Emkay’s analysts note that Britannia’s significant capital spending over FY16-FY25 would help prepare for demand acceleration and showcases management’s confidence in the business.

For now, investors in the stock are sitting pretty on handsome gains given that the shares have risen 47% in the past one year. The packaged foods company’s volume and margin performance over many quarters along with market share gains have imp-ressed the Street. But, after a steep run-up, valuations are now pricey. The stock trades at almost 53 times FY24 estimated earnings, showed Bloomberg data. Significant gains could be limited in near term.

In FY24, with the effect of price hikes waning, Britannia’s volume trajectory is crucial since growth would be volume-led. For this, rural and urban demand needs to pick up pace. In FY23, volume growth stood at 2-3%. Besides volume, margin performance requires closer tracking. Britannia hit multi-quarter high on gross margin (44.9%) and Ebitda margin (19.9%) front in March quarter. But a replication of the same seems unlikely in coming quarters due to elevated costs of inputs such as dairy and flour.

Updated: 23 Jun 2023, 02:08 AM IST