Britannia investors need a volume treat

“With the company delivering better-than-expected financial results during FY23, Britannia’s earnings expectations were reset. Thus, the valuation of the stock gets re-rated,” said Amnish Agarwal, Head of Research, Prabhudas Lilladher. According to the perspective, Bloomberg data, the one-year forward price-to-earnings multiple is now around 47 times versus 40 times at the start of FY2023, Agarwal explained.

After facing margin pressure for several quarters, Britannia’s consolidated EBITDA margin has grown consistently year-on-year in the last three quarters. The strong margin performance in recent quarters was led by a confluence of factors such as price increases, cost efficiency measures and declining commodity costs.

In fact, during the March quarter (Q4FY23), the company’s gross margin and EBITDA margin reached multi-quarter highs of 44.9% and 19.9%, respectively. Solid margin performance comes when inflation levels are high. In Q4, the consumer food price index was higher year-on-year. Note that the EBITDA margin was also partly supported by the PLI push of 90 crores, some of which pertain to earlier periods. Adjusting for this, the Ebitda margin beat some analysts’ expectations.

The question to ponder is what’s next? While the prices of some items such as palm oil and laminates are on the downside, some other inputs are on the upside. The cost of flour, which accounts for the largest portion of their input costs, was up 4% sequentially in Q4 and up 21% year-over-year. Inflation is also being seen in dairy products. These pressures are likely to persist in the near future. Britannia expects pricing changes in some categories to drive volume growth and market share gains.

Overall, the company expects gross margin to hover around FY23 levels of 41% in the coming quarters. EBITDA margin is likely to moderate from the high seen in Q4 and the full FY23 of around 17.5%.

But volumes will be in focus in FY24. “FY24 is likely to be a volume revival story for Britannia,” said Alok Shah, an analyst at Ambit Capital. growth seen in FY23.” Also no further increase in prices is expected.

In FY23, volume growth was in the 2-3% range. Britannia expects volume growth in FY24 to be better than FY23. In Q4FY23, the number of packs sold was strong.

It helps that the company continues to see market share gains. Britannia has widened the market share margin with no. Number 2 company in the biscuit portfolio. It also expanded its presence in the rural market. This is led by strong distribution capabilities and brand strength. The uptrend is expected to continue.

Meanwhile, the company’s diversification strategies are on track. In FY23, the non-biscuit portfolio grew by 1.5x. The biggest categories viewed here are Cake, Rusk, Dairy and Bread. 600-700 crore revenue each in FY23. “(At least some) success of new segments and ramp-up of adjacent categories is imperative. The outlook looks much better on this,” said analysts at ICICI Securities.

As it stands, Britannia shares are flirting with their 52-week high Monday saw 4,700. “For now, most of the positivity is reflected in valuation multiples, and we do not see further expansion in valuation multiples in the near term,” Shah said.