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Investors with a two-year horizon, seeking a defensive option, can consider buying the Britannia Industries stock. Growth rates in food/snack categories within FMCGs have surged over the past year, suggesting that these under-penetrated segments have reached an inflection point.

Britannia Industries appears well placed to capitalise on market expansion in categories such as biscuits and bakery products to deliver strong sales growth. In addition, the likely moderation in prices of raw materials such as wheat and sugar (on improved supply and anti-inflationary policy measures) may also prop up the company’s profit margins from present low levels.

The Britannia stock also trades at a significant discount to peers in the FMCG space. At its current market price of Rs 1,452 the stock trades at about 17 times its FY08 earnings and 15 times estimated FY09 earnings (using conservative assumptions). Stocks such as Nestle India, ITC and Dabur — with presence in the foods business — trade at 20-30 times their forward earnings.

Though Britannia reported 53 per cent growth in net profits on a 15.6 per cent sales growth for 2007-08, both numbers do have an unsustainable component. Growth rates were bolstered by excise duty exemptions in last year’s budget and a low base due to a decline in profits last year. However, the company now appears well on the road to recovery.

Volume growth in the biscuits segment has moved up significantly, driven by new launches and low unit packs. While Britannia has expanded its Tiger franchise through low-priced packs and new variants, it has also added to its premium portfolio through brand extensions for Treat and NutriChoice. This has improved the product mix and may enhance margins in future. Over the past year, Britannia has countered rising input costs mainly through reduced pack sizes; selling prices on biscuits have been held for the past three years.

Heightened competition due to heavy brand-building outlays and market gains by ITC for its Sunfeast biscuits have curtailed Britannia’s pricing power and weighed on its stock in the recent past. However, competitive and pricing pressures in biscuits and bakery products may wane as the market expands and ITC shifts focus to some of its more recent FMCG forays such as shampoos, soaps and snack foods.

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