It's been a rollicking ride for the stock of Britannia Industries, up 52 per cent in a year. The stock's price multiples have similarly shot up to 40 times from the 34 times trailing earnings last April.

Britannia had shifted focus to premium variants of its biscuit brands to improve margins, and consistently added to health and dairy line-up to broaden offerings. FMCG companies have also weathered spending cutbacks far better than other consumer segments. However, much of the potential for Britannia appears to have been captured in current valuations.

Competition abounds in both premium and mass segments from domestic and international players. Sales growth has been decelerating gradually for the past three quarters. Margins have also not improved significantly, and could face pressure from advertising costs. Nestle India, among the biggest listed food FMCG companies has already posted low revenue and profit growth for the March '12 quarter.

Peers in the FMCG basket such as HUL and ITC, which are more broad-based, trade at valuations below 35 times trailing earnings. Given the high valuations, investors can take advantage of the Britannia stock's good run and book profits on their holdings.

Losing steam

Sales growth for Britannia has been on a steady downward path over the past few quarters as competition bit and consumption in packaged foods slowed. Growth in the December '11 quarter slowed to 15 per cent, down from the 23 per cent in the December '10 quarter.

The non-biscuits segments for Britannia, comprising dairy, breads and cakes have been increasing contribution and offer higher growth rates. Even so, 80 per cent of revenues come from the biscuit segment; market growth in the overall biscuit segment has been suffering as inflation may have prompted consumers to scale down.

Britannia managed volume growth in biscuits of about 6 per cent in the nine months ended December '11 compared to the 16 per cent clocked in 2010-11. With inflation yet to cool off, packaged foods may continue to find the going tough. Sales could therefore slow more.

Competitive pressures

With the glucose biscuit segment beginning to flag on shifting consumer preferences, Britannia had moved into high-end versions of its flagship brands, introducing products such as Treat-O and GoodDay Chocochip. It also entered the health segment with its wide NutriChoice range, and the breakfast market with oats and other ready-to-eats.

However, Britannia is hardly alone in redirecting focus to the premium biscuit segment. ITC's stable has high-end variants of Sunfeast, while the other market biggie, Parle G, has the Hide and Seek range. International competition in the premium segment comes in the form of Kraft Foods and its flagship Oreo cookies. On the health front, GSK Consumer Healthcare has capitalised on its Horlicks brand, while international player, United Biscuits, has pushed its McVitie's portfolio.

Low margins

While Britannia increased thrust on premium variants of its biscuits, cheeses and breads, operating margins are yet to improve significantly. For the nine months ended December '11, margins stood at 6.8 per cent, up slightly from 6.4 per cent in the year ago. Operating margins for the previous financial years have also hovered in the 5-6 per cent range. FMCG peers have double-digit operating and net profit margins.

Stiff competition also means that Britannia may have to increase adspend to maintain market share of around one-third. Promotional expenses for the nine months ended December '11 increased 23 per cent. As a proportion of sales, adspend moved up to 7.5 per cent in the period, compared to the 7 per cent in the December '10 quarter. Given the norm of double-digit adspend to sales in the FMCG space, there is scope for this to increase. Operating margins could thus be subdued.

Some respite could come from slower price rise on key inputs such as wheat and sugar. Raw material costs dropped gradually to 63 per cent, as a proportion of sales, by the December '11 quarter from the 67 per cent in the December '10 quarter.

Sliding net profits

Sales have grown at a compounded annual rate of 18 per cent over the past three years to Rs 4,605 crore. Net profits, though, have declined 10 per cent in the same period to Rs 120 crore on higher operating and interest costs.

Unlike most FMCG companies which operate on low debt, consolidated debt-equity ratio of the company stood at one at end-September '11. Interest costs have doubled in the year 2010-11, though it remained flat for the nine months ended December '11. Even so, net margins are the lowest among peers at 3.7 per cent.

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