Ever since the Covid-19 pandemic broke out, the foods segment has been the main growth driver for FMCG companies. The June 2020 quarter volume growth (year-on-year) for Britannia Industries, which came in at 21.5 per cent, is a testimony to this.

Early restart of production after the easing of lockdown and expansion as well as focus on select products that bring the maximum revenues paid off during the quarter.

With the pandemic not seeming to go away soon, in-home consumption is expected to continue to boost volumes for food companies in the near term, and Britannia will be a beneficiary.

Over the medium term, Britannia’s efforts to become a ‘total foods company’ by improving its presence in allied sub-segments such as dairy, wafers and croissants bode well for volumes as well as margins. With prospects being bright, the stock has moved up sharply since the March 23 low, gaining 80 per cent.

However, the valuation provides some comfort. Britannia trades at a discount to FMCG behemoth Hindustan Unilever, which is slightly on back foot now, considering that a chunk of its portfolio is in the discretionary consumption space.

While HUL trades at 62 times its estimated earnings for FY21, Britannia trades at 49 times. Investors can make use of corrections to buy the Britannia stock.

Britannia has been able to tide over the pandemic-induced restraints during the April-June quarter by focussing on improving its reach as well as optimising production to suit demand. The company focussed on 20 per cent of the products that bring 80 per cent of the revenues — such as Milk Bikis, Marie, NutriChoice (digestive), Good Day and cream biscuits.

This helped improve productivity and optimise costs, and brought in better utilisation of manufacturing capacities. From around 19.7 lakh outlets as of March 2020, the company improved its direct reach to 21.5 lakh outlets at the end of the June quarter.

With the firm getting about 37 per cent of its revenues from rural areas, the fact that rural India has been so far less impacted by the pandemic, too, helped Britannia. It added 3,000 preferred dealers in rural areas in the June 2020 quarter.

With the modern trade channel being impacted due to closure of malls etc, the company’s strong foothold in general trade (sale through local stores/smaller outlets) helped. Going forward, the rise in in-home consumption is expected to continue in the near term given the localised restrictions on movement and eating out across the country.

Expansion in offerings

Long-term prospects are also sanguine. While at least two-thirds of its revenues come from biscuits, over the years, the company has been diversifying its mix. In this context, it is betting on its dairy business. Currently, products such as cheese, yoghurt and dairy whiteners are available. It recently extended its portfolio into value-added products such as dairy drinks — milk shakes and lassi .

With a view to improving efficiencies and margins, Britannia is expanding its back-end capabilities of the dairy business, such as setting up a larger procurement pool for milk. Wafers and croissants are another area. But these businesses are quite small now, contributing only about 2 per cent to overall revenues. The fragmented nature of the market for wafers and low market penetration of both these products vis-à-vis biscuits promise good prospects.

To cash in on the demand for ‘natural’ and ‘wellness’ products , the company also plans to launch biscuits and dairy varieties fortified with vitamins, minerals and also with natural ingredients such as ginger and turmeric.

Margins expand

For the quarter ended June 2020, the company recorded a 26.5 per cent growth (year-on-year) in consolidated sales to ₹3,384.46 crore. With volumes growing at 21.5 per cent, the remaining came from price and superior mix.

Operating margins improved sharply from ₹14.03 per cent to 20.9 per cent.

Lower prices of inputs such as flour, refined palm oil and milk helped.

The company also cut down on advertising spends by about 200 basis points. Thanks to a strong operating performance, consolidated profits doubled to ₹545 crore.

With volumes growing by low single digits in 2019-20, the lower base, coupled with higher demand, could continue to support volumes this fiscal.

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