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Britannia Industries Ltd’s soggy Q1 FY20 leaves a bad aftertaste for investors

Investors will find Britannia Industries Ltd’sJune quarter results unappetizing. True, consumer staples firms are facing a demand slowdown and, as such, expectations from the company were not running high. Still, Britannia’s Q1 performance is disappointing, with growth being much lower than peers. To add to that, the management’s commentary on demand outlook was discouraging.

“Britannia management all but ruled out a quick recovery in demand, with its commentary being sharply weaker than we have heard from other consumer packaged goods (CPG) managements,” said analysts from Kotak Institutional Equities in a review report.

In a post-earnings conference call, the management said: “If the consumer is thinking twice before buying even a 5 product, then obviously there is some serious issue in the economy.” In that backdrop, it’s hardly surprising that Britannia’s shares have fallen by 3% since it announced its Q1 results on 9 August.

Perhaps, the most disappointing aspect is the subdued domestic volume growth of 3%, a marked deterioration from the past few quarters. Consolidated revenue growth of about 6% appears discouraging, missing Street expectations.

“We are surprised by the growth divergence between Britannia (biscuits) and other players (categories). It is worth noting that (1) Nestle (F&B play akin to Britannia but much more urban centric) reported strong 12%+ growth driven by chocolates and noodles, and (2) Dabur (rural play) reported 10% volume growth despite rural weakness,” said Kotak’s analysts.

On the profitability front, growth slowed further with earnings before interest, taxes, depreciation and amortization declining by 69 basis points year-on-year to 14.6%. Even though revenue growth rates fell, some costs, such as employee and other operating expenses, rose as much as 11%.

Additionally, the consumption slowdown woes are likely to continue. Analysts from Jefferies India Pvt. Ltd said: “Britannia’s earnings trajectory is witnessing a sharp slowdown from the past given the low hanging fruits of market share gain in biscuits and overall cost savings are captured in the base.” In a report on 12 August, it added: “While we like attempts to build categories for future, they would remain margin and ROCE dilutive in short term. Consensus expectations and valuations remain rich relative to actual delivery.” ROCE is return on capital employed.

So far in FY20, Britannia’s shares have shed nearly 19% of their value, underperforming the Nifty 200 index. Still, with valuations at about 47 times estimated earnings for FY20, investors may not be tempted to bite the stock.

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