Grande Cold Brew Valuations: Britannia Industries

I wrote this back in October. I might do this once a week, where I dive deep into a company. Please find my disclosures related to finance articles here.


Britannia Industries

Business Quality:

100-year giant!

Very few companies cross that milestone. The probability of survival is already on the side of the company.

Britannia’s main products consist of different biscuits which contribute 66% to the revenue.

The company has a great brand moat.

Britannia is a household name – it has been dominating the biscuit category for 100 years, over 70% of Indian households consume Britannia products, which becomes 80% in urban India and a staggering 90%+ in metros. The number of Britannia packs sold in a month is the same size as the population of the country!

The company sells brands which are recognizable names.

Perishable products and needs frequent replacement

Products are irreversible.

Simple products and do not need to innovate every year.

Because of such strong brand moat, Britania has a huge pricing power.

They also seem to have gained market share over Parle-G.

Red flags:

Health Conscious food: More people are reading the ingredients and counting calories. Britannia needs to launch healthy snacks and become popular among millennials. They have launched Nutrichoice Oats Chocolate and Almond made with the goodness of whole wheat flour, oats and almond and delightful taste of choco chips.

Management has warned about muted demand in domestic and international regions.

Fraud Detection:

Let’s see if the company has any potential frauds.

Modified C Score is 3 on a scale of 9. A lower number is better than a higher one. Britannia scored decently on this.

Let’s look at another ratio called Sloan ratio. Sloan ratio measures the quality of earnings. If the company’s Sloan ratio is between 10% and -10% quality of earnings are good. Anything above 10% and lower than -10% raises red flags. I like to look at the correlation between Sloan ratio and Earnings.

There have been 4 times in the last 10 years that the company’s Sloan ratio has crossed over 10%. This indicates poor earnings strength.

Let’s dig deeper. These poor earnings might be because the company is booking revenues aggressively. Looking at the trend of Receivable we can see that the collection days have gone up sharply last year, from an average of 7.4 days to 11.2 days. A lower number is better. It indicates that the company is able to collect credit efficiently.

A single year does not form a trend but this is something to track in the coming years.

Debt Doctor:

Their Debt to Equity and Debt to Earnings ratio is pretty low.

I also look at how the management is managing the capital.

Britannia has a very good Return on Invested Capital at an average of 35% over the last 9 years.

Management also scores high on ROE with an average of 40% over the last 9 years.

On looking closer I found that the management increased ROE by reducing the financial leverage and improving the net profit margin. Extra points for that!

Future Growth:

Biscuit sector is expected to grow at about 12%

Margin growth rate has slowed down. Putting some pressure on pricing power. But the profit margin is still pretty healthy at 15%.

Biscuits are estimated to be used by 90% of the Indian population. This leaves them with less room for expansion.

To solve this company is expanding internationally to Nepal and Saudi Arabia.

The company is also launching new products in the cake, filled croissants, and dairy segments.

Britannia wants to become “Total Food Company”.

There seems to be quite a bit of competition at least in the dairy segment. Might be difficult for them to compete.

Valuation:

Biscuit sector is expected to grow at about 12%. It seems fair to give them a higher growth rate (of about 15%) than the industry as they are the market leader. DCF model suggests a fair price around Rs.1800-Rs.2000. Which means that the company is overvalued.

Let’s look at it relative to its own history.

Britannia’s 5 years Median PE is 45. It currently trades at PE of 64.

Britannia’s 5 years Median PB is 18. It currently trades at PB of 18.

Britannia seems to be overvalued with respect to its own history.

Britannia is also overvalued compared to other FMCG companies.

Bottom Line:

– Strong brand moat

– Dependent on a saturated market of Biscuits

– Difficult to achieve a growth rate of above 15%

– The company is betting big on Dairy. If that picks up in the coming quarters they might be able to unlock more growth.

– It is not a value play. The company is trading at a high premium valuation.

– It would be a buy if it comes down 15%-20% in a market-wide sell-off.

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