Stock pick of the week: Why analysts are bullish on Britannia Industries
Britannia’s market leadership, revenue growth in the fourth quarter, and recent underperformance that has brought down valuations have made it analysts’ top pick.
Though Britannia’s market share gain in the biscuits space continues, the company has been impacted by increased competition in its core biscuits portfolio and the ongoing rural slowdown. Traditionally, rural markets grow much faster than urban ones and, therefore, the sharp fall in rural growth is impacting all FMCG companies, including Britannia. This explains why Britannia’s overall volume growth in the biscuits segment now is lower than in the previous quarters.
Britannia, however, plans to overcome this slow growth in its biscuits segment by diversifying its product portfolio. The idea is to maintain its overall growth rate with contribution from new products. Most new launches—cakes, milk shakes, cheese, salty snacks, wafers, etc.—have generated a good response. These products are expected to help Britannia fulfil its dream of becoming a total foods company. Britannia enjoys strong brand equity and its pan-India distribution network has been helping with these new products. Due to these innovative launches, analysts feel that Britannia’s combined revenue share from new launches will double in 2019-20. New launches currently contribute around 4.5% to the company’s revenue.
The company’s recent underperformance is another reason why analysts are getting bullish on this counter. Britannia lost 14% during the past three months, while the ET FMCG Index lost just about 1% and Sensex gained 3%. Pressure on margins due to new launches is the main reason for Britannia’s underperformance. The company has traditionally kept its margin stable by increasing or decreasing prices, depending on changes in the cost of raw materials, and by efficient cost management.
However, cost management may take a backseat in the short term because of a series of new product launches, which will warrant additional advertisement spending. Commissioning of new manufacturing facilities also means higher depreciations. So, investors looking to get into this counter now should be ready to stay put for the long haul. The earnings jump may happen only after a few years.
We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.