Who would have thought that confectionery could be such a complicated business? Even research analysts seem to shy away from churning out reports on them. I have been trawling the Net for days and have come up with only one report on the FMCG sector that also talks of the biscuit business. It estimates that the market for bakery products is worth Rs 10,000 crore. This is not as large as, say, steel, but neither is it so insignificant that brokerage houses have no taste for it. Necessity is the mother of invention—and of market research. Without any readily available analysis on Britannia, I will have to go ahead with my ambitious plan of creating a report along the lines of the others that I read daily.
True to my procrastinating self, I put off the research by a few more days and spent the evening mulling over the solitary report on Britannia. According to researchers, it is a fabulous time to buy more of the stock. Their verdict is hinged on two parameters: an imminent, bountiful monsoon and low valuations. The former is based on the assumption that the predictions of the meteorological department turn out to be accurate this year (I, for one, won't believe it until I hear the pitter patter of rain on my scalding porch). If they are, then food inflation will fall due to bumper crops. This will reduce the cost of agricultural inputs for food manufacturers like Britannia and expand their profit margins, which were squeezed last year.
The second reason analysts like Britannia is that it is valued attractively, with an enterprise value to sales ratio (EV/sales) of 0.9x (calculated on the estimates for the financial year 2012). This term was Greek to me and I scurried back to Google to decode it. Simply put, EV/sales measures the sales generated per unit of a company's asset value. A sibling of the more commonly used price to sales ratio, EV/sales is considered superior because it also factors in the company's debt. The lower the EV/sales ratio, the cheaper the stock. At first glance, this sounded impressive, but why didn't researchers consider simpler valuation tools like EPS and PE ratios? After all, the jury is still out on the interpretation of EV/sales. Some experts believe that a low ratio has a negative implication as well—that investors do not expect the company's sales to increase significantly in the future. Clearly, one must analyse the analyst reports as well. Instead of helping me take a quick, informed decision, this one has left me ambivalent. I will sleep on it and begin my own investigation tomorrow.
After suffering the condescension of Professor Calculus, who was nevertheless helpful, I have formulated a three-pronged strategy to evaluate Britannia. The first step is to find out its growth in net revenues, profit from core businesses and the EPS. Next, I must get the same information about its rivals in order to benchmark the company's performance. Finally, because every analysis should be forward-looking, I must know Britannia's market share and future plans.
Britannia's quarterly result (March 2010) had an array of unsavoury tidbits for its investors. Between 2008-9 and 2009-10, its net profit after tax (PAT) dropped from Rs 143.24 crore to Rs 103.1 crore, and the EPS fell from Rs 63.41 to Rs 43.19. As it manufactures only dairy and bakery products, the concept of separate profits for different business divisions does not apply to Britannia, but it is important to know that almost 90 per cent of the company's revenue is generated by the bakery segment. The food giant has no clear competitor with the same product range. It is up against Nestle and Amul in the dairy segment and faces stiff competition from Parle and ITC's Sunfeast brand in bakery products. Of the four rivals, only two are listed companies. A quick check on Nestle's Website revealed that the company's net profit had jumped by 2.3 per cent in the previous financial year. The balance sheet of ITC has clubbed all noncigarette FMCG businesses together, which makes comparison futile.
Britannia's future looks anything but sweet. According to news reports, the company lost a major chunk of its market share to Parle in the first half of 2009. It dismissed this as temporary, attributing it to the freebies offered by Parle to jack up volumes. But last year, Parle entered the market of Marie and Bourbon biscuits, strongholds of Britannia, and has bitten off a significant chunk of the market share in these categories. A quick peek at the report confirms that Britannia's market share dipped by 2 per cent last year. To counter competition, it is focusing more on the dairy segment, beginning with the launch of flavoured milk. It also plans to cut costs to blunt the impact of high food prices.
I am not convinced that these measures are adequate. The company has nothing to offer in the dairy segment that is different from the products of Nestle or Amul. Moreover, regional companies are nibbling away at its market share of cheap biscuits. In the high-end segment, the threat of Kraft, set to enter the Indian market after taking over Cadbury, is too big to be ignored. Another stock in my portfolio, HCL Tech, had also underperformed in the recent quarterly results. However, I retained it because a turnaround seems in sight and the company has concrete plans to increase revenues. This is not true of Britannia. So, even as I continue to be its loyal customer (and rip open my third pack of Little Hearts today), I have no appetite for it as an investor. After all, investing is not a matter of the heart—or the stomach.