Fast-moving consumer goods (FMCG) companies manufacture and sell packaged consumer products with a high inventory turnover. These include daily-use items like food and beverages, personal care products, home care products, and other consumables.
Given its deep penetration, the FMCG sector in India is a mainstay of the economy. The industry has seen steady growth over the years, driven by rising incomes, a growing population, and changing lifestyle trends.
FMCG majors like Britannia, HUL, ITC, and Dabur are popular stocks owned by lakhs of investors in India. This blog discusses why FMCG stocks like Britannia make a compelling investment case for owning them in your portfolio.
Key Reasons to Own Britannia FMCG Stocks
Here are some key reasons why FMCG stocks should be part of a well-diversified investment portfolio:
- Resilient Business Model: FMCG companies showcase resilience across market cycles given their products’ non-discretionary, daily-need nature. During economic volatility, when consumers cut back on discretionary spending, spending on essential food and personal care products continues.
- Pricing Power: Leading FMCG companies like Britannia, HUL, and Nestle have strong pricing power. This allows them to pass on raw material inflation to consumers by hiking product prices without materially impacting demand.
- Strong Brands: Companies like Britannia have potent brands that command loyalty and recall among consumers, built over decades. Such brand equity gives them an edge over the competition.
- Distribution Reach: Britannia and HUL have invested in building widespread distribution networks penetrating India’s rural, semi-urban, and urban markets. This enables them to cater to demand nationally.
- Focus on Innovation: Leading players continuously invest in product innovation, brand building, and consumer-insight-led R&D to keep pace with evolving preferences.
Why Britannia Makes for a Good FMCG Bet?
Here is what makes Britannia a good FMCG bet:
- Market Leader: Britannia is India’s leading biscuit maker, commanding a 31% volume market share. Britannia is among the top players in adjacent categories like cakes and dairy.
- Diversified Portfolio: Previously a predominantly biscuits player, Britannia has diversified into adjacent categories like bread, cakes, rusk, dairy, etc., aiding revenue growth. New categories contribute ~20% of total sales.
- Financials: Britannia has compounded annual revenue and profit growth of 8% and 15% over the last five years. It has a debt-free balance sheet and robust cash flows.
- Valuation: Britannia stock trades at a P/E ratio of ~55x its trailing 12-month earnings, a discount to some FMCG peers. The valuation premium reflects growth prospects.
- Dividend Track Record: This company has a consistent dividend history, with an average 3-year payout ratio of 57.8%. It offers stable income, and ~ its 75% dividend payout policy makes it attractive.
Opening a demat account allows you to start investing in stocks like Britannia. This step ensures secure electronic storage and trading of shares, making the investment process seamless.
Growth Drivers for Sector
Key factors expected to aid longer-term growth:
- Increasing nuclearisation of families leads to higher consumption. More nuclear families with higher disposable incomes spend more on packaged food and personal care items, resulting in a consumption uptick across categories.
- Demand is moving towards premium products across categories. Consumers are upgrading towards more premium offerings in biscuits, snacks, juices, skin/hair care, etc. This results in higher realisations and value growth for companies.
- Rising urbanisation levels aid FMCG demand: The percentage of the population residing in cities and urban India is increasing steadily by ~1% each year, expanding the addressable market size for FMCG products.
- Rural India accounts for 50% of consumption. However, per capita spending is still low,w indicating headroom for growth: While rural India is a key demand driver, per capita consumption of packaged FMCG products is still low at about half of urban levels, indicating the segment’s untapped potential.
- Increasing penetration of modern retail and e-commerce to expand sales channels: Higher adoption of modern trade formats like supermarkets and hypermarkets and growth in e-commerce are expanding the distribution reach for FMCG. This also aids demand growth over the long term.
Additionally, India’s under-penetration of branded packaged products across food and personal care categories offers organised players the opportunity to convert consumers from the loose/unbranded segment to branded offerings.
Britannia Share Price Performance
- Britannia share price has surged over 7x in the last 10 years, translating to ~ a 27% CAGR over the past decade.
- Outperformed the Nifty FMCG index, which gave 4x returns in the same period. Britannia gave 7x returns, indicating significant outperformance.
- Stock trading at all-time highs after strong Q2 show. Q2 results marked double-digit revenue and profit growth on a year-on-year basis.
As seen above, Britannia stock has been a stellar long-term wealth creator for investors. The stock has significantly outperformed the Nifty FMCG index over the past decade.
Britannia’s robust Q2 results, double-digit volume growth guidance for this fiscal and good festive season demand outlook have led the stock to record highs recently.
Valuation Analysis
- Based on its last 12-month earnings, Britannia trades at a P/E multiple of ~55x, above the Nifty average of 24x.
- Premium valuation reflects its leadership, brand strength, and growth prospects. Given structural drivers, the valuation premium is likely to be sustained.
- It trades at a 10-20% discount to other FMCG majors, which is relatively more reasonable than HUL and Nestle.
Based on last year’s earnings, Britannia trades at a Price-to-Earnings ratio of 55x. Its market position, strong brands, and structural growth tailwinds justify the premium valuation. Though not cheap, it is at a 10-20% discount to other consumer majors.
Conclusion
Britannia makes an appealing long-term bet given its leadership in key categories, substantial brand equity, distribution reach, and focus on strengthening its product portfolio.
With ample headroom for growth in India, Britannia is well-placed to capitalise on the consumption uptick over the coming years. Its stock is poised to benefit from recovery in out-of-home consumption post-pandemic.
Despite near-term concerns about input inflation and the rural slowdown, Britannia is expected to deliver 12-15% revenue growth and 18-20% earnings growth over the next two years.
While premium valuations persist, its strong brands, growth levers and prospects justify higher multiples to some extent. Investors could consider accumulating the stock on dips.
