Saturday, November 2, 2013

Britannia Industries - The Expensive Multibagger

On 27th May 2011 we recommended Britannia Industries (See article here: Ting Ting Tding) at Rs.391 in-spite of being expensive (35 time PE multiple) at that time. Prima facie the stock was expensive on PE front but the growth was cheap as the company was growing at very high pace. Guess what? the stock is still expensive today and is up more than 250% from the recommended price. Closing price of Britannia Industries as on 1st Nov was Rs.940

Fundamentally the company has done exceptionally well with sales and net profit up around 40% and 60% respectively between FY-11 and FY-13 (See charts below). High brand value and size of opportunity for its products across rural india is keeping the stock expensive which is now trading at a PE multiple of 50 times FY-13 EPS. Rise in EPS and further appreciation in PE multiple made the stock multi-bagger.

Britannia Industries Sales Growth

Britannia Industries PAT and EPS Growth

So what should you do with the stock now?

PE re-rating for FMCG stocks at large is almost over as there is limited room for further appreciation in PE multiple due to relatively slower growth in sales and return ratios. High inflation has started affecting spending by house holds on premium FMCG products. Also the competition is far more than what it was 3 years back. As a result the company might not be able to grow in future at a pace it has done before which might lead to PE de-rating. The stock might stay stagnant for long period of time or correct and consolidate at lower levels till the earnings and valuation become reasonable.

Hence investors should exit the stock gradually on every rise and wait for the price and time correction before re-entering the stock.

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