ICDs and slowdown put a cap on Britannia Industries` valuations

Shares of Britannia Industries Ltd have surged as much as 13% in the past five trading sessions. This comes at a time when the Nifty FMCG index has risen by about 1.5%

To begin with, the stock had corrected sharply after the company’s disappointing June quarter performance and rather tepid management commentary. On 21 August, the stock had closed at a 52-week low.

Analysts said this is only a recovery in the stock from its lows and that the short-term outlook continues to remain muted, given the demand slowdown. Domestic volume growth had dropped to an eight-quarter low of 3% in the June quarter.

Having said that, Britannia’s investors may well have other worries. “The pessimism in Britannia’s stock really began around the time when it disclosed that an additional part of its treasury surplus had been lent to promoter-group companies as inter-corporate deposits (ICDs carry 10% p.a. interest)," said analysts from JM Financial Institutional Securities Ltd in a report on 26 August.

According to Britannia, its ICDs have dropped to under ₹500 crore from about  690 crores at the end of March.

JM Financial points out, “Given several debt-related issues that surfaced amongst Indian corporates in the recent past, such an issue remains a sore point in a company with an otherwise solid business opportunity."

And, as pointed out earlier, it’s not like Britannia has impressed on the financial performance front. The June quarter results don’t inspire confidence. Consolidated revenues increased by 6% over the same period last year, the weakest in the past many quarters.

“Given the slowdown in its core category and Britannia’s recent entry into new categories, earnings trajectory will remain weak," said analysts at Jefferies India Pvt. Ltd after the company’s June quarter results.

Notwithstanding the recent share price appreciation, the Britannia stock is still down by about 12% so far in FY20. In comparison, the Nifty FMCG index has shed 5%.

Still, Britannia’s valuations at about 50 times estimated earnings for FY20 are not exactly cheap. Unless demand revives meaningfully, the scope for expansion in valuations appears capped.