Britannia vs Nestle: Which is a better choice for long-term investment?

The FMCG index is the best performing index of 2023 year-to-date (YTD), rising over 13 percent as against an around 2 percent gain in benchmark Nifty. The rally in FMCG stocks comes on the back of deflation in most raw material prices, increasing focus on premiumisation and margin recovery.

Going forward as well, experts believe that price growth in FMCG firms shall ease while volume growth will improve. FY24 is likely to be a strong year in terms of margins for most companies.

With FMCG companies on the path of recovery, let's analyse between Britannia and Nestle, which consumer staples major has better growth opportunities in the long term.

Stock Price Trend

Both stocks have given double-digit returns in the last one year with Britannia rising 30 percent and Nestle gaining 25 percent. Meanwhile, in 2023 YTD, Britannia added 7 percent whereas Nestle advanced nearly 10 percent.

While Britannia has given positive returns in 4 of the 5 months of 2023, Nestle has been in the green in only 2 of the 5 months in the current calendar year.

Britannia is up over 1 percent in May after a 5.3 percent rise in April. However, it lost 3 percent in March. Meanwhile, it gained 3.3 percent in Feb and was flat in Jan.

Nestle, however, has shed 1.2 percent in May so far after a 10.4 percent and 5.5 percent jump in April and March, respectively. In Jan and Feb, the stock lost 3 percent and 1.8 percent, respectively.

Meanwhile, in the long term, both stocks have given exceptional returns. Britannia has surged 56 percent in the last 5 years and 120 percent from its COVID low hit in March 2020. Whereas, Nestle has soared 126 percent in the last 5 years and 76 percent from its COVID low hit in March 2020.

Britannia hit its 52-week high of ₹4,706.05 yesterday on May 25, 2023, and its 52-week low of ₹3,272 on June 20, 2022. The stock has gained nearly 40 percent to ₹4,563.30 now from its 52-week low.

Nestle, on the other hand, hit its 52-week high of ₹22,295.95, earlier this month on May 8, 2023, and its 52-week low of ₹16,433.45 on June 17, 2022. The stock has risen 30 percent to ₹21,474.90 currently from its 52-week low.

About the firms

Britannia Industries is an Indian company specialised in the food industry, part of the Wadia Group headed by Nusli Wadia. Founded in 1892 and headquartered in Kolkata, it is one of India's oldest existing companies and is best known for its biscuit products. The company sells its Britannia and Tiger brands of biscuits, breads and dairy products throughout India and abroad. The products of the company are exported to over 79 countries across the world.

Nestlé India Limited is the Indian subsidiary of Nestlé which is a Swiss multinational company. The company is headquartered in Gurgaon, Haryana and its products include food, beverages, chocolate, and confectioneries. The company was incorporated on 28th March 1959. As of 2020, the parent company Nestlé owns 62.76% of Nestlé India. The company has 9 production facilities in various locations across India. It manufactures products under brand names, such as “NESCAFE, MAGGI, MILKYBAR, KIT KAT, BAR-ONE, MILKMAID and NESTEA”.

Earnings

Both companies posted strong earnings as rising demand, price hikes and moderating raw material prices helped margins recover.

In the March quarter, Britannia reported a 47 percent YoY jump in its consolidated net profit to ₹559 crore driven by strong demand and expanding margins versus ₹380 crore a year earlier. Meanwhile, its total revenue from operations rose 13 percent to ₹4,023 crore.

For FY23, the company reported a 52.3 percent YoY rise in consolidated net profit to ₹2,322 crore while revenue from operations increased 15.3 percent YoY to ₹16,300.55 crore.

“Our intensified cost efficiency program coupled with moderation in commodity inflation led to a healthy operating margin in this quarter. We remain vigilant of the competitive actions in the marketplace and is closely monitoring commodity price trends, especially around wheat and sugar,” said Varun Berry, Vice Chairman and Managing Director of Britannia.

Nestle, on the other hand, posted a 24.69 percent rise in profit at ₹736.64 crore for the March quarter compared with ₹590.77 crore in the year-ago period. The company follows a January-December financial year. Meanwhile, revenue from operations grew 20.98 percent YoY to ₹4,830.53 crore from ₹3,992.60 crore in the same quarter last year.

The company announced that in the March quarter, it witnessed the highest growth in a quarter in the last 10 years, excluding an exceptional quarter in 2016 that was a one-off due to a low base in 2015. Product groups delivered double-digit growth, a notable feature in the past four quarters in a row, it added.

Which is a better long-term investment?

Preeyam Tolia, Senior Research Analyst - FMCG & Retail, Axis Securities, has picked Nestle over Britannia. According to the expert, Nestle has all the right levers for growth in the long run; hence, he likes Nestle more from a longer-term perspective.

However, Tolia also stated that both companies shall deliver the market leading performance in both top-line and bottom-line growth, as both the companies are gearing up to increase distribution reach, especially in rural areas, and their continued thrust on driving premiumisation agenda. Under Suresh Narayanan, Nestle has transformed the focus from the bottom line to growth by launching new products and driving a premiumisation agenda, Tolia added.

Ajay Thakur, Research Analyst, Anand Rathi Institutional Equities, also prefers Nestle between the two. While both Nestle and Britannia offer healthy long-term prospects, he believes Nestle with its parentage, global product portfolio (a large part of which is yet to be launched in India) and superior technology (R&D) enabled offerings can provide a better longer-term growth opportunity.

Sonam Srivastava- Founder at Wright Research, an investment advisory firm, as well, has chosen Nestle.

"Nestle and Britannia are both major players in the fast-moving consumer goods (FMCG) industry, but Nestle holds better long-term growth prospects. This is primarily due to its stronger brand portfolio, wider distribution network, and a larger presence in emerging markets. Nestle boasts globally recognized and trusted brands like Nescafe, KitKat, and Maggi, providing a competitive advantage. In comparison, Britannia may not have such a diverse and powerful brand lineup," she explained.

She further added that Nestle's wider distribution network enables its products to reach more consumers, making them more accessible and increasing their market potential. Moreover, Nestle's greater presence in emerging markets positions it to capitalize on the rapid growth observed in these regions. As emerging markets expand economically, Nestle stands to benefit significantly, said the expert.

Even Nirav Karkera, Head of Research at Fisdom, sees better opportunities in Nestle.

"Both Nestle and Britannia are prominent FMCG majors that have demonstrated financial solid performances and strategic initiatives to drive growth. Nestle appears to have a slightly better growth opportunity for the long term. Nestle's impressive financial performance in the first quarter of CY2023, surpassing market expectations across critical metrics, signifies its ability to generate substantial revenue and profitability. Additionally, Nestle's broad-based growth across various product categories and geographic regions and consistent commitment to innovation showcase its ability to adapt to changing market dynamics," he explained.

On the other hand, Britannia's impressive financial results in the first quarter of 2023, including a significant revenue increase and remarkable gross and EBITDA margins, highlight its strong performance and market position. While Britannia exhibits favourable growth prospects, Nestle's strong financial performance, focus on innovation, broad-based growth, and strategic investments position it slightly ahead regarding long-term growth potential, the expert said.

Suman Bannerjee, CIO, Hedonova, also likes Nestle.

As per the expert, Nestle outperforms Britannia in several financial indicators.

"Both companies have shown consistent revenue growth with a CAGR of 8.5% over the last five years. Nestle's revenue increased from ₹8,959 crore to ₹13,500 crore, while Britannia's revenue grew from ₹8,934.6 crore to ₹13,449 crore during the same period. Nestle also has a higher operating profit margin (22.6% vs 16.1%) and net profit margin (13.9% vs 11.4%) compared to Britannia. Both companies have paid dividends, with Nestle having a higher average dividend payout ratio of 91.5% compared to Britannia's 68.5%.

Both companies are debt-free, but Britannia's debt has increased slightly due to capacity expansion. Nestle has a higher return on capital employed (92.2% vs 46.5%) and returns on equity (63.1% vs 34.9%) compared to Britannia. Overall, based on these financial indicators, Nestle appears to have better performance and growth prospects compared to Britannia. However, other factors such as market conditions and future strategies should also be considered before making investment decisions," Bannerjee analysed.

Contrarian Views

Vinit Bolinjkar, Head of Research, Ventura Securities, has picked Britannia over Nestle.

According to Bolinjkar, Britannia Industries is expected to see improved biscuit volume growth in FY2024, driven by relevant pricing actions. The company's non-biscuit portfolio is growing at 1.5x the rate of its biscuit portfolio. Further, gross margins are expected to remain stable at around 45% in FY2024. Operating profit margins (OPM) are expected to remain in the high teens in the near term. Improving mix, procurement efficiencies, and cost-saving initiatives will help the OPM to consistently improve in the coming year, he said.

For Nestle, he pointed out that its gross margins continued to be under pressure in the most recent quarter, contracting by 159 basis points (bps) year-on-year. This was due to higher input costs, particularly for fresh milk, fuels, and green coffee. The cost of fresh milk is expected to remain firm due to the continued increase in demand and volatility in the global milk market. The cost of fuels is also expected to remain firm due to the rise in crude oil prices. The cost of green coffee is also expected to remain firm due to the ongoing drought in Brazil, the world's largest producer of coffee, he added.

Nirvi Ashar - Fundamental Analyst, Religare Broking, also believes Britannia is the better choice.

"We believe that both the stocks, namely Britannia and Nestle have shown resilient performance in the past 3-5 years wherein Britannia sales & PAT grew by 10-12% and 13-15% while that of Nestle was at 11% and 12-14% respectively. In addition, looking at the valuation, both are trading at a premium valuation but Nestle is trading at a more expensive valuation than Britannia, so our preferred choice for investment will be Britannia. Besides, there is a huge scope for growth for Britannia given its investment strategy, product innovation across different categories as well as increasing distribution reach," she said.

Kaustubh Pawaskar, Deputy VP - Research, Sharekhan by BNP Paribas, as well, chose Britannia.

As per the expert, Britannia has widened the gap with the No. 2 player in the biscuits category and is focusing on becoming a formidable player in the bakery and dairy business by adding capacities in key markets. The company is going big with the dairy segment, making strong investments in product launches, he added. This along with scale-up in revenue of the adjacent categories and efficiencies would help Britannia achieve double-digit earnings growth of 17% over FY2023-FY2025E. It is currently trading at 49x/41x its FY24E/25E EPS, which is at a discount to large FMCG stocks (including Nestle India), noted Pawaskar.

Urmi Shah, Research Analyst, SAMCO Securities, as well, prefers Britannia.

As per the expert, both the FMCG companies, Nestle and Britannia have shown healthy growth in the past few years and have witnessed strong demand from the rural segment, hence are strategically planning market penetration in the market. Nestle had growth at a decadal high and is keeping the growth momentum with new product launches and strong consumer sentiment on fire by premiumisation and innovation and even Britannia is no guest to innovation, she noted. The company has launched various products, across categories from Western snacks to dairy to biscuits. However, Britannia is still not done exploring the rural markets and at the current valuation, thus poses to be a good investment opportunity, she said.