Nestle vs Britannia: Which FMCG Stock is Better?

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Nestle vs Britannia: Which FMCG Stock is Better?

Feb 10, 2022

The fast-moving consumer goods (FMCG) sector is the fourth largest sector in the Indian economy. Food and beverages account for 19% of this sector.

The food industry in India has been evolving since India opened up for global trade. The scenario went from major international players selling their products in the country, to India exporting its products to all developed and developing countries.

The industry has also seen significant changes with increasing disposable income, penetration in rural areas, and e-commerce.

With growing consumer needs, companies are changing their offerings to capture a share in the market.

Two major players in this rapidly evolving industry are Nestle India and Britannia Industries.

This article compares both companies based on their financials, operational efficiency, and growth prospects.

Business overview

Nestle India is a subsidiary of Nestle S A, one of the largest food and beverage companies in the world.

The company primarily manufactures milk and nutrition products, prepared dishes, cooking aids, and chocolates and confectionery.

It has market leadership in several business categories including prepared dishes, cooking aids, and chocolates.

On the other hand, Britannia Industries is among India's leading food companies and is a part of the Wadia Group, a reputed Indian business house.

Its products are spread across multiple business segments, including biscuits, bread, cakes, rusk, dairy products, and salted snacks.

Britannia is a well-established Indian brand and has market leadership in the biscuits segment. It is also the largest player in the organised bread segment.

Nestle India and Britannia Industries Business Overview

  Nestle Britannia
Business Segments Milk and nutrition
Prepared dishes and cooking aids
Chocolates
Biscuits
Bread
Cakes
Rusk
Dairy products
Salted snacks
Popular Brands Nestle Everyday
Nescafe
Cerelac
Maggi
Kit Kat
Munch
Bar-one
Milkybar
Polo
Good Day
Tiger
NutriChoice
Milk Bikis
Marie Gold
Little hearts
Jim Jam
Bourbon
Strengths Diversified revenue profile
Well established brands with strong brand recall
Continued technical support from Nestle SA
Market leader in several categories
Established player in biscuit market
Largest player in organized bread segment
Healthy market position in FMCG category
Global presence
Key Risks Intense competition Intense competition
Fluctuations in raw material prices
Data Source: Company Website

Both companies offer FMCG food products and are leading players in their respective segments.

Nestle enjoys leadership in its cooking aids and prepared dished segment. On the other hand, Britannia has established its position as the Indian biscuit brand.

Revenue growth

In the last five years (2017-2021), the revenue for both Nestle and Britannia has grown at a CAGR of 8.5%.

The revenue growth for Britannia was driven by volume growth due to product innovations in all its business segments. It has also increased its market share for most of its products.

For Nestle, the revenue growth was led by volume growth due to penetration into rural areas. The company's share of exports in total revenue has also increased over the years as the company is introducing Maggi in various countries.

Nestle vs Britannia Revenue Growth (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Revenue (in m)          
Nestle 89,590 100,039 115,522 126,173 135,008
Britannia 89,346 100,043 112,611 118,790 134,490
Revenue Growth (%)          
Nestle   11.7% 15.5% 9.2% 7%
Britannia   12% 12.6% 5.5% 13.2%
Source: Equitymaster

Profit margins

Operating profit margin indicates what percentage of the operating revenue is the profit after paying for all operating expenses.

Nestle is leading with a five-year average operating profit margin of 22.6% against 16.1% of Britannia.

Nestle vs Britannia Profit Margins (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Operating Profit Margin (%)          
Nestle 20.9% 21.3% 23.2% 23.6% 23.9%
Britannia 14.6% 15.3% 15.7% 15.7% 19.1%
Net Profit Margin (%)          
Nestle 11.4% 12.5% 14.2% 15.9% 15.6%
Britannia 10.1% 10.2% 10.5% 12% 14.1%
Source: Equitymaster

Nestle is again leading with a five-year average net profit margin of 13.9% in terms of net profit margin. On the other hand, Britannia's five-year net profit margin is slightly lower at 11.4%.

Both the companies are undertaking cost efficiency programs to keep the overall costs low through technological interventions, waste reduction, and optimising manufacturing and supply chain lines.

However, Nestle and Britannia's profit margins depend on the price of commodities that are subject to inflationary pressures. To maintain profit margins, the companies are increasing the prices and reducing the grammage per pack.

Manufacturing facilities

Nestle India has eight manufacturing facilities across seven states in India. The company is also planning to invest over Rs 26 bn over the next three to four years to build a state-of-the-art manufacturing facility in Gujarat to expand its manufacturing capabilities.

Britannia Industries has five mega factories across India with multiple manufacturing lines. It is also investing in building another mega factory in Maharashtra to expand its capacity.

The company also has an extensive network of 80+ manufacturing units from which it sources its products.

Distribution network

Both Nestle and Britannia have an extensive distribution network.

Nestle has a strong network of distributors across the country who place the company's products in over 3 million retail outlets.

The company is focussing on strengthening its presence in the rural areas with its project 'unlocking the rural market'.

Since the pandemic hit, the company has seen an increase in e-commerce traffic. More players are developing their infrastructure to support online shopping, increasing Nestle's online presence across the country.

Britannia has a wide distribution network across the country and a retail presence of over 5 million stores. There has been a rapid rise in its rural dealers in the past five years, and its presence in e-commerce has been multiplying over the past three years.

Britannia follows a 'focus states' strategy to expand its business in key states. The growth in business from these states has been higher than the rest of India from the past few years.

Research & Development

Nestle and Britannia are heavily investing in R&D to launch new products.

Nestle is concentrating on improving its products line by diversifying its product portfolio. The company has launched 90 new products in the last five years, and ten new innovative projects are in the pipeline.

On the other hand, Britannia aims to become a 'Total Foods Company'. It's launching innovative products across business segments with nutritional benefits. It also concentrates on reducing the sodium and sugar levels in its products.

Advertising and Marketing

Both Nestle and Britannia spend heavily on advertising their products.

Nestle has a comprehensive advertising strategy and has been increasing its advertising and sales promotion expenses at a CAGR of 8.9% over the last five years against a 3.2% CAGR of Britannia.

The company is growing its digital footprint and is continuously giving media support to its brands.

On the other hand, Britannia has undertaken key marketing campaigns to advertise its brands but spends very little on promoting its brands. It concentrates on promoting only its major brands like Good Day and Marie Gold.

Dividends

A company shares profits with its shareholders in the form of dividends. Dividends can be in the form of cash or stock.

Dividend ratios such as dividend payout ratio and dividend yield can be used to compare both companies' dividends.

The dividend payout ratio determines how much dividend is paid from the earnings. In contrast, the dividend yield tells us what percentage of the share price is the dividend amount paid on a per share basis.

The higher the ratios, the better.

Nestle vs Britannia Dividend Ratios (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Dividend Payout Ratio (%)          
Nestle 60.7% 67.7% 69% 167.5% 92.6%
Britannia 14.9% 14.9% 31.2% 60.4% 221%
Average Dividend Yield (%)          
Nestle 1% 1.2% 1.2% 2.7% 1.3%
Britannia 0.4% 0.3% 0.3% 1.3% 5.2%
Source: Equitymaster

Nestle and Britannia have consistently paid dividends to their shareholders for the last five years. Nestle's five-year average dividend payout stands at 91.5%, while its five-year average dividend yield stands at 1.5%.

The five-year average dividends payout for Britannia is lesser than Nestle's at 68.5%. However, the five-year average dividend yield is similar to Nestle at 1.5%.

Inventory days

Inventory days measures the time taken by the company to convert its inventory into sales. Nestle and Britannia's 5-year average inventory days are 69 and 65 days, respectively.

Nestle vs Britannia Inventory Days (2016-2021)

Inventory Days 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Nestle 78 78 90 55 44
Britannia 31 50 55 102 86
Source: Equitymaster

Britannia is more efficient in managing its inventory and has a better sales performance than Nestle.

Debtor days

Debtor days measures the time taken by the company to collect its receivables from its debtors. The lower the number, the better. Nestle and Britannia's 5-year average debtor days are 4 and 1, respectively.

Nestle vs Britannia Debtor Days (2016-2021)

Debtor Days 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Nestle 4 3 4 4 5
Britannia 1 1 1 1 1
Source: Equitymaster

Both Britannia and Nestle have low receivables days, indicating a strong cash flow.

Debt-to-equity ratio

The debt-to-equity ratio shows how much leverage a company is using. The lower the debt, the better the company's risk profile.

Nestle vs Britannia Debt to Equity Ratio (2016-2021)

Debt to Equity Ratio (x) 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Nestle 0 0 0 0 0
Britannia 0 0 0 0.2 0.2
Source: Equitymaster

Nestle and Britannia are debt-free companies. However, from the past two fiscals, Britannia Industries debt has gone up as the company is increasing its capacity across all its business segments by building a plant in Maharashtra.

Strong cash flows of both the companies have enabled them to run their companies debt-free.

Return on capital employed (ROCE)

Return on capital employed measures the company's efficiency in generating profits from the capital invested.

The five-year average ROCE for Nestle and Britannia is 92.2% and 46.5%, respectively.

Nestle vs Britannia Return on Capital Employed (2016-2021)

ROCE (%) 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Nestle 49.4% 55.9% 68.5% 142.1% 145.1%
Britannia 48.1% 43.9% 41.4% 37.4% 61.5%
Source: Equitymaster

Nestle is doing better at generating profits on the capital invested than Britannia Industries.

Return on equity (RoE)

Return on equity (RoE) measures how efficiently the company uses its equity capital to generate profits.

The five-year average ROE of Nestle stands at 63.1%, while for Britannia, the ratio is 34.9%.

Nestle vs Britannia Return on Equity (2016-2021)

ROE (%) 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Nestle 30.5% 35.8% 43.7% 102.6% 103.1%
Britannia 32.9% 29.6% 27.3% 31.9% 52.6%
Source: Equitymaster

Nestle has been more effective in terms of generating returns for its shareholders than Britannia.

Valuations

Price to Earnings ratio (P/E) and Price to Book Value (P/BV) are valuation ratios used by analysts to determine the relative value of a stock.

PE ratio uses the company's earnings to determine how much a shareholder is willing to invest against one rupee of earnings.

P/BV ratio, on the other hand, uses a company's book value to determine how much a shareholder is willing to pay against one rupee of book value.

Nestle's P/E and P/BV ratios stood at 72.7 and 75, respectively, for the financial year 2021. For the last five years, the average is 60.8 and 40.1, respectively.

For Britannia, the P/E and P/BV stand at 42.2 and 22.2 respectively for the financial year 2021. The five-year average is 56.5 and 18.7, respectively.

Nestle vs Britannia Valuation Ratios (2020-2021)

  P/BV Ratio 5 year average P/BV Average P/E Ratio 5 year average PE
Nestle 75 0.0 72.7 0.0
Britannia 22.2 0.0 42.2 0.0
Source: Equitymaster

Nestle is more overpriced than Britannia in terms of both P/E and P/BV ratios. Both the shares are also trading at a premium to their 5-year averages.

Apart from P/E and P/BV, another very popular valuation for making an investment decision is EV/EBITDA. It measures the value of the company by considering its true earnings.

Lower the number, the more attractive investment for takeover.

Nestle vs Britannia EV/EBITA (2016-2021)

EV/EBITDA 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Nestle 28.64 32.65 36.68 44.55 52.46
Britannia 28.42 35.79 38.20 31.14 31.64
Source: Equitymaster

Britannia is cheaper than Nestle, making it a better option for a takeover in the near term.

Sustainability efforts

Nestle and Britannia, both, have taken various steps to reduce their carbon footprint.

Nestle has reduced its greenhouse gas emissions by over 53% and energy consumption by over 48% in the last 15 years.

It is also focussing on sustainable operations by increasing its use of railways and waterways to transport its products.

Nestle is also plastic neutral and focuses on responsibly sourcing its raw materials.

Britannia aims to use 100% recyclable or reusable packaging by the end of 2024. It has taken steps to reduce its usage of plastic and paper in packing its products.

The company has also increased its usage of renewable energy sources and reduced its usage of water and energy in the past few years.

Impact of Covid-19

The pandemic did not impact the food industry, as much as it impacted other industries. Both Nestle and Britannia saw healthy growth in revenue and volumes due to increased in-house consumption.

However, the supply chain and distribution network of both companies was affected due to the lockdown.

During the pandemic, Nestle provided manpower and transportation to its suppliers across the country to ensure the smooth running of its factories.

The company also partnered with restaurants and introduced 100+ quick and easy recipes for its menus. Besides this, the company expanded its role in the delivery system by introducing a service and product platform.

Britannia, on the other hand, followed the 80:20 rule. It concentrated on 20% of the products that bring 80% of the revenue and prioritised their production and distribution.

Post-Covid, there is a higher demand for staples. Both Nestle and Britannia are positioned to cater to the changing trends and rising customer demand.

Future prospects

During the pandemic, the food industry saw the customers move towards online business channels to buy groceries and goods. They also started demanding more nutritious food.

There was also an increase in rural demand.

Going forward, Britannia and Nestle both have a host of opportunities in front of them to expand. Both the companies are well equipped to capitalize on the opportunities.

Nestle is already ensuring the rural demand is being met through its penetration strategy. It's identifying the changing customer needs and is launching innovative products rapidly.

Britannia, on the other hand, has identified that the per capita consumption of biscuits in India (2 kgs) is much lower than some developed countries (10 kgs). It has re-introduced Milk Bikkis with 100% Atta (wheat) with attractive advertising.

It is also increasing its distribution network, both online and offline, using technology.

With changing customer preferences, the company is also launching new flavours in all its product categories and creating a market for itself.

Which is better?

Though the revenue growth for both companies is somewhat similar over the past five years, Nestle has higher profit margins and a higher dividend payout ratio.

Nestle is also leading in terms of its returns on capital and to its shareholders. Despite a capex of Rs 26 bn for the next couple of years, the company has zero debt.

However, Britannia is doing a better job at managing its inventory and receivables.

In terms of valuation, Nestle's shares are overpriced compared to Britannia. However, compared to their five-year averages, both the shares are overpriced.

Though both Nestle and Britannia are a part of the food industry, there is only a slight overlap in their segments and cater to different customer needs.

Nestle's has a diversified product portfolio. It continuously launches new products to stay ahead of its competition. It already has an international presence through its parent company.

On the other hand, Britannia has established itself as the biscuit maker in the country and is growing its international footprint.

Before you choose a stock to invest in, take a look at each of the company's fundamentals and valuations. They help in deciding which company is better for investment.

Still confused which is better?

Use our feature-rich comparison tool, which draws a detailed comparison between any two companies. This tool also includes a graphical analysis making it easy to see trends!

Nestle vs Britannia

You can also compare both the companies with their peers.

Nestle vs Marico

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Britannia vs Heritage Foods

For a detailed analysis, check out Nestle's factsheet and Britannia's factsheet.

You can also check out the latest quarterly results for Nestle and Britannia.

Since stocks from the FMCG sector you, check out Equitymaster's powerful Indian stock screener tool to find the top FMCG companies in India.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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