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Business Standard - 18 Sep 2003

HLL and ITC’s entry into biscuits will affect Parle and Britannia

After testing the waters with niche offerings in untapped segments of the biscuit market, heavyweights Hindustan Lever and ITC have now forayed into the mass biscuit market. While ITC has launched its glucose brand, Sunfeast, HLL has decided to differentiate its product, Modern ‘Energy’ Biscuits, by using wheat and soya as ingredients. Importantly, both ITC’s and HLL’s new offerings are priced at Rs 4 for a 100 gram pack, the same level as Parle G and Britannia’s ‘Tiger’ glucose biscuits.

Given HLL’s and ITC’s massive distribution reach, this new development would clearly have a significant impact on the market shares of both Parle and Britannia. In case the taste of the new products do not go down very well with consumers, the already established players may get some breathing space, but it will be only a matter of time before that gets corrected and the pressure will soon be back on. Structurally, the entry of players such as HLL and ITC in the mass biscuit market is bound to affect the dominance of Britannia in the biscuits market. What’s more, competition from regional players such as Surya Foods, known for its ‘Priya Gold’ range of biscuits, has also increased. It certainly doesn’t help that the company has just had a change in leadership.

Further, since the company has hived-off its dairy division, overall growth rates would clearly be lower than what investors have been used to for a while. As far as profitability goes, much depends on the company’s ability to further reduce costs, unless there is a further reduction in excise rates. Given the increase in competition, taking price hikes may still be some time away. In such a scenario, Britannia’s long-term growth rate would turn out to be much lower than earlier estimates. It’s no wonder then that the stock has underperformed the market and peers in the FMCG sector by a huge margin during the current rally. The stock still gets a discounting of around 14 times FY04 earnings, which, considering that growth rates will drop, gives the feeling that the stock’s underperformance will continue.