Outperform on Britannia, target price Rs 1,100: Standard Chartered

Updated: Jun 4 2014, 17:05pm hrs
BritanniaThe new management?s focus has raised market share and margins.
We maintain an 'outperform' rating on Britannia Industries with a new price target of R1,100 (R45 per share for subsidiaries). Given the strong ROE (45-50%) and healthy dividend payouts (40-45%), we value the stock at 24x forward P/E. Britannia remains our preferred pick and we believe positive changes in strategy should help the company deliver 15%/16% sales/EPS CAGR over FY14-17e. At 21x FY16E P/E, the stock is cheap versus peers.

After moderate performance for a decade (FY03-13), we find the recent changes implemented by new management constructive. The new managements focus on the core business, improving distribution efficiency and cost savings have raised market share (up 130 bps y-o-y to 28% as of February 2014) and margins (OPM up by 284 bps in FY14) with hope of more to come. We believe limited innovation, lack of offering in high growth segments like mid-priced cookies and creams, entry into unrelated categories and international forays were some of the strategic mistakes that slowed down Britannia.

Better targeting of retail outlets, appropriating existing portfolio (price hikes in strong brands) and focus on R&D (likely to launch new products). Expanding depth in the urban region to improve availability and widening its reach in high-growth rural areas should increase market share. Savings across the supply chain have lowered other expense-to-sales 33 bps y-o-y to 10.8% in FY14. Management sees enough opportunity to save costs.

Standard Chartered