We like BRIT for its strong execution in biscuits viz, distribution expansion, cost efficiencies and steady premiumisation that bode well for revenues and margins, allowing EPS to rise at a 16% CAGR in FY17-20E. Yet, its 48x FY19E P/E bakes much of this in already, in our view. Given limited room for positive surprises (we are ~5% below street), we initiate at HOLD and Rs 4,850 PT. Given the high accessibility through smaller SKUs and presence of multiple local brands at lower points, the potential for upgrading and market share gain from unorganised/local players, ~30% of the total market, is significant in the post-GST distribution paradigm. We believe Britannia is well-placed in the category in terms of its premium brands portfolio acceptability with consumers. Distribution efforts in rural India over the past few years should yield results going forward, given expected pick-up in rural growth.
We estimate 11.5% revenue CAGR over FY17-20E, driven by 8.3% volume CAGR. EBITDA margins for Britannia have improved ~800bps in the past five years, helped by higher gross margin (largely mix improvement) and cost efficiencies in manufacturing and distribution. While the bulk of margin expansion is behind us, expansion now will be driven by mix and cost savings. We are building 168 bps EBITDA margin expansion over FY17-20E, driven by 56bps y-o-y gross margin expansion and ~120 bps from acost savings.
Recently, promotions have increased significantly, suggesting low scope for margin expansion despite stabilisation in input costs. Britannia has increased the share of in-house manufacturing over the past 5 years to ~55%, which has helped margins given scale and technology benefits in new plants. This, coupled with targeted entry into newer food categories, should lead to lower ROCE given higher capex intensity. We expect the trend to continue and the company to reach ~65% in-house production by FY20.