Maintain ‘overweight’ on Britannia and target price of R2,300 per share. Our target implies a potential return of 21.4% and therefore, we rate the stock ‘overweight’. We use DCF to derive our target and use a cost of equity of 11%, which includes a risk-free rate 8%, MRP of 5%, beta of 0.6 and terminal growth of 5%, all unchanged.
We have marginally revised our estimates post Q3FY15 results, as we keep FY15 earnings largely unchanged while we cut our FY16-17e earnings estimates by 2-3%, as we believe the company will pass on some of the benefits of soft commodity prices to consumers, while we have a long term positive view on the company. We have increased our capex estimates in line with management guidance.
While demand conditions remain weak, Britannia grew at c14% (against to c5% category growth) with underlying volume growth of c9% in biscuits and gained further market share. This sustained performance is the result of Britannia’s aggressive push to deepen its distribution, the supply chain over haul, and focus on key brands. Britannia increased direct outlet coverage by 20% to 1m outlets. It has also increased rural coverage by 50% in the last three years.
Britannia’s next focus is to aggressively pursue volume growth and market share backed by a robust pipeline of product innovation and it aims to consolidate all the new product development under five key pillar brands, namely Good Day NutriChoice, Tiger, Marie, and Treat, which it believes offers the best cost economics of A&P spends.By HSBC