We like BRITannia 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 `4,850 PT.
Premiumisation and conversion from unbranded potential remain in biscuits
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.
Limited scope for margin expansion now Ebitda margins for BRIT 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 168bps Ebitda margin expansion over FY17-20e, driven by 56bps y-o-y gross margin expansion and 120bps from cost savings. Recently, promotions have increased, suggesting low scope for margin expansion despite stabilisation in input costs.
Rising share of in-house production and entry into new segments to lower ROCE profile
BRIT 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.
BRIT’s current valuation at 48x FY19e PE leaves limited scope for re-rating and bakes in the positives already. We value the stock at 45x Sep 19E EPS (10% premium to 5-year avg. sector PE) to arrive at our PT of 4,850. Upside risk: more-than-expected margin expansion and strong jump in top-line growth; downside risk: increased competition and sharp inflation in input prices.
BRIT is the market leader in the biscuit category and has outperformed consumer goods sector growth since FY15. We believe that the company has enough drivers to continue reasonable volume-led, top-line growth which should be in line with sector growth rates. However, on the margin front, we believe that expansion will be gradual, driven by mix and cost savings. Hence, at the current valuation (trading at 48x FY19e EPS), we initiate coverage at Hold.