We initiate at buy and Rs 3,300 target price on Britannia. We see strong brands, improved execution of a holistic product strategy and enhanced distribution efforts ensuring growth ahead of the market. Business momentum in the past five years has been solid with steady market shares, 13% revenue CAGR (volume-driven), and 900bps Ebitda margin expansion. The outlook also remains good—est. 13% revenue CAGR (FY16-18e) and modest margin gains driving 18% EPS CAGR. Good asset turns and negative working capital should ensure healthy return ratios (better than domestic peers).
Many positive drivers
(i) Distribution/penetration efforts: ‘direct reach’ expansion, focus on weaker markets, ‘split-route’ model in urban India, and use of technology.
(ii) Product strategies: strengthening core brands with big relaunches and visible brand building support, portfolio expansion with a premiumisation bias, footprint improvement in other foods.
(iii) Manufacturing/supply chain efforts + cost control.
(iv) Agility and solid execution by a motivated management team.
We believe the stock price consolidation in past 6-12 months prices in the risks of input cost inflation and competition. Cost push should be manageable vs. past cycles given the higher pricing tables and premiumisation cushion. Lower promotions and/or price hikes are already visible.
Elevated expectations on the stock seem to have been largely reset post the recent results.
Rs 3,300 target price (35x FY18e EPS)
Like peers, absolute val’s are rich, but relatively, Britannia is trading at the lower-end of the sector despite healthy growth/returns. Our multiple is pegged at a 40% premium to past five-year average, warranted given steady performance in a challenging market and improved execution. Our valuation is in line with the sector average, but at a discount to what we ascribe to larger F&B peer, Nestle India. Key subsidiaries like dairy are currently a drag and impact headline multiples.
Weaker macro; commodity headwinds; irrational competition; threat from other foods; tepid response to new investments; potential promoter group issues. The company is a leading branded biscuits and baked goods manufacturer in India, positioned to gain from the longer term consumption opportunity and the shift towards branded/organised segments. It is among a handful of the large listed F&B plays in India with healthy operating and financial metrics. In the past five years, there has been a very sharp uptick in Britannia’s earnings and valuation multiple rerating, driven by steady market share trends, 13.5% revenue CAGR (ahead of the market), Ebitda margin expansion by 900bps to 14%, et al. We think the outlook remains steady going forward also—estimate healthy 13%/17%/18% revenue/Ebitda/EPS CAGR over FY16-18e. Good asset turns and negative working capital ensure healthy return ratios (est. >40% ROEs and >60% ROCE despite extensive capex)—better than other domestic consumer peers. Britannia missed the street’s elevated expectations last quarter, even though we think the underlying business momentum remains fairly strong. We believe expectations have been reset to a large extent post the recent results and that stock price consolidation in the last 6-12 months adequately prices in concerns on potential commodity cost headwinds and maybe competitive pressures— we think both are manageable.
Steady growth and margin trends
We see a number of positive drivers and key strategies that should support a healthy revenue growth trajectory and modest margin gains going forward :
Strong brands and holistic product strategies—strengthening the core: Britannia’s portfolio has strong established brands with products that have been around for decades. While industry volumes have been decelerating, the company’s efforts of restaging key brands like Good Day, Milk Bikis, 50-50 and recently the mass brand Tiger (with some degree of premiumisation focus) aid the superior growth trends. We see high marketing support on mass + digital media and through high impact associations (cricket series, Filmfare awards and celebrity/film tie-ups) supporting the brands.
Pricing and mix improvement: We believe pricing-led growth will positively contribute to overall revenues going forward; calibrated price hikes and gradual moderation in promotions have already started. Moreover, premiumisation appears to be a secular trend in the Indian biscuits market, further boosting revenue growth (and margins). In our view, this appears to be an underlying principle with which the company is driving new launches and distribution efforts especially in tier 1 cities/urban markets.
Portfolio expansion: Britannia has been aggressive on innovation—we’ve seen a slew of launches in the last two years with a bias towards premiumising the biscuits portfolio (e.g. Nutrichoice Heavens, Good Day Chunkies, Pure Magic Chocolush). Longer term, new product development and entry in adjacencies in non-biscuits can be a driver – we think Britannia is well placed to benefit from the larger F&B opportunity.