New launches gaining traction; outperformance is likely to be sustained; TP revised to Rs 3,588
Britannia posted Q2FY20 consolidated revenue/Ebitda growth of 6.2%/8.3% y-o-y in line with our estimates. Volumes increased 3% y-o-y on a base of 12% y-o-y; this coupled with 1.5% y-o-y each price and product mix enrichment fueled growth. Although the company had to deal with moderate inflation in key raw materials, it held onto gross margin y-o-y on the back of price hikes and tight inventory management (wheat forwards for full year).
To be sure, debt looks elevated (up Rs 12.2 bn since Q4FY19), but that is attributable to Rs 5 bn worth of wheat purchased in Q1FY20 and Rs 8.5 bn worth of issuance of bonus debentures. New categories fared well, aiding Britannia’s journey towards becoming a total foods company. Maintain Buy with a TP of Rs 3,588.
Market environment soft; launches gaining traction
Britannia clocked 3% y-o-y volume growth – soft considering its track record, but still faster than biscuit market growth rate. The company’s endeavour to transform into a total foods company is on track—tasting sequential growth in some of its new category launches with the overarching plan of scaling up salted snacks in west India and croissants in east and south India. This coupled with the fact that premium products are outgrowing mass products is a positive.
Conference call takeaways
Overall biscuit industry’s revenue growth was sub-5%. Product mix is moving towards premium segment. In-house manufacturing is close to 60%. Biscuits share in revenue will be 75% currently which is expected to come down to 70% as new categories gain heft. Wholesale contribution is 33%. Contribution of new launches remains at 3%. Looking at seeing Treat brand reaching Rs 500 mn-1,000 mn size in 1.5 years.
Outlook and valuation: Going strong; maintain Buy
A robust product pipeline, entry in new categories and geographies, deepening penetration and brand investment would help Britannia sustain its outperformance in our view. We envisage deepening direct distribution coupled with the push in rural and weaker markets to drive growth and also market share gains. Rolling forward the valuation, we arrive at revised TP of `3,588 (`3,564 earlier). Maintain ‘BUY/SO’. At CMP, the stock is trading at 49.0x FY21e EPS.