Britannia has had a strong run with the stock up 194% in the last one year and 49% YTD. We highlighted in our Jan 2015 report that Britannia is now in the second phase of value creation which should accompany volume growth acceleration, market share gains led by new product launches and increasing depth and breadth of distribution. Having restructured the supply chain and aggressive cost management in the first phase, Britannia has successfully transformed the cost economics of the business (biscuits and bakery). This not only doubled margins and unlocked earnings growth, but also resulted in substantial jump in return on capital. Consequently, stock returns not just mirrored earnings growth but were also accompanied by substantial expansion of multiple.
We remain quite positive about the strategic direction of the company. We also expect near term earnings to stay robust due to lower base of margins for the next two quarters but stock price in our view already prices in the elevated trajectory of volume growth and improved margins of the business.
The current stock price is building long term annualised earnings growth expectations of c14%, which are rich if not excessive. We see limited upside from here. We have increased our target price to Rs 2,800 but downgrade our rating to ‘hold’ from ‘buy’.