IDEA 2 ACT: Britannia Industries Ltd

Buy - BRITANNIA

CMP (NSE) 15:57, 24 Sep

4,042.90 0.550.01%

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Sector

FMCG

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Reco. Price

3,450

Period

1-Year

Target Price

3,916

upside

13.6%

Stop Loss

0

Last updated on

08 Sep, 2016

Premiumisation of brands to improve gross margins
Britannia continued leveraging of its power brands of biscuits into premium categories, which is helping it to improve margins. As a result, gross margins have improved from ~35% in FY12 upto ~42% in FY16. Moreover, it is planning to increase in house manufacturing upto 65% (~50% currently) over the next two years. Continued focus on super premium segment will help in further expansion of EBITDA margin. Focusing on high-margin and fast growing premium and super-premium categories, Britannia will enjoy the benefits of increased market share and expanding margins.
 
Improving distribution reach to provide volume led growth
Britannia’s direct distribution has now reached upto 1.32 mn outlets (+60,000 added in Q1FY17). Whereas total distribution has now reached upto 4.5 mn outlets as a consequence, gap with there largest competitor Parle has been narrowed to 1.2 million outlets from 1.7 mn outlets in FY13. The company’s intent is to increase rural distribution reach. There rural distributors have increased to 8,300 in Q1FY17 (+33% yoy). Also in Hindi-speaking belt (Rajasthan, Gujarat, Madhya Pradesh, Uttar Pradesh) where it has ~15% market share, it is focusing to improve it. All these initiatives would provide it the volume led growth.
 
Focus on expanding non -biscuit portfolio to improve margins
The non biscuit portfolio (Rusk, Cake) which have superior margins than biscuit segments has grown in FY16 (~16% yoy). The company is sharpening its focus on cake & rusk where the margins are 1.5x of biscuits segment. The dairy segment revenue growth (~4% over FY12-FY16) was not upto the mark, so it is focusing to expand its dairy segment revenues 5x in next 5 years.
 
Outlook & Valuation
We have positive view on the stock on account of 1) premiumisation of its strong brands, 2) efforts to improve the distribution strength 3) focus on high margin non-biscuit portfolio, (including dairy, bread, rusk and cakes) 4) increase in rural penetration & strengthening its position in the Hindi-speaking belt 5) increasing inhouse manufacturing (from 50% to 65%) over the next two years. The stock trades attractive at 34.3x FY18E earnings. The stock is trading at the lower-end of the sector despite healthy growth & margins. We expect the company should fetch higher multiple. We recommend Buy on the stock with one year target price of Rs4,014, based on 39x FY18E earnings.
 
Financial Summary
Rs cr. FY14 FY15 FY16 FY17E FY18E
Revenue 6912 7858 8678 9677 11032
EBITDA 627 863 1226 1456 1825
OPM% 9.1 11.0 14.1 15.0 16.5
PAT 395 688 806 982 1235
EPS Rs 33.0 57.4 67.2 81.9 102.9
P/E (x) 107.2 61.6 52.6 43.2 34.3
ROE % 49.5 55.3 45.6 40.1 36.6
ROCE % 58.9 58.1 63.9 56.5 66.5

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