While Britannia (BRIT) has been the ideal performing stock in our Coverage Universe considering the fact that our ‘upgrade to Buy’ stance on 24th Feb, we think it presents eye-catching investment prospects from each a lengthy- and close to-term point of view.
Strong structural chance: BRIT’s chance for development is considerable, with the all round Biscuits category estimated to develop in the mid-single digits. Furthermore, the chance in terms of industry share gains is even higher – BRIT’s industry share is only in the mid-30s. The broad Packaged Foods industry (estimated at $40–50 bn) presents the strongest structural chance in India’s consumption space. BRIT’s FY21e income of ~$1.8 bn is a fraction of this addressable industry.
Impressive direct attain expansion in FY21 continues to provide industry share gains: In addition to in-property consumption led demand development and probably ~40% EPS development in FY21, BRIT final results in 9MFY21 notably reported (i) continued industry share gains – even in a powerful rural consumption atmosphere (Parle has historically fared far better owing to a greater rural salience at more than 50% of sales v/s BRIT’s 30%) and (ii) a continued speedy enhance in distribution to 2.3m outlets – the second ideal soon after HUVR in our Coverage Universe.
Recent traction in non-biscuit segments encouraging: As highlighted earlier, the enterprise has also shown indicators of a scale-up in the non-biscuit portfolio to ~2% of sales – led by Cream Wafers and Milkshakes.
Second COVID wave could lead to stronger FY22 earnings: In-property consumption could make a powerful return amid the second wave of COVID. We are not altering our forecasts but – provided the early stages of lockdown and measures presently getting implemented in only one state. Nonetheless, there is a scope for each topline and earnings development for FY22 as a powerful push for merchandise could outcome in substantially reduce trade discounts.
Benign commodity expense trend continues: Commodity fees stay soft, which is critical for a low gross margin enterprise like BRIT’s (~40% gross margins historically and 42.4% in FY21e).
Base much less difficult soon after Q1FY22: The challenge for BRIT from a base point of view would come largely in Q1FY22 with the base becoming far much less difficult subsequently.
Strong structural outlook, enhancing close to-term narrative, low-cost valuations: Despite (i) ~40% EPS development probably in FY21 (ii) a powerful track record of ~20%/27% EPS development in the preceding 5/10 years ended FY20 (iii) an enhancing outlook for FY22 (iv) the ideal-of-breed structural development possibilities and (v) ROE of more than 40%, the stock trades at 40.7x FY23e this is at a substantial discount to its historical 3- and 5-year averages of 46–48x. Maintain Buy, with revised TP of Rs 4,575 (Rs 4,120 earlier), targeting 50x FY23 EPS.