Impressive Quality of Earnings
Marginally ahead of our estimates, Britannia Industries has delivered an impressive set of numbers for 3QFY18. While net sales grew by 13% YoY to Rs25.6bn (vs. our estimate of Rs25.1bn), net profit increased by 19.6% YoY to Rs2.63bn (vs. our estimate of Rs2.6bn). Volume growth in the core business came in at an impressive 11% YoY. EBITDA grew by 31% YoY to Rs3.9bn, 14% higher than our estimate of Rs3.4bn, mainly on the back of lower input cost. Other income declined by 17% YoY to Rs451mn due to lower yields on investments.
We continue to be optimistic on Britannia’s growth trajectory in coming years on the back of strong management bandwidth, increased distribution reach, superior product-mix, higher share of organised players and benign input costs. Expecting Britannia’s revenue and earnings to clock 14.4% and 20.3% CAGR, respectively through FY17-20E, we maintain our BUY recommendation on the stock with a revised Target Price of Rs5,642 (from Rs5,318 earlier).
Strong Growth in Core Business
Volume growth of 11% YoY is impressive in our view, as the Company witnessed 6% YoY growth in the base quarter despite the impact of demonetisation. Some of the new product introductions include Pure Magic Deuce, revamp of Good Day Chocolate and activation of Bourbon. The Management restated its endeavour of moving towards becoming a complete foods player. The croissant JV project with Greece-based Chipita is in progress and the Company has also started liquid milk collection to foray into the dairy segment. The Management stated that Britannia has witnessed improved market shares at the cost of other national and regional players.
Benign Input Prices & Cost Rationalisation Aided Margin Growth
Gross margins improved by 110bps YoY to 38.5% on the back of improved product-mix and benign input prices. The average price of wheat and milk prices declined 6% and 3%, respectively in 3QFY18. While sugar prices remained flat, palm oil prices rose by 6%. Other expenses declined by 80bps YoY to 19.6%. The Management stated that the Company is on track to achieve cost savings to the tune of Rs2.3bn in FY18E and has set an even higher target for FY19E. Resultant EBITDA margins rose by 210bps YoY to 15.2%.
Outlook & Valuation
Looking ahead, we believe that continued focus on penetrating into weak markets, increased direct distribution reach (1.8mn outlets), superior product-mix (premium value mix of 75:25), strong cost saving measures and benign input cost scenario will continue to drive Britannia’s earnings growth. Based on expected EPS of Rs128.4, the stock currently trades at 37x FY20E earnings. We continue to maintain our BUY recommendation on the stock with a revised Target Price of Rs5,642 (from Rs5,318 earlier).
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