Buy Bajaj Finserv Ltd For Target Rs.6,611 - HDFC Securities
Britannia Industries, the market leader in biscuits in India - derives majority of its revenue from the sale of bakery products with a direct distribution reach of 22+ lakh outlets in India. The company has delivered a very good Q1FY21 results with a 26% rise in revenue and 91% rise in operational profit on the back of operational efficiency and increased demand for biscuits in the absence of out of home food consumption. However, as witnessed in Q2FY21, this growth moderated as non-essentials spends increased in Q2FY21. Going forward, as we deal with lower GDP forecasts, some downtrading can be expected across product lines which might cause some uncertainty on margins. However, Britannia has one of the most efficient managements that has shown time and again its ability to control costs and launch new innovative products. The company has also performed very well in hindi belt and market share seems to have grown in the rural regions where it has seen significant growth in the traditional trade channels. Britannia is diversifying its portfolio by entering new categories and in Q4FY20 it has launched its own milk drinks (milk shakes and lassi). Also growth in high margin dairy products like cheese and curd is encouraging. We believe, as growth in bakery products normalizes, the adjacencies and dairy business will pick up for the company. The company is planning 3 Greenfield plants (TN, UP, Bihar) and 2 Brownfield plans (Odisha, Ranjangaon) for expansion of the capacities in various categories.
Valuations and View:
While a double digit revenue growth might not be sustainable for Britannia over a long term, Britannia seems to have gained market share and is expected to have a better growth than the lower single digit growth of the company pre-covid. Traction in non bakery business will lead to better margins and the company has capex plans to augment its existing capacities in the next 1-2 years to cater to the increased demand. Britannia has created enormous wealth over the last decade and rewarded its shareholders handsomely. Rise in ICD (Inter Corporate Deposit) amounts and tapering of the revenue growth in second half are our recent concerns. While the price for Britannia has already corrected 15% from its yearly highs, we believe the stock can correct bit more and can be bought on dips to Rs 3341-3351 band (41.0xFY22E EPS) and add more on dips to Rs.2930-2938 band (36.0xFY22E EPS) for a base case fair value of Rs 3586 valuing the company at 44.0xFY22E EPS and a bull case fair value of Rs 3912 valuing the company 48.0xFY22E EPS.
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