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Buy Britannia Industries Ltd For Target Rs.4,575

Narrative improving, increasing scope for upside

While Britannia (BRIT) has been the best performing stock in our Coverage Universe since our ‘upgrade to Buy’ stance on 24th Feb, we believe it offers attractive investment prospects from both a long- and near-term perspective.

* Strong structural opportunity: BRIT’s opportunity for growth is significant, with the overall Biscuits category estimated to grow in the mid-single digits. Furthermore, the opportunity in terms of market share gains is even greater – BRIT’s market share is only in the mid-30s despite the company being the largest player in the Biscuits space. The broad Packaged Foods market (estimated at USD40–50b) presents the strongest structural opportunity in India’s consumption space. BRIT’s FY21E revenue of ~USD1.8b is a fraction of this addressable market.

* Impressive direct reach expansion in FY21 continues to deliver market share gains: In addition to in-home consumption led demand growth and likely ~40% EPS growth in FY21, BRIT results in 9MFY21 notably reported (a) continued market share gains (sustained for 37 quarters now) – even in a strong rural consumption environment (Parle has historically fared better owing to a higher rural salience at over 50% of sales v/s BRIT’s 30%); and (b) a continued rapid increase in distribution (especially direct distribution) to 2.3m outlets – the second best after HUVR in our Coverage Universe.

* Recent traction in non-biscuit segments encouraging: As highlighted in the FY20 Annual Report analysis note, the company has also shown signs of a scale-up in the non-biscuit portfolio to ~2% of sales – led by Cream Wafers and Milkshakes. Its entry into Salty Snacks (albeit restricted to Andhra Pradesh initially) also offers promise. While these segments may take a back seat due to the COVID-led impact on discretionary demand, the opportunity remains immense from a medium- to long-term perspective.

* Second COVID wave could lead to stronger FY22 earnings: In-home consumption may make a strong return amid the second wave of COVID. We are not changing our forecasts yet – given the early stages of lockdown and measures currently being implemented in only one state. Nonetheless, there is a scope for both topline and earnings growth for FY22 as a strong push for these products could result in much lower trade discounts – as was the case last year.

* Benign commodity cost trend continues: Commodity costs remain soft, which is important for a low gross margin business such as that of BRIT (~40% gross margins historically and 42.4% in FY21E).

* Base less challenging after 1QFY22: As highlighted in our upgrade note, the challenge for BRIT from a base perspective would only come largely in 1QFY22 with the base becoming far less challenging in subsequent quarters.

* Strong structural outlook, improving near-term narrative, inexpensive valuations: Despite (1) ~40% EPS growth likely in FY21, (2) a strong track record of ~20%/27% EPS growth in the preceding 5/10 years ended FY20, (3) an improving outlook for FY22, (4) the best-of-breed structural growth opportunities, and (5) ROE of over 40%, the stock trades at 40.7x FY23E; this is at a substantial discount to its historical three- and five-year averages of 46–48x. Maintain BUY, with revised TP of INR 4,575 (INR4120 earlier), targeting 50x FY23 EPS.

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