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Britannia Industries is well-placed in the core biscuits segment and is promptly addressing adjacency gaps, to evolve into a ‘Total Foods Company’. Britannia aspires to clock mid-teen growth, with double-digit growth in Biscuits which, we believe, is possible only post requisite action towards establishing its adjacencies. But given the relentless rural slowdown, we model-in a low 10% revenue CAGR over FY23-26E. We initiate coverage on Britannia with a BUY and Jun-24E TP of Rs5,700/sh, based on 50x PER (~20% premium to its last 10-yr avg fwd PER). With a solid brand price straddle in place, it has been widening product availability with improved distribution, and has bolstered sourcing with an amplified capex cycle. We see the shift from opex to capex aiding earnings. Muted rural demand, inflation and competition are key risks to our call

Fortifying the Biscuits play with strategic actions

Britannia has, under the leadership of Varun Berry, seen steady market-share expansion since the last 10 years; it has achieved 15-year peak share of 33.5% (Emkay estimate). We believe Britannia is well ensconced in the category for sustaining the share gains, on the back of: i) faster growth in the premium category, ii) the market shift, from Rs5 to Rs10, iii) gradual shift from unorganized, iv) an enhanced health portfolio, v) regional thrust, and vi) a strong research and development team. Britannia has fitted itself appropriately for its journey ahead with an accelerated capex cycle (over FY16-25) and expanding product reach, along with a superior distribution reach.

Execution in adjacencies crucial

The company has been charting its business diversification for a long time now, albeit dragging its feet on the execution front (non-biscuits share remains at 22-25% of sales). We believe factors such as robust opportunity in core biscuits, Britannia’s limited domain knowledge in adjacencies and its negative margin mix have hurt its diversification agenda. Going ahead, Britannia is looking to secure partnerships with domain experts, like its tie-up in the croissants/cheese space. Mgmt aspires to achieve 35% revenue from non-biscuits in three years, expanding it to 40% in five years and to 50% in ten.

Execution and favorable setting to aid valuations; initiate with BUY

We initiate coverage on the stock with a BUY recommendation and Jun-24E target price of Rs5,700/share, based on 50x Jun-25E earnings. Our valuation of 50x is at a 20% premium to its last ten-year average forward PER. Valuation premium is justified by the improved execution and positive outlook on adjacencies. Management targets achieving mid-teen growth which, in our view, will require an improved demand setting across urban and rural. We model-in ~10% top line and ~16% earnings CAGR over FY23-26E. Key risks to our BUY call are: a) sustained inflation in key wheat flour, b) surge in competitive intensity (spike at the premium-end), c) Company’s inability to execute in adjacencies, and d) rural slowdown.

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