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Strong franchise with hunger of market share

We initiate coverage on Britannia Industries Ltd. (BRIT) with NEUTRAL rating due to following reasons: (1) Strong runway of growth in Indian packaged foods industry. (2) Continues market share gains in the core category with increased focus on smaller towns supporting growth. (3) Non?Biscuit portfolio gradually increasing in mix led by NPD’s. (5) Decent margin expansion over FY23E?25E led by price actions, normalization of commodity inflation and cost optimization

Strong runway of growth in Indian packaged foods industry

The Indian packaged food market is expected to be double and grow up to USD 70bn in the next 5?10 years, led by economic growth, demographic dividend and growing e? commerce. Category leaders like BRIT are expected to benefit from this tailwind.

Continues market share gains in the core category

BRIT has gained >80bps market share in the last two years. Share gains have come from both smaller as well as from no. 2 player. Market share in urban markets is 39% and in rural market it stands at 27?28%. Apart from improving distribution, share gain is also on the back of focused strategies to win in organized retail channels, core renovation & innovation, consistently drive upgrades through right products, sku’s & communication. Rural distribution has gone up to 28,000 distributors. Along with rural footprint expansion, it is also focusing on a wider direct reach. Direct reach now stands at 26.4lacs. Rural distribution still lags urban by 11ppts hence scope for distribution expansion still has a long way to go. Hindi belt is growing 20% faster than rest of India in recent times but BRIT believes there is still some room for attention.

Non?Biscuit portfolio gradually increasing in mix led by NPD’s

Non?biscuit portfolio has grown at a healthy rate over the years and now stands at 23% of the portfolio mix with cakes & rusks alone contributing ~50%. Smaller portfolios are also expected to scale up with the recent capex. New Product Developments (NPD’s) in FY22 stood at ~4.5% of revenue & is expected to improve further with normalization

BRIT should be able to deliver ~17% earnings over FY23E?25E growth led by

We model reveneue CAGR of 8.3% over FY23E?25E led by ~5.5% volume CAGR. On the margin front, inflationary pressures have cooled?off from peak levels. Benefits have already started accruing from 3QFY23. This should lead to strong margin expansion over the next two years. We expect gross margin to touch previous levels (close to ~42%) by FY24 itself. Normalization of overheads especially advertisement spends will restrict flow?through. We thus build 210bps/130bps expansion in Gross/EBITDA margin over FY23E?25E.

Initiate coverage on BRIT with a NEUTRAL rating and a target price of Rs 4,960

At the current market price, the stock is trading at 57x/47x/42x FY23E/FY24E/FY25E EPS as we build in ~17% earnings CAGR over FY23E?24E (~20% over FY22?25E). We initiate coverage on BRIT with a NEUTRAL rating and a target price of Rs 4,960, valuing it at ~51x March’2024E EPS (implied March’25E PE multiple of ~45x compared to 3yr/5yr avg fwd. multiple: ~46x/48x) due to the structural opportunity in the packaged foods space, decent return ratios (even while it looks to have come?off in FY22), healthy dividend payout and potential addition of new categories going ahead. Key monitorable: Rural growth outlook, commodity prices and level of ICD’s to group companies

3QFY23 Result Highlights ? Solid earnings beat led by margin improvement

* Headline Performance: Consolidated revenues was up 17.4% YoY to Rs42bn. Total volumes to have grown in low single digits (packet volumes up 17%). EBITDA was up 51.5% YoY to Rs 8.2bn. Reported Profit of Rs9.3bn includes an exceptional gain (net of tax) of Rs 3.6bn, pursuant to a recent JV agreement with Bel SA for the Cheese business and consequent sale of 49% equity stake in its subsidiary & fair valuation of the residual 51% stake.

* Margins: Consolidated gross margin expanded by 570bps YoY to 43.7% (up 470bps QoQ). Consolidated EBITDA margin was up 440bps YoY to 19.5%.

* 9MFY23: Revenue, EBITDA and APAT were up by 16%, 23% and 23%, respectively. EBITDA margin up by 90bps YoY to 16.5%.

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