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. The broad Packaged Foods market (estimated at $40–50 bn) presents the strongest structural opportunity in India’s consumption space. BRIT’s FY21e revenue of ~$1.8 bn 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 (i) continued market share gains – 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 (ii) a continued rapid increase in distribution to 2.3m outlets – the second best after HUVR in our Coverage Universe.
Recent traction in non-biscuit segments encouraging: As highlighted earlier, 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.
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 products could result in much lower trade discounts.
Benign commodity cost trend continues: Commodity costs remain soft, which is important for a low gross margin business like BRIT’s (~40% gross margins historically and 42.4% in FY21e).
Base less challenging after Q1FY22: The challenge for BRIT from a base perspective would come largely in Q1FY22 with the base becoming far less challenging subsequently.
Strong structural outlook, improving near-term narrative, inexpensive valuations: Despite (i) ~40% EPS growth likely in FY21; (ii) a strong track record of ~20%/27% EPS growth in the preceding 5/10 years ended FY20; (iii) an improving outlook for FY22; (iv) the best-of-breed structural growth opportunities; and (v) 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 Rs 4,575 (Rs 4,120 earlier), targeting 50x FY23 EPS.