Buy Britannia Industries - Slew of negative news flow impacts stock price - Prabhudas Lilladher

Britannia has underperformed CNX FMCG index by 35% in the past one year due to 1) uncertainty on pack size regulations 2) weakening volume growth and 3) sharp increase in prices of key inputs like sugar, wheat and fuel etc

Input costs softening, volumes have bottomed out: Input costs have started softening as sugar and wheat prices have declined by 13% from the recent highs and Palm oil prices are down 28%. Volume growth has started recovering as sales growth has jumped from 9.5% in Q2FY13 to 18.1% in Q3FY13. We estimate 16.5% sales CAGR post 14% in FY13.

Higher margin segments continue to gain traction: Share of Glucose biscuits has declined to less than 19% of total biscuit sales for Britannia. In addition Cake, Bread and Rusk have increased share by 6% in past five years and are growing at 25% CAGR. Sales of innovations has increased by 1.5x in the past two years. Realization on these products is 2-5x than the normal variants.

Dairy business to emerge as the next growth driver: BRIT's dairy business has seen 22% CAGR in Sales and PAT of Rs155m in FY12. We expect this business to maintain 20% CAGR in sales with margin expansion due to huge potential in dairy and focus on higher margin niches.

Increased Capex shows management confidence: BRIT has set-up two units in Odisha and Bihar and is in the process of setting up another unit in Gujarat. This is the strongest phase of Capex ever by the company which shows management confidence on growth outlook and likely gains from owned units under the GST regime.

Estimate 25% PAT CAGR over FY13-15; 'BUY' with a target of Rs635: We expect BRIT to post 16.5% sales CAGR. 140bps margin expansion will enable 27% PAT CAGR over FY13-15. 40% ROE and 50% Payout ratio, coupled with 27% PAT CAGR, makes stock attractive at 18.7xFY15 earnings. Potential value unlocking from real estate can add to potential returns; BUY.

Source : Equity Bulls

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