Britannia Industries - Golden triangle at play - Prabhudas Lilladher

BRIT analyst meet reinforced our positive stance on the ability of the company to sustain margin expansion in the coming quarters. We believe focus on following golden triangle principle with a balance of revenue growth, market share and profit growth will enable BRIT to post 35% PAT CAGR over FY13-15. 'BUY' with a target of Rs885, a 20% upside. Key takeaways are:

- Biscuit market growth has slowed down as indexed sales growth is only 35% of earlier levels, pace of premiumisation has also slowed down. However BRIT's premium brands straddle across price points and are not perceived as being unaffordable, thus enabling sustained growth in this environment. Bountiful monsoons and Food Security bill can boost growth rates in coming quarters.

- Rural India offers huge growth opportunity as BRIT's market share in rural India is only 70% of its urban share (total share 33%). Strong brand equity, rising aspirations and pricing power can increase growth significantly; efficient and cost effective distribution remains a challenge.

- BRIT plans to sustain share of own manufacturing at 50% from an earlier level of 30% backed by a capex of Rs4.5b in the past 3 years. The capex has been aimed at 1) Bigger Units (cap of 15000MT/unit) 2) multiples lines (3/unit) 3) fiscal benefits (VAT refund in Bihar and Orissa for 10 years; est. Rs180m in FY13) 4) control on production and quality 5) use of proprietary technology.

- BRIT's has reduced conversion costs by 90bp and overheads by 110bp in 1QFY14. Cost reduction in freight, energy (bio mass in new units), raw material sourcing (reverse auction) and distribution (integration of dairy and bakery, low volume SKU rationalisation) has led to these savings. Mgt is aiming at simplifying the systems and processes with focus on bigger manufacturing plants, bigger innovations, lean organisation structure and better distribution which will enable further cost reduction in coming periods as well.

- Volatility in input costs remains a challenge; however recent quarters show benefits of cost control measures in a stable input cost scenario.

Source : Equity Bulls

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