Neutral on Britannia Industries - Analyst Meet - Motilal Oswal

Britannia (BRIT IN, Mkt Cap US$0.9b, CMP Rs360, Neutral)

We attended the first ever analyst meet of the company to take stock of 1) management outlook on growth opportunity, 2) competitive intensity, 3) commodity price inflation, and 4) margin outlook in the medium term.

Biscuits are the single largest processed food segment with sales exceeding Rs124b. Britannia is well placed to capitalize on the processed foods opportunity due to 1) strong brands, 2) increased innovation, and 3) large distribution. Britannia is expanding the opportunity size by entry into 1) flavored milk, 2) easy to cook breakfast, and 3) value-added biscuits and snacks.

Commodity price inflation is hurting profit margins. Rising prices of key inputs like wheat and sugar defy logic in a year of bumper harvest; vegetable oil prices are moving in tandem with palmoil prices.

Britannia's is trying to protect profit margins by 1) cutting costs (Rs2b costs cut in past 3 years), and 2) calibrated price increases, and 3) increasing sales proportion of higher margin value added products.

However margins of 8-10% are ruled out in the medium term.

Britannia has achieved 15% volume growth and has 33% market share (same as that of Parle); the company has grown ahead of market volume growth in the biscuits segment. We expect Britannia to report sales CAGR of 20% over FY10-13; volumes are expected to increase at 15% CAGR.

We are positive on the growth potential in the biscuits category however EBIDTA margins are unlikely to recover to 8-10% in the medium term. Medium-term profitability will continue be a function of competitive intensity and margin trends in key category of biscuits.

We estimate 18% PAT CAGR over FY10-13. The stock trades at 34x FY11E EPS of Rs10.5, 23x FY12E EPS of Rs15.5 and 17.5x FY13E EPS of Rs20.6. Maintain Neutral.

Source : Equity Bulls

Keywords