Britannia Industries Stock Research Report by ICICI Securities
Sector: Consumer Food
CMP Rs. 4626, Target Rs. 5300 (15% upside potential)
Target Period: 12 Months
Britannia Industries Stock Research Report: Trending well with eye on diversification opportunity. Retain preferred pick status
Britannia’s revenue growth of 13% YoY was above our estimates. Gross margin and EBITDA margin expansion of 690bps YoY and 440bps YoY to 44.9% and 19.9% (very close to all time high margins) was driven by pricing flow through, lower input cost index and strategic raw material buying. It is likely to pass on the benefits of input cost moderation to continue its market share gain trajectory (highly pleasing to note). It continues to drive (1) market shares gains (15-year high) and (2) distribution expansion (for rural markets and adjacent categories). Adjacencies and new launches also continue to perform well. Non-biscuits portfolio growth of 1.5x of overall growth is very encouraging.
BRIT has seen one of the most resilient (core) performance in the last three years (driven by market share and distribution gains). We believe it is likely to witness industry-leading distribution-led revenue growth. Consensus (including us) expects Britannia to invest in new categories, till now, pressure on core margins was not providing ammunition. We reckon, it will now re-earn the (premium) multiple as a total goods company. Going forward, success of (at least a few) new segments and ramp up of adjacent categories is imperative. The outlook on this appears much better. Maintain ADD with revised TP of Rs5,300.
● Britannia Industries Stock Research Report: Good revenue performance driven by distribution: Consolidated sales were up 13% YoY with a 4-year CAGR of 9%. Volume growth (domestic) was in low-single digits (~2-3% YoY; packs volume grew 12% YoY) implying pricing benefit of ~12%. Grammage reduction in price-point packs would have weighed on volume growth print. Britannia is likely to pass on the benefits of input cost moderation to maintain its market share gain trajectory. Even as the rural market has seen a slowdown (on an overall basis), management highlighted benefits from distribution expansion (high double digit growth and 1.4x market share gains in rural vs pan India). Focus continues on increasing direct distribution and enhancing rural footprint. Management highlighted there is enough scope for distribution in Hindi belt.
● Pricing actions, weak base and input cost pressure moderation driven by strategic buying led to margin expansion: Consol. gross margin expanded 690bps YoY to an all-time high of 44.9% on the back of the pricing actions (increases), PLI benefits (Rs0.9bn) and input cost correction (strategic buying). On sequential basis, it was up 130bps. Management expects moderate input inflation going forward. EBITDA margin expanded also expanded by 440bps YoY to 19.9% (closer to all time high). We believe Britannia had taken sufficient pricing actions and continues to undertake intensified cost efficiency measures to protect margins. Management highlighted that they may have to correct consumer prices in order to remain competitive and gain market shares which will restrict any material margin expansion going forward. We note that the increased pace of NPD will also require some A&P investments.
● Performance and initiatives towards non-biscuits portfolio drives confidence on diversification: Non biscuits portfolio grew by 1.5x of overall growth in FY23 and is expected to continue the same growth trajectory. Breads continued to grow profitably while Croissant continues to perform well and crossed Rs1bn after its national launch (base market of Tamil Nadu and West Bengal continues to grow 50% YoY). Dairy also performed well with 2x YoY distribution and Winkin Cow crossed Rs1.5bn revenue (growing at high double digits). Added 3 new lines in Rusk business and bridged portfolio gaps in cake market to compete in highly fragmented markets. Innovation also has picked up with adding orange flavour in Croissant, launch of Winkin Cow rich flavour milk shakes and Come Alive coconut water. Britannia has plans to launch healthier products under Come Alive brand.
● Distribution expansion continues: Number of RPDs (rural preferred dealers) and direct distribution increased by 2k and 0.2mn YoY to 28k and 2.7mn outlets (overall reach of 6.7mn outlets). Even though Britannia has best in class distribution, it highlighted that it is lagging behind the competitor by ~1mn outlets in Hindi belt and there is enough scope for distribution expansion. We believe Britannia (and Nestle) are likely to witness industry-leading distribution led revenue growth.
● Valuation and risks: We increase our earnings estimates by 7-3% for FY24-25E; modelling revenue / EBITDA CAGR of 11% / 14% over FY23-25E. Maintain ADD with a DCF-based revised target price of Rs5,300 (was Rs4,700). Key upside risk to our thesis is faster-than-expected revenue growth in core biscuits. Key downside risk is sustained weakness in consumption demand.
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