Britannia Industries Rating: Buy- Firm widening the gap with its peers

The Britannia management’s efforts in the last few years on (i) expanding distribution, especially direct reach which is now at 2.3m outlets (next only to HUVR) while its total reach is now the best for any listed Food company; (ii) boosting R&D capabilities, after setting up a new R&D centre five years ago; (iii) successful implementation of its low unit packs strategy, leading to consistently strong growth in the hinterland; (iv) consistent cost rationalisation; (v) continued investments in boosting overall and regional manufacturing capabilities (including the ongoing Rs 15 bn on its mega facility in Ranjangaon); and (vi) its new regional strategy (similar to HUVR’s highly successful WIMI strategy) is resulting in consistently widening moats over peers in Biscuits (market leadership has extended for 37 quarters now) and in the broader $40-bn Food category where BRIT made an impressive initial foray in FY20.

Exciting long-term opportunity
With the widening of its moats, BRIT has strengthened its right to win and is poised to gain further market share (currently only in the mid-30s) in the Biscuits category, which contributes ~80% of sales, and in the overall $40 bn Packaged Food industry.

Remarkable track record
BRIT’s track record over the last 10 years ending FY20 is extremely strong, with topline and earnings ahead of peers. This is remarkable given that most FMCG peers have struggled to post double-digit CAGR over the last three-to-five years.

Valuation and view
Inexpensive valuations: The extraordinary strong base in FY21e (40% EPS growth forecasted), led by high in-home consumption and low material and A&P costs, does put some pressure on the next few quarters, particularly in Q1FY22 where the base has shown 105.4% EPS growth. However, beyond that it will become less challenging in subsequent quarters. On the other hand, the stock is now attractive at 36.5x FY23e EPS, a discount to its 3/5 year average P/E multiple of 48x/46x and also on a relative basis as compared to its peers.

A favourable risk-reward ratio: Since our downgrade in Nov’19 on challenging valuations and rising raw material costs (not a concern now), the stock has underperformed peers (4% return v/s double-digit average returns by its peers). While we remain cautious due to challenges to FY22 earnings growth, we believe downside is limited as the narrative is likely to move to FY23 and beyond in the next few months.

Upgrade to Buy: Immense structural opportunity, remarkable track record, RoEs of over 40% and an attractive risk-reward ratio on FY23e earnings, after its recent underperformance, lead us to upgrade BRIT to Buy. Our TP of Rs 4,120 (based on 45x FY23e EPS) implies an upside of 24% from its CMP.