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Britannia Industries - Initiating Coverage - Betting on Premiumization, Distribution and Cost optimization - Reliance Securities

Posted On: 2017-02-23 20:03:56

Market leadership in biscuits, increased premiumization, strong pricing power, improving direct distribution network, and management bandwidth would drive growth for Britannia Industries (BIL), going forward. Varun Berry - who joined BIL as Chief Operating Officer (COO) in Jan''13 and elevated as Managing Director in Apr''14 - has been at the forefront of driving premiumization and cost-optimization strategy as well as increasing BIL''s distribution network. We expect 13% revenue and 16.2% earnings CAGR through FY16-19E and initiate coverage on the stock with BUY recommendation and Target Price of Rs3,796.

Premiumization - The Buzz Word

BIL has been continuously focusing on premiumizing its portfolio over the past three years, which has significantly improved its gross margin profile, apart from benefiting from tailwind in the cost of inputs. With sharp rise in the cost of inputs in recent past, we believe that BIL would be able to maintain and is likely to improve its gross margins, going forward on the back of increased premiumization.

Aggressive Pursuit for Cost Optimization

BIL has seen 25% fall in trade loads, 30% fall in product returns and 75% reduction in wastage through FY13-16. It has focused on consolidating manufacturing facilities in fewer locations than before but on a larger scale, with thrust on placing large manufacturing capabilities closer to the market place instead of being geographically dispersed. This would further enable BIL to keep better control over quality and ensure supply chain efficiencies.

Distribution Network - Building Blocks for Sustainable Growth

BIL has also focussed aggressively on improving its distribution network in last three years. While BIL has strong presence in Southern & Western markets, it is relatively weak in Northern market. Doubling of direct distribution reach to 1.5mn outlets in FY17 from 0.7mn outlets in FY13 has enabled BIL to offer complete portfolio to the retailers and run several activations at retailer level.

Outlook & Valuation

We expect BIL to post consolidated revenues of Rs108.9bn & Rs125.2bn in FY18E & FY19E, respectively, while consolidated PAT is pegged at Rs10.6bn & Rs12.7bn for the same period. We expect BIL''s EBITDA margins to correct in FY17E, following it is expected to improve to 14.8% in FY19E owing to price hikes, recovery in volume growth, increasing premiumization and higher operating leverage. We expect consolidated EPS to be Rs88.1 in FY18E & Rs105.4 in FY19E. Based on current price, the stock currently trades at 36.9x FY18E and 30.8x FY19E earnings. We initiate coverage on the stock with BUY recommendation and Target Price of Rs3,796, which implies an upside of 17% from the current levels.

Shares of BRITANNIA INDUSTRIES LTD. was last trading in BSE at Rs.3236 as compared to the previous close of Rs. 3236.1. The total number of shares traded during the day was 6831 in over 1670 trades.

The stock hit an intraday high of Rs. 3276 and intraday low of 3211.25. The net turnover during the day was Rs. 22222683.


Source: Equity Bulls

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