Analyst Corner| Britannia Industries: Upgrade rating to‘buy’ from ‘hold’

Britannia suggests that the growth momentum at the margin is sustaining and given the uncertainty on the spread of COVID-19, strong growth and market share gains are likely to persist.

Impressive Q1 sales growth of 26.4% implies June month grew in excess of 30%, evidence of accelerating momentum, This is not a one-off: growth is sustaining, input costs benign which suggest earnings growth in FY21 will be very strong Securing medium-term growth too with capacity and innovation; upgrade to Buy from Hold, new TP INR4,500.

Owing to consumer preferences for safer, trusted branded packaged food products amid the COVID-19 pandemic and Britannia’s sharp execution and agility in rising to the occasion, it delivered an exceptional performance in a quarter of peak disruption for most consumer companies. Consolidated sales/EBITDA/clean PAT grew 26.4%/81.7%/104.7% yoy, respectively, led by strong underlying volume growth of 21.5%. Gross margin expanded (100bps) due to better mix and benign input prices, operating leverage and cost control led to a jump in EBITDA margins (by 640bps) leading to EBITDA beating consensus by 28%.

The biggest question for investors is whether the sharp rally in the share price already factors in this expected strong growth (which was signalled at Q4FY20 results). And whether this operating rebound is a one-off and as the situation normalises, should Britannia drop to more subdued growth, hence does the stock now offer limited upside given valuation?

Britannia suggests that the growth momentum at the margin is sustaining and given the uncertainty on the spread of COVID-19, strong growth and market share gains are likely to persist. Input basket is benign and Britannia expects it to remain so in FY21. Mix will remain focused on relatively premium and fast-selling SKUs, and will only gradually encompass all other products. Overhead cost control will continue and operating leverage should fuel very strong EBITDA growth in the coming quarters as well. Given the sharp earnings growth improvement, Britannia now trades at 45x FY22e PE, implying long-term earnings growth expectations of c13%, which in our view is achievable. The recent rally in the share price is also largely in part a catch-up rally (2-year stock CAGR is just 8%, as volume growth suffered last year due to rural slowdown), hence momentum is likely to sustain if the growth remains stronger beyond Q1. We increase our earnings estimates by c15% and TP to INR4,500; upgrade the stock rating to Buy from Hold.