Motilal Oswal
Britannia (Buy)
Target: ₹4,120
CMP: ₹3400.80
The management’s efforts in the last few years on a) expanding distribution, especially direct reach which is now at 2.3m outlets (next only to Hindustan Unilever) while its total reach is now the best for any listed Food company and is nearing Parle among unlisted ones; b) boosting R&D capabilities, after setting up a new R&D center five years ago; c) successful implementation of its low unit packs strategy, leading to consistently strong growth in the hinterland; d) consistent cost rationalization, which is essential in a low gross margin category like Foods; e) continued investments in boosting overall and regional manufacturing capabilities (including the ongoing ₹1,500 crore on its mega facility in Ranjangaon); and f) its new regional strategy (similar to HUL'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 $40b Food category where Britannia made an impressive initial foray in FY20.
Immense structural opportunity, remarkable track record, RoEs of over 40 per cent superior to most consumer peers, and an attractive riskreward ratio on FY23E earnings, after its recent under-performance, leads us to upgrade Britannia to a Buy. Our target Price of ₹4,120 is based on 45x FY23E EPS.