Result Update Research Institutional India I Consumer 08 February, 2021 Britannia Industries Ltd BUY Price: Rs3,542 Target Price: Rs4,409 Diversification of consumer choices impact volume Forecast return: 24% Britannia’s Q3FY21 performance was below expectations. Given diversification of Market Data consumer choices consol. revenue/EBITDA/PAT grew 6.1%/ 21.8%/ 22.3% led by healthy Bloomberg: BRIT IN growth in traditional trade and rural markets, while modern trade and institutional 52 week H/L: 4,015/2,100 business (~10% each) witnessed moderate recovery. After a stellar 1HFY21 performance, Market cap: Rs853.1bn the company has shifted its focus on strategic planks, (1) grow distribution, (2) cut costs, (3) build innovation pipeline, (4) nurture adjacent business, and (5) strive for sustainable and Shares Outstanding: 240.9mn profitable growth. We reckon, emphasis on under indexed Hindi speaking rural markets Free float: 22.4% helped in gaining market share. The company delivered all time high gross margin at 43.9% Avg. daily vol. 3mth: 805,840 (+242bps), whist, despite high employee cost and other expenses the EBITDA expanded Source: Bloomberg 21.8% resulting in EBITDA margin at 19.3%. PAT rose to Rs4.6bn (+22.3%). We maintain Changes in the report FY21E/FY22E earnings and introduce FY23E estimates. We retain Buy rating with DCF-based Rating: Unchanged revised target price of Rs4,409 (implying 46x FY23E EPS). Changed to Target price: Continued focus on Strategic planks as demand conditions return to normalcy Rs4,409 from Rs4.273 EPS: FY23E (95.1) Britannia delivered lower than expectation consol. revenue at Rs31.7bn (+6.1%). Domestic Source: Centrum Research estimates business saw 5.3% growth backed by ~4% growth in volumes. Management cited, traditional trade and buoyancy in rural markets saw faster growth, yet modern trade and institutional Shareholding pattern business was muted given lower footfall in stores, offices, schools and rail services. Dec-20 Sep-20 Jun-20 Mar-20 Management said, after excellent 1HFY21, it has shifted focus back to its growth agenda Promoter 50.6 50.6 50.6 50.6 driven by (1) strengthening distribution/marketing spends (2) cut costs (3) accelerate pace of FIIs 17.7 16.0 14.7 14.7 innovation (4) driving adjacent business and (5) strive for sustainable growth through IT DIIs 10.5 11.2 12.4 13.1 transformation project SAP Hana. We believe these efforts will enable the company to deliver Public/other 21.3 22.2 22.3 21.6 its ambition to become a “total food company”. Further, focus on direct coverage (2.29mn) Source: BSE and rural distributors (23K) could aid revenues and market share gains in Hindi region. Centrum estimates vs Actual results Continue to sustain the COVID efficiencies YE Mar Centrum Actual Variance Company reported all time high gross margin at 43.9% (+242bps) YoY led by healthy product (Rs mn) Q3FY20 Q3FY20 (%) mix, and moderate inflation (~3-4%). Though key RM saw rise, RPO (+25%) and sugar (+1%), Revenue 32,625 31,656 (3.0) wheat flour (-7%) and milk (-15%) reported decline. EBITDA expanded at 21.3% YoY, despite EBITDA 6250 6,115 (2.2) increase in employee cost (+8.4%), other exp. (+4.4%) resulting in EBITDA margin at 19.3% EBITDA margin 19.2 19.3 10bps (+250bps). Management alluded large part of the efficiency gains led by (1) better factory Adj.(%) net profit 4,749 4,558 (4.0) productivity (2) lower wastage 0.7x (3) 50%+ more direct dispatch to trade and (4) operating Source: Bloomberg, Centrum Research estimates leverage. However, we expect rise in ad-spends could weigh on margins going forward. Key highlights from management commentary (1) International business growing at healthy pace led by Middle East and Africa (2) return of train travel could see jump in out-of-home consumption (3) setting up greenfield operations in TN (capex of Rs4bn), whilst UP plant could come up in 18 months (4) Ranjangaon total capex Rs15bn and (5) Upgrade in IT/ERP systems will benefit distributor sales management and vendor management directly, yet it would also help in better inventory planning. Valuation and Risks We believe improved operating performance and strong execution capabilities provide healthy returns to long-term investors. Moreover, considering 9MFY21 performance and demand outlook we maintain FY21E/FY22E earnings and introduce FY23E estimates. We retain Buy rating with DCF-based revised TP Rs.4,409 (implying 46x FY23E EPS). Risks to our call include rising input costs, abrupt competition and unsecured loans to promoter group. Financial and valuation summary YE Mar (Rs mn) 3QFY21A 3QFY20A YoY (%) 2QFY21A QoQ (%) FY21E FY22E FY23E Revenues 31,656 29,827 6.1 34,191 (7.4) 128,885 140,891 156,186 EBITDA 6,115 5,020 21.8 6,754 (9.5) 23,012 25,534 28,646 EBITDA margin (%) 19.3 16.8 250bps 19.8 (50bps) 17.6 17.9 18.1 Adj. Net profit 4,558 3,726 22.3 4,987 (8.6) 17,988 20,153 22,884 Adj. EPS (Rs) 18.8 15.4 22.1 20.6 (8.7) 74.8 83.8 95.1 EPS growth (%) 28.3 12.0 13.6 PE (x) 46.4 41.5 36.5 Consumer EV/EBITDA (x) 37.7 33.5 28.6 PBV (x) 15.9 13.0 10.8 Shirish Pardeshi RoE (%) 36.9 33.9 31.8 Analyst, Consumer RoCE (%) 29.3 28.0 27.3 +91-22-4215 9634 Source: Company, Centrum Broking [email protected] Please see Disclaimer for analyst certifications and all other important disclosures. Britannia Industries Ltd 08 February, 2021 Thesis Snapshot Estimate revisions Valuations FY21E FY21E FY22E FY22E YE Mar (Rs mn) % chg % chg We believe improved operating performance and strong execution New Old New Old capabilities provide healthy returns to long-term investors. Moreover, Revenue 1,28,885 1,28,885 0.0 1,40,891 1,40,891 0.0 considering 9MFY21 performance and demand outlook we maintain EBITDA 23,012 23,012 0.0 25,534 25,534 0.0 FY21E/FY22E earnings and introduce FY23E estimates. We retain Buy rating EBITDA margin 17.6 17.6 0 bps 18.3 18.3 0 bps with DCF-based revised TP Rs.4,409 (implying 46x FY23E EPS). Risks to our call include rising input costs, abrupt competition and unsecured loans to Adj. PAT 17,988 17,988 0.0 20,153 20,153 0.0 promoter group companies. Diluted EPS (Rs) 74.8 74.8 0.0 83.8 83.8 0.0 Source: Centrum Broking Valuations Rs/share DCF-based target price Rs4,409 Britannia Industries versus NIFTY 50 WACC (%) 9.3 1m 6m 1 year Terminal growth (%) 6.0 BRIT IN (0.9) (10.0) 8.9 NIFTY 50 4.0 33.1 23.4 P/E mean and standard deviation Source: Bloomberg, NSE 70 60 Key assumptions 50 YE Mar FY21E FY22E 40 Domestic Volume growth 10.5 7.8 30 Domestic Price/Mix growth 2.1 1.5 20 Gross Margin 41.7 41.8 10 Employee costs as % of Sales 4.1 4.0 Other expenses as % of Sales 19.7 19.6 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20 Feb-21 Aug-12 Aug-17 Aug-13 Aug-14 Aug-15 Aug-16 Aug-18 Aug-19 Aug-20 Tax rate 22.2 22.2 P/E Mean Source: Centrum Broking Mean + Std Dev Mean - Std Dev Mean + 2 Std Dev EV/EBITDA mean and standard deviation 53 45 37 29 21 13 5 Feb-13 Feb-19 Feb-12 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-20 Feb-21 Aug-15 Aug-12 Aug-13 Aug-14 Aug-16 Aug-17 Aug-18 Aug-19 Aug-20 EV/EBITDA Mean Mean + Std Dev Mean - Std Dev Mean + 2 Std Dev Source: Bloomberg, Centrum Broking Peer Comparison Mkt Cap CAGR FY20-FY22E (%) PE (x) EV/EBITDA (x) RoE (%) Company Rs bn Sales EBIDTA PAT FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E Britannia 836.2 11.0 17.7 19.9 59.6 46.4 41.5 47.6 37.7 33.5 32.4 36.9 33.9 HUL 5,256.1 15.1 19.2 21.9 69.9 57.2 51.0 52.9 40.3 36.6 88.4 32.2 20.8 Dabur 915.5 8.3 13.7 13.4 59.5 52.9 46.3 53.8 46.8 40.5 25.2 24.3 24.0 Colgate-Palmolive 432.2 4.0 7.2 6.9 53.0 50.6 46.3 36.2 33.1 31.2 53.7 52.1 53.9 Emami 224.5 7.7 16.3 15.4 43.5 35.3 32.2 27.8 21.8 19.3 26.9 33.0 32.1 Bajaj consumer 38.9 4.8 18.0 15.9 21.1 17.7 15.7 15.9 12.1 9.9 33.0 29.5 26.4 Source: Company, Centrum Broking Centrum Institutional Research 2 Britannia Industries Ltd 08 February, 2021 Exhibit 1: Centrum Quarterly Monitor Q2FY21 Q3FY21 Our Comments Demand On the demand front the management Management witnessed resilient We believe Britannia will continue to benefit Environment highlighted that consumer spending demand in general trade and rural from improving out-of-home consumption which was earlier concentrated towards markets, however MT and Institutional and institutional business going forward with essentials is now evening out /getting sales was muted.