Britannia Industries has underperformed broader indices in the last one year, clocking a 13% absolute return versus the Nifty’s 34% and the Nifty Consumption index’s 26%. The stock is currently trading at 35x its FY2023E EPS, which is at a stark discount to some large consumer goods stocks such HUL and Nestle India (which trade at 40x and 55x, respectively). Considering its strong track record (after the induction of Mr. Varun Berry as MD &CEO), leadership positioning in the biscuits category, strong return ratios and future growth prospects,

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Sharekhan believes that Britannia Industries is a better pick in the FMCG space with strong growth prospects and a favourable risk-reward ratio. Sharekhan recommends Buy on Britannia Industries With an unchanged price target of Rs 4200.

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Britannia Industries Revenue grew at a CAGR of 9% over FY2015-19 (and at a CAGR of 11% over FY 2017-19) aided by a wider distribution reach, product innovation, market share gains and strong traction in the Hindi-speaking belt. Britannia’s direct distribution reach expanded to 22.9 lakh outlets in December 2020 from 7.3 lakh outlets in March 2014 (rural distribution network expanded to 23,000 from 7,000 as of March 2015). While some levers will remain key revenue drivers going ahead, we believe growth in adjacencies (cake, rusk and dairy products) driven by innovation would add on to revenues in the coming years.

Britannia’s Subsidiaries(including the Dairy and international businesses) revenues and operating profit grew by 27% and 33% in FY2020 (grew by 32% and 118% in 9M FY21).Cost-saving initiatives such as reducing wastages, cutting distance to market and higher in-house production helped OPM improve to 16% in FY2020 from 9% in FY2014.

Sustained cost-savings, scale-up of efficiencies in new facilities (higher capacity utilisation at Ranjangaon facility) and premiumisation would help OPM rise further to 20% by FY23E. This will help Britannia’s earnings to grow at a CAGR of 18.4% over FY20-23E. Britannia has invested Rs 700 cr in its phase I capital expenditure of Ranjangaon facility (total capex of Rs 1500 cr by FY24).

Britannia’s Key Risks:

Any slowdown in sales of key categories or significant increase in key input prices from the current level would act as a key risk our earnings estimates in the near term