Sell Britannia Industries Weak outlook, though good 3Q; : Anand Rathi

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Britannia Industries
Weak outlook, though good 3Q; reiterate Sell
Britannia reported PAT growth of only 3.5% in 3QFY11. With
rising food inflation and keen competition, we expect Britannia’s
earnings growth to remain under pressure in coming quarters.
We retain Sell on the stock and target price of `313.

 Revenue growth of ~22%. Britannia reported 22.5% revenue
growth yoy. Revenue boosted owing to the company having hiked
prices of key SKUs by ~10% in Nov-Dec ’10. Britannia launched
NutriChoice Oats and Ragi in 3QFY11; it also entered the readyto-
cook segment via launch of Porridge Upma and poha-mix
under its brand healthy start. Consolidated revenue is up 21.6% yoy.
 Lower ad spend expands margin. Ad spend reduced 110bps to
6.9% in 3QFY11 as a percentage of net sales and led to margin
expansion of 80bps. Higher interest cost, post issue of bonus
debenture and rise in income tax, resulted in net profit growth of
only 3.5%. Consolidated PAT is up 44% yoy.
 Rising competitive pressures. Competitive pressures continued
to increase in 3Q as well. United Biscuits is introducing small
SKUs to gain market share. GSK Consumer has stepped up
product offerings. With Unibic and ITC launching products at the
premium end, Britannia may continue to face keen competition.
 Valuation and risks. We value the stock at target price of `313,
based on target PE of 20x on FY12e earnings. Our target PE is at
25% premium to 12M forward Nifty PE. Key risks: Improved
performance at subsidiaries.