We are revising FY14 and FY15 EPS estimates for Britannia Industries (BRIT) by 12%
and target price to Rs812 (SOTP). This follows 280bps margin expansion to 8.8% in
Q4FY13, a 4-year high margin in any quarter. Although BRIT’s margins have
remained volatile in the past, we believe that favourable input costs, focus on
higher margin segments and more rational competition will enable 130bps margin
expansion over FY13-15 and provide 28% PAT CAGR. 45-50% P/E discount (FY15
Consol EPS) to Nestle (NEST) and GSK Consumer (GSK), despite 55% ROCE and
39.4% ROE, limits downside in the stock. Maintain ‘BUY’,
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and target price to Rs812 (SOTP). This follows 280bps margin expansion to 8.8% in
Q4FY13, a 4-year high margin in any quarter. Although BRIT’s margins have
remained volatile in the past, we believe that favourable input costs, focus on
higher margin segments and more rational competition will enable 130bps margin
expansion over FY13-15 and provide 28% PAT CAGR. 45-50% P/E discount (FY15
Consol EPS) to Nestle (NEST) and GSK Consumer (GSK), despite 55% ROCE and
39.4% ROE, limits downside in the stock. Maintain ‘BUY’,
Q4 margins highest since Q4FY09; Input costs remain favourable: BRIT
reported 280bps EBITDA margin expansion in Q4FY13 (highest since Q4FY09) led
by operating leverage and benign input cost environment. Input costs remain
favourable as Sugar prices are down 16% from peak, Palm oil prices are lower by
25% and Wheat prices by 6%.
Sales mix moving towards higher margin products/segments: Premiumisation
continues as Glucose is now less than 19% of Biscuit sales. Also, higher margin
Cake, Bread and Rusk have grown at 28% CAGR since 2008 and accounts for 17%
of sales. We note that all the leading layers are keen on higher margin ‘Cookies
and Creams’ segments. New players like Oreo, McVitie’s etc. have tried to
expand the premium end without any irrational pricing to disturb the market.
Contribution from subsidiaries on a rise: Subsidiaries are no more a drain and
contributed to an EPS of Rs2.1 in FY13. BRIT Dairy is leading the pack, with 22%
CAGR in sales and 7% PAT margin. We estimate EPS of Rs3.2 in FY15 from subs.
Revising estimates by 12-13%; Maintain ‘BUY’ with a target of Rs812: We are
revising FY14 and FY15 estimates by 12-12.5% which factors in 80bps margin
expansion in FY14 to 7.4% and 50bps in FY15 to 7.9%. We estimate 28.5% PAT
CAGR over FY13-15. We value the stock at Rs812 based on 23xFY15 standalone
EPS and 1xFY15 EV/sales for subsidiaries. The stock would trade at 22.8xFY15
consolidated earnings and 25x FY15 on standalone EPS at our target price.
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