ICICI Securities maintains ‘hold’ on Britannia Industries, raises TP from Rs 545 to Rs 570

Valuation and risks: We raise our target price (TP) to Rs 570 from Rs 545. We maintain our ‘hold’ rating on the stock. We continue to use a P/EV-ROEV -based valuation approach, applying a target multiple of 4.9x (previously 4.8x) to our EV per share estimate of Rs122 (previously Rs121). We arrive at this multiple based on a Gordon growth model, assuming a normalised ROEV of 18.5% (previously 18.3%) and a 9% COE (unchanged). After discounting to the present, we arrive at a target price of Rs570, implying downside of c0.1% from current levels. Key upside risks to our rating and estimates include a rise in sales of protection policies and better-than-expected NBV growth. Key downside risks include weaker-than-expected NBV growth; irrational pricing in protection leading to weaker growth and margins for the group. The stock trades at a FY22 P/EV of 4.1x vs. sector average of 3.1x.

Deceleration in revenue growth sequentially, consolidated sales / ebitda / PAT grew 12% /37% / 23%, respectively. Standalone revenue grew 11% (volume growth of 9%), driven by increased in-home consumption and likely market share gains. Adjacent business also reported healthy profitable growth. Middle East and Africa grew in single digits while rest of international business grew in double digits. The company has reintroduced its full range of products during the quarter, which was rationalised to increase productivity in Q1FY21.

Margin expansion is driven by lower input cost, efficiencies and operating leverage. Gross margin expanded 230bps YoY to 42.5% driven by deflationary input cost, better mix, factory efficiencies and wastage reduction. Ebitda margin expansion was higher at 360bps YoY to 19.8%, led by lower other expenses (-110bps YoY; supply chain efficiencies, reduced wastage and operating leverage) and lower staff costs (-10bps YoY). Ad-spends have returned closer to pre-Covid levels. Management expects commodity prices to remain stable going forward as forecast on harvest and monsoons are good.

Balance sheet and cash flows: Cash generation has increased significantly driven by strong performance in H1FY21, significant decline in capex intensity (-48% YoY) and marginal improvement in working capital – OCF / FCF grew 2.3x / 16.8x YoY to Rs7.2billion / Rs6.3billion. Working capital days improved by four days to 13 days, driven by lower inventory (-2 days) and higher payables (+2 days). Net debt increased from Rs3.8 billion in March to Rs19.2 billion in September due to higher dividends and increased borrowings.

Valuation and risks: We cut our earnings estimates by 7-8%; modelling revenue / ebitda / PAT CAGR of 9% / 17% / 16%, respectively, over FY20-22E. Maintain ‘reduce’ with a DCF-based revised target price of Rs3,200 (was Rs3,300). At our target price, the stock will trade at 38x Sept’22E. Key upside risk to our thesis is faster-than-expected revenue growth in core biscuits.