Angel Broking's multibagger picks: Britannia, JK Tyre

Rajen Shah of Angel Broking picks Britannia Industries and JK Tyre as multibagger stocks. He feels both the stocks will see strong upside going ahead.

He expects Britannia to see a strong upside with a target of Rs 1,000 in next 18 months. In case of JK Tyre, he feels there is a good chance of the stock picking up, not only because rubber prices are likely to stabilise in the range of Rs 170-180, but also due to the fact that the stock is trading far lower than its peers. Also Read: Mkt to be choppy till expiry; stay on long side: Sukhani

Below is the verbatim transcript of Rajen Shah's interview on CNBC-TV18

On Britannia Industries
Britannia reported reasonably fine numbers with a 12 percent growth in top line and about 30 percent growth in bottom line. It surged about 18 percent over the past two sessions, but this is just the beginning. We see a very strong upside, almost of about 50 percent over the next 18 months.
We have a target of about Rs 1,000 for Britannia by December 2014. The reason is a complete facelift of Britannia on cards. Currently, almost 75 percent of its revenue comes from the biscuit business; hence it is called a biscuit company. But over the next four-five years, this company will be called a complete food company, Nusli Wadia has taken steps in this direction. Varun Berry has been promoted as the head of Indian operations. Earlier, he had been with Pepsi for about 18 months and with his last assignment as the CEO of Pepsi.
Pepsi has been aggressively launching and marketing its products. So, the success of Pepsi would be replicated here in Britannia over the next three-five years and that will completely relate the Britannia stock which has been underperforming over the past three-four years.
If you see other FMCG companies or food companies, like Nestle, which will report about Rs 10,000 crore of top line this year. It is trading at a market cap of Rs 50,000 crore, so it is trading at five times the sales. Also, if you see any FMCG company like Hindustan Lever which reported about Rs 26,000-27,000 crore of topline and is trading at about Rs 1,25,000 crore of market cap, five times the sales, Jubilant is again trading at Rs 1,400 crore of top line sales, Rs 7,000 crore of market cap, five times the sales.
Even international companies like Pepsi that are growing at about hardly three percent, Pepsi this year would be growing at about 2-3 percent. So USD 65 billion is the revenue, market cap is about Rs 130 billion so it is at two times the sales. Company which is hardly growing at 2-3 percent is trading at two times the sales.
Even Mondelez International which was formed from the demerger of Kraft Foods, for the last two years, has not been growing and this year it would report stagnant USD 35-36 billion of sales and is trading at a market cap of about USD 55 billion so it is at about 1.7 times the sales. So, Britannia re-rating is on the cards because this company will be growing by at least 15 percent.
A company which grows at 15 percent deserves 2.5 times sales. Currently, if you see Britannia's revenue this year, it would be about Rs 7,000 crore which we were expecting for FY14 and the market cap is Rs 8,200 crore, hardly 1.2 times the sales. So, on that parameter as well as on the growth opportunity which we foresee for Britannia, it’s a strong upside for Britannia with a target of Rs 1,000 in about 18 months from now.


On JK Tyre
Despite subdued market conditions, tyre companies have done very well whether it is MRF, Apollo, Ceat or JK Tyre. All have posted reasonably fine numbers for the year ended March. This is because of rubber prices coming down from Rs 225-230 per kilogram to Rs 175. This good trend would continue for the current year because we expect the rubber prices to stabilise in this range of Rs 170-180. Besides crude also, if you see, year on year it is down about 10 percent from USD 116 to USD 104.
Outgo on account of crude based raw material will also decline which will help improve margins and profits of these tyre companies. Besides, in the next few months the Reserve Bank of Indian (RBI) would lower interest rates so that will revive the auto industry which saw flat growth last year.
Overall, we are very positive on the tyre industry. JK looks more promising because on a valuation basis it is the cheapest as Apollo Tyres last year reported about Rs 12 kind of earnings and the stock is at about Rs 90 and so it is trading at about 7.5 times in last year earnings.
MRF year ended September, we took the second part of last year and added the profits to first half of this year and the EPS works out to Rs 1,650 and the current price of about Rs 15,300, so it is trading at 9.5 times. Looking at them, on an average they are trading at about 8.5 times earnings. JK Tyre is trading at hardly 2.5 times. The stock is at Rs 120.
You cannot compare JK's management with Apollo and MRF but the price differential is too high. The valuation gap is too much and JK needs to at least move to about five PE multiple. At five PE multiple, this stock can easily move up to about Rs 220-225 levels.