Neutral Britannia Industries; target of Rs 3715: Motilal Oswal

Motilal Oswal recommended Neutral rating on Britannia Industries with a target price of Rs 3715 in its research report dated October 20, 2020.

October 21, 2020 / 02:42 PM IST
 
 
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Motilal Oswal 's research report on Britannia Industries


Britannia Industries (BRIT) has been aided by a confluence of positive factors in 1HFY21, such as high in-home consumption (biscuits constitute 75–80% of sales), reduction in ad spends, decline in material costs, and low promotional spends (owing to strong demand). These are likely to drive the strongest topline growth since FY12 (15.2% in FY21E) and the highest PAT growth since FY16 (35.2% in FY21E). Sales momentum is tapering after an extraordinary spurt of ~27% in 1QFY21. Moreover, extraordinary earnings growth in FY21 presents a significant hurdle from an FY22/FY23 perspective as none of these factors present a structural positive. Furthermore, material costs could result in high volatility in earnings for BRIT – it has one of the lowest gross margins among peers (40.3% in FY20). While we like the structural story, (a) expensive valuations (45.4x FY22), (b) sustained concerns related to elevated group inter-corporate deposits (ICDs) – now at around INR7b (v/s INR6b at end-FY20 when they crossed their own erstwhile stated threshold of INR5b), and (c) an uncertain earnings outlook beyond FY21 have led us to maintain our Neutral rating.


Outlook


However, we maintain our Neutral rating on account of various factors: (a) expensive valuations at 45.4x FY22, (b) sustained growth in group inter-corporate deposits (ICDs) – now at around INR7b (v/s INR6b at end-FY20 when they crossed their own erstwhile stated threshold of INR5b), (c) an uncertain earnings outlook beyond FY21, and (d) likely impact on ROCEs going ahead despite very strong earnings growth in FY21 due to increased capex and the continued presence of high cash and debt levels on the books. Our TP of INR3,715 is set at 45x Sep’22 EPS.


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first published: Oct 21, 2020 02:42 pm

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