We initiate our coverage on Britannia Industries Ltd with a ?buy? rating and a target price of R1,050 based on our SOTP-based valuation (P/E of 25X for the standalone business and P/S of 1X for the subsidiary businesses). At our target price, the stock would trade at a consolidated P/E of 25x Q2FY15e EPS, in line with its five-year average P/E multiple and at 10% discount to the sector average multiple of 28x.
We believe an in-line-with-historical average multiple is justified given the healthier-than-in-the-past competitive dynamics in the industry, improving premiumization-led growth profile and our expectation that the recent improvement in execution (that has yielded material margin benefits) is sustainable.
We rate biscuits among the top packaged-food categories in India. Britannia is well placed to ride the rising premiumisation trend in the category, aided by its solid portfolio (wide spread), leadership in the premium cookies and creams segments.
Britannia?s standalone ebitda margins recovered from a low of ~5% to 8-8.5% over the past several quarters but we model further ebitda margin expansion of ~80 bps (consolidated basis) over FY14-16, driven by internal factors (focus on market-share improvement via distribution improvement and expansion, improved manufacturing efficiency and better profitability in the non-bakery portfolio) and external tailwinds (category premiumisation and a manageable raw material environment).
