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Buy Britannia Ind with a target of Rs 1820 - Citigroup
Tuesday, June 5, 2007
Citigroup is bullish on Britannia Industries and has recommended a buy rating on the stock with a target price of Rs 1820
Margins picking up:
Britannia’s margins are looking to turn up after remaining depressed over the past 5-6 quarters. Key raw materials prices, wheat flour and sugar, have softened and should aid margins going forward. However, we expect advertising spend to increase on rising competition and new product roll out.
Promoter dispute: not much clarity:
We do not have clarity on the final outcome of the Danone-Wadia dispute, but exit of one of the promoters may be possible. In the event of the potential exit of one of the promoters, and the fragmented shareholding structure, a third party could acquire Britannia, though chances of that outcome are very low.
An attractive acquisition candidate:
Britannia had emerged as the third most attractive candidate for a leveraged buyout (LBO) across our regional consumer universe in Feb-07. While the stock is up 50% since then and no longer attractive in our LBO screen, it is still a good fit for companies like HLL and ITC, which are trying to enhance their presence in the foods segment.
FY07 results:
FY07 net profit declined 20% to Rs 1.13 billion. Sales growth momentum, however, remained strong with FY07 sales growing at 28%.
Revising estimates, price target:
Despite factoring in lower raw material costs, we are cutting our FY08E-FY09E EPS estimates by 9.2%-23.5%, mainly reflecting 1) lower than expected FY07 and 2) higher ad expenses going forward. However we increase our price target to Rs1, 825 as we roll forward our target 20x P/E 1-year forward to mid-FY09E.
Valuation:
At current valuations we rate the Britannia Buy (1L). Our Rs 1,820 target price is based on 20x mid-FY09E P/E, at the higher end of its recent trading band. Our target P/E reflects new top management appointments that should quell corporate governance concerns and ensure strong business growth, as well as recent resurgence in sales growth and margins. We expect a 45% EPS CAGR over FY07-10E. At 20x mid-FY09E P/E, Britannia would trade at a 20% premium to the market average P/E. We use P/E as our base valuation methodology, as Britannia has steady earnings growth. At our target price, the stock would trade at 15x 12-month forward EV/EBITDA, which is at about 20% premium to the average market multiple.
Margins picking up:
Britannia’s margins are looking to turn up after remaining depressed over the past 5-6 quarters. Key raw materials prices, wheat flour and sugar, have softened and should aid margins going forward. However, we expect advertising spend to increase on rising competition and new product roll out.
Promoter dispute: not much clarity:
We do not have clarity on the final outcome of the Danone-Wadia dispute, but exit of one of the promoters may be possible. In the event of the potential exit of one of the promoters, and the fragmented shareholding structure, a third party could acquire Britannia, though chances of that outcome are very low.
An attractive acquisition candidate:
Britannia had emerged as the third most attractive candidate for a leveraged buyout (LBO) across our regional consumer universe in Feb-07. While the stock is up 50% since then and no longer attractive in our LBO screen, it is still a good fit for companies like HLL and ITC, which are trying to enhance their presence in the foods segment.
FY07 results:
FY07 net profit declined 20% to Rs 1.13 billion. Sales growth momentum, however, remained strong with FY07 sales growing at 28%.
Revising estimates, price target:
Despite factoring in lower raw material costs, we are cutting our FY08E-FY09E EPS estimates by 9.2%-23.5%, mainly reflecting 1) lower than expected FY07 and 2) higher ad expenses going forward. However we increase our price target to Rs1, 825 as we roll forward our target 20x P/E 1-year forward to mid-FY09E.
Valuation:
At current valuations we rate the Britannia Buy (1L). Our Rs 1,820 target price is based on 20x mid-FY09E P/E, at the higher end of its recent trading band. Our target P/E reflects new top management appointments that should quell corporate governance concerns and ensure strong business growth, as well as recent resurgence in sales growth and margins. We expect a 45% EPS CAGR over FY07-10E. At 20x mid-FY09E P/E, Britannia would trade at a 20% premium to the market average P/E. We use P/E as our base valuation methodology, as Britannia has steady earnings growth. At our target price, the stock would trade at 15x 12-month forward EV/EBITDA, which is at about 20% premium to the average market multiple.
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IMPORTANT DISCLAIMER
Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.
