Why Macquarie Thinks Britannia Will ‘Underperform’

Brokerage firm Macquarie initiated coverage on Britannia Industries Ltd. with an ‘Underperform' rating due to rising competition in the cookies segment.

Macquarie is one of the only two firms which have a bearish view on the stock. It has a target price of Rs 4,210 on the share, indicating a downside of 16 percent from yesterday's closing price. The rating is anti-consensus as 30 of the 39 analysts, or 77 percent, tracked by Bloomberg have a favourable rating on the company with the average 12-month target price of Rs 5,243—reflecting hardly any upside potential.

Britannia, the largest maker of cookies in India, has been successful in making the best of its opportunities in the last five years but intensifying competition in the premium biscuit segment may now limit its market share gains, Macquarie said in a research note.

Rival Parle Products, primarily focussed on the value segment, has stepped up investments in premium biscuits. “Our channel checks suggest market share gains for Parle in the premium segment,” Macquarie said.

The report highlights other factors that could work against Britannia:

• Increasing reach in distribution for smaller regional players.
• The value segment has started witnessing higher traction post Goods and Services Tax implementation, an area where Britannia has limited offerings.
• Non-biscuits and international segment not large enough to move the needle on earnings.

The stock currently trades at 48 times its earnings for financial year 2019-20, a 20 percent premium to the broking firm's valuation of 40 times assigned to the company.

Also Read: India's Second Largest Biscuit Maker In Sweet Spot, Credit Suisse Says