Rajen Shah Of Angel Stock Pick: Britannia Industries

Rajen Shah's call to buy Britannia Industries has yielded a 45% return in 3 months. Now, with the appointment of Pepsi's CEO as part of the strategy restructuring, Rajen Shah sees a complete re-rating and huge upside for Britannia and advises a buy

Rajen Shah’s call to buy Britannia Industries has yielded a 45% return in 3 months. Now, with the appointment of Pepsi’s CEO as part of the strategy restructuring, Rajen Shah sees a complete re-rating and huge upside for Britannia and advises a buy

Rajen Shah of Angel Broking has always been fond of Britannia Industries. In February 2013, when Britannia Industries had reported modest Q3 FY 2013 results and its stock price was ruling at Rs. 498, Rajen Shah had confidently told investors to buy Britannia with a target price of Rs. 564.

Today, just 3 months later, when Britannia is ruling at Rs. 723, Rajen Shah can’t help beaming from ear to ear as his stock call has generated returns of 45% in 3 months.

This surge in the stock price has come on the back of a strong Q4 FY 2013 performance by Britannia. The strong result is the beginning of a planned facelift which will convert Britannia from a biscuit company (75% of the revenue comes from the biscuit business) into a full fledged foods company over the next four-five years.

Rajen Shah sees huge upside and advises a Buy. He pointed out that Nusli Wadia was determined to convert Britannia into a foods company and towards that end, Varun Berry, the ex-CEO of Pepsi, has been promoted as the head of Indian operations. Varun Berry has rich experience of how consumer markets function and was instrumental in the aggressive launch and marketing of Pepsi’s products. He would be able to replicate Pepsi’s success in Britannia over the next three-five years, Rajen Shah said.

Britannia Industries’ Key Financials
(Rs cr)	Mar 2013	Mar 2012	YOY
Operating Income	1,502.42	1,321.89	13.66
Total Expenses	1,370.55	1,241.53	10.39
Operating Profit	131.87	80.36	64.10
Other Income	21.10	10.23	106.26
PBDIT	152.97	90.59	68.86
PBT	127.73	68.54	86.36
Adjusted Net Profit	87.85	53.03	65.6

If Britannia does convert itself into a food company, it will be re-rated to command the multiples that food companies like Nestle and Jubilant Foodworks command, he added.

Rajen Shah emphasized that FMCG companies and food companies like Nestle, Hindustan Unilever and Jubilant were trading at about 5 times their sales. Even internationally, where the growth rate is subdued, FMCG stocks like Pepsi and Mondelez International were trading at about two times sales.

In contrast, Britannia with a growth rate of about 15% was quoting at just about 1.2 times sales. Britannia deserved a valuation of at least 2.5 times sales, Rajen Shah said and expressed confidence that it would quote at Rs. 1,000 in 18 months time.