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Phase of (easy) market share gains appears over
Our headline is a repeat of what we wrote over the last few months. 2QFY20 volume growth of 3% continued the subdued performance from 1Q. We believe that in addition to the "rural slowdown" narrative, Britannia’s performance has also been impacted by the improvement in growth by regional players, pointing towards an end of easy market share gains (in North and East India) and therefore a muted medium-term. We believe that recent launches in premium biscuits and geographical expansion of adjacent products can somewhat mitigate this challenge. That said, we liked Britannia’s ability to manage costs (even in an inflationary environment) and continue to expand margins, albeit at a decelerated pace. Lower loans receivable (includes ICDs to group companies) likely points to the Rs2bn repayment received in 1Q (ICDs to group companies stood at Rs5bn as of Jun’19 – 10% of net worth, 43% of OCF and 66% of FCF). Retain REDUCE. Conference call on Friday, 15-Nov, 1600 hours IST. Dial-in number +91 22 6280 1313.
* Revenue grew 6%: Consolidated sales / EBITDA / PAT grew 6% / 8% / 33%. Standalone revenue grew 7% led by 3% volume growth. We believe that this performance has also been impacted by potentially lower share gains in north and east markets. Despite the slowdown, Britannia continued its focus on premiumisation with the launch of Treat Cream biscuits and Little Hearts Strawberry. Management remains committed to scale up its recent launches in adjacent categories, focusing on Salted Snacks in West India and Croissant in East and South.
* Margin expansion likely driven by lower ad-spends: Gross margin expanded 10bps YoY to 40.2% despite moderate inflation in key raw material prices for the bakery business and steep increase in milk prices impacting the dairy business. EBITDA margin expanded 30bps YoY to 16.1% driven by lower other expenses (- 50bps YoY). We believe that this is driven by lower ad-spends as Britannia shifted towards focused product campaigns. We will seek clarity in the call whether maintenance ad-spends has been cut.
* Valuation and risks: Our estimates are largely unchanged; modelling revenue / EBITDA / PAT CAGR of 10% / 13% / 23% over FY19-21E. Maintain REDUCE with a DCF-based target price unchanged at Rs2,700. At our target price, the stock will trade at 34x Sep’21E. Key upside risk to our thesis is faster-than-expected revenue growth in core biscuits.
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