Significant beat leads to 15% earnings upgrade; Expensive valuations drive Neutral rating
* Britannia Industries (BRIT) has been aided by a confluence of positive factors, such as high in-home consumption (biscuits constitute 82% of sales), reduction in ad spend, decline in material cost, and low promotional spend (owing to strong demand). These are likely to drive the strongest topline growth since FY12 (18.3% in FY21E) and the highest PAT growth since FY16 (38% in FY21E).
* However, this extraordinary earnings growth in FY21 presents a significant hurdle from an FY22/FY23 perspective as none of these factors present a structural positive. Furthermore, material costs could result in high volatility in earnings for BRIT – it has one of the lowest gross margins among peers (40% in FY20).
* While we like the structural story, expensive valuations (47.5x FY22), sustained concerns of elevated group inter-corporate deposits (ICDs) at around INR6b (similar to 4QFY20 when they crossed their own stated threshold of INR5b), and an uncertain earnings outlook beyond FY21 have led us to maintain our Neutral rating.
Strong performance on all fronts, with highest ever margins
* BRIT’s consol. sales increased 26.7% YoY to INR34.2b in 1QFY21 (est.: INR32.9b). Standalone sales grew 24.8% YoY to INR32.3b. Base business volume growth was 21% (our estimate: +19%).
* Consol. EBITDA grew 81.7% YoY to INR7.2b (est.: INR5.5b), consol. PBT rose 81% YoY to INR7.4b (est.: INR5.5b), and consol. adj. PAT increased 105.4% YoY to INR5.4b (est.: INR4.1b).
* The consol. gross margin expanded by 120bp YoY to 41.7%. Management forecast moderate inflation in prices of key raw materials. Lower staff cost (- 50bp YoY) and lower other expenses (-460bp YoY) imply EBITDA margin expansion by 630bp YoY to 21% (highest ever margins).
Highlights from management commentary
* BRIT successfully pursued rural sales (37% of sales) as urban sales slowed to some extent.
* Advertisement and sales promotion (A&SP) spends were rationalized for the quarter; they contributed ~200bp to the 460bp reduction witnessed in other expenses to sales in 1QFY21.
* Group ICDs remain at end-4QFY20 levels (INR6b).
* Capex of INR7b over the next two years (with Dairy capex to be determined and added later) would be significantly higher than the INR2–2.5b annual rate expected earlier.
Valuation and view
* Changes to the model have resulted in a 15.7%/3.3% increase in FY21/FY22 EPS.
* A confluence of positive factors such as: a) high in-home consumption (biscuits constitute 82% of sales), b) reduction in ad spend, c) decline in material cost, and d) low promotional spend (owing to strong demand) are likely to drive the strongest topline growth for BRIT since FY12 (18.3% in FY21E) and the highest PAT growth since FY16 (38% in FY21E).
* However, this extraordinary earnings growth in FY21 also presents a significant hurdle from an FY22/FY23 perspective as none of the above-mentioned factors present a structural positive. Furthermore, material cost could result in high volatility in earnings for BRIT, which has one of the lowest gross margins among peers (40% in FY20).
* We like the structural story, particularly as new category traction has been impressive in FY20 (as highlighted in our AR analysis note). However, we maintain our Neutral rating on account of: (1) expensive valuations at 47.5x FY22, (2) sustained concerns of elevated group ICDs at around INR6b – similar to 4QFY20, when they crossed their own stated threshold of INR5b, (3) an uncertain earnings outlook beyond FY21, and (4) impact on ROCEs going ahead despite very strong earnings growth in FY21 due to increased capex and the continued presence of high cash and debt levels on the books. Our TP of INR3,700 is set at 45x Jun’22 EPS.
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