Driven by tailwinds (and good execution)
1Q revenue grew 27% – strong 22% volume growth and 5% realisation growth (equally driven by mix and price hike). Tailwinds of accelerated category growth (consumers staying at home) and (likely) market share gains for Britannia (strong brand positioning, direct distribution expansion, execution edge) are likely to continue in rest of FY21. Upstocking of a lean supply chain (channel inventory has reduced to ~3 days from 11 days pre-COVID) may support growth, if underlying demand moderates. That said, we highlight the risk of a potential volume decline in FY22 assuming normalcy returning and consumers spending less time at home. Lower input inflation, cost controls and operating leverage likely to drive earnings growth in FY21. ICDs to group companies were flat QoQ (was Rs6.3bn as of Mar’20). REDUCE retained – rating all about fundamentals vs. rest.
* Revenue growth momentum continued in June’20: Consolidated sales / EBITDA / PAT grew 27% / 82% / 105%. Standalone revenue grew 25% driven by 22% volume growth – increased in-home consumption, market share gains (management estimates double-digit category growth). Growth in realisation was equally driven by better mix and pricing. Management expects strong demand to continue in rest of FY21. Further, growth was driven by initiatives like 1) expanded rural reach (22,000 rural preferred dealers, +16% QoQ), 2) increased direct distribution (2.15 mn outlets), 3) Distributor support (Tele calling order, distributor point pick up) and 4) focused digital campaigns. Adjacent business growth was strong with bread and rusk growing faster than company’s growth and cheese-led growth in Dairy. International business growth was also strong with Middle East recovering to mid-single digit growth trajectory and double-digit growth in rest of international business.
* Margin expansion driven by lower ad-spends, cost efficiencies and operating leverage: Gross margin expanded 120bps YoY to 41.7% despite moderate (c.3%) inflation driven by better mix, factory efficiencies and wastage reduction. EBITDA margin expansion was higher at 630bps YoY to 21% led by lower ad-spends (-200 bps YoY), lower other expenses (-260bps YoY) and lower staff costs (-50bps YoY, +14% YoY on absolute basis). Management expects commodity inflation to be moderate as forecast on harvest and monsoon are good.
* Valuation and risks: We increase our earnings estimates by 5-14%; modelling revenue / EBITDA / PAT CAGR of 11% / 18% / 20% over FY20-22E. Maintain REDUCE with a DCF-based revised target price of Rs3,300 (was Rs3,000). At our target price, the stock will trade at 39x Mar’22E. Key upside risk to our thesis is faster-than-expected revenue growth in core biscuits.
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