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Published on 21/10/2020 10:29:07 AM | Source: Yes Securities Ltd

Update On Britannia Industries Ltd By Yes Securities

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2QFY21 investor call takeaways

Quick normalization of growth and margin profile to cap upside potential

Management presentation highlights

* Macro Economic outlook – Seeing a slow recovery with lower purchasing power given about 20% salaried job losses.

 

* Demand outlook – Demand diversifying into multiple categories; some downtrading visible; pent‐up demand playing out in non‐essential categories.

 

* Supply outlook – After the disruption in 1Q which impacted industry supply and helped Britannia, the market opening up has again brought back a level playing field.

 

* Distribution and marketing – Direct reach increased again to 22.3 lakh after a drop to 19.7 lakh in March; rural distributors increased to 22k from 19k in March; Hindi belt continues to grow at 13‐22% CAGR since FY18

 

* ASP spends – coming back close to normalcy; went back to spending aggressively on brands where product and SKU availability was adequate – Good Day, Marie Gold and Bourbon.

 

* SKU and range availability – Back to 98% range availability after dropping to 75% in May; company now reaching 5% more retailers than pre‐COVID levels; continuous replenishment of distributors now up 5% above pre COVID levels after falling to 36% levels in 1Q.

 

* Cost Focus – Factory productivity 10% above pre COVID levels, Wastages improvement back to 80% of pre COVID levels, Direct dispatch from factories up 50% from pre COVID levels.

 

* Adjacent business – Middle East and Africa delivering positive growth; rest of markets growing in double digits; bakery saw strong margin improvement in bread, strong growth in rusk, cakes still struggling; dairy saw strong growth in cheese but muted performance from drinks, margins improved due to benign milk prices.

 

* Commodity inflation – overall 2‐3% moderate inflation; deflation in milk and flour prices; strong inflation in palm oil and sugar

 

* Capex plans – Planning new plants in TN, UP, Bihar and brownfield expansion in Odisha and Ranjangaon; dairy plant to commissioned in FY23; evaluating co‐ packing opportunities in Africa.

 

Q&A highlights

* Adjacent business – Home consumption products demand has normalized and out of home consumption items has started recovering; rusks have grown faster than biscuits; cakes performance quite weak.

 

* Greenfield expansion – Would need more capacity even for 5‐6% volume growth going forward; already started work for plants in TN and UP.

 

* Monthly growth momentum   – Double digit growth in July, low single digit in August, September bounced back again to high single digits; festive season shaping up well; expect to gain further market share.

 

* Downtrading – Biscuits being one of the cheapest snack is an opportunity to take share from other product segments; no sharp movement towards small packs seen yet; will not move aggressively towards low‐margin value segment despite all‐time high margins and consumer aspiration for value.

 

* Q2 vs Q1 consumer behavior – Consumer behavior towards more in home consumption changing now towards normalcy; company benefitted from being first off the block in 1Q and got lot more trials from consumers which is sticking to some extent.

 

* ICD exposure update – Rs 700 crs at 2Q end; similar to March levels.

 

* Margin outlook – Expect some normalization in margins given full range of SKUs will result in some loss in efficiency and ASP spends will also pick up.  

 

* Input cost outlook – Do not expect deflation; expect stability to return from December in wheat while palm oil seeing inflationary trends.

 

* Inventory – Back to normal company inventory levels of 9‐10 days which went down to 4‐5 days in last quarter; distributor inventory flattish at 5‐6 days.  

 

* Rural/urban trend – GT growing extremely well, MT (10% of revenue) very weak, rural (30% of business) did better due to lockdowns in urban areas, trade partners had liquidity crunch which was managed well.

 

* Innovation – Will pack up pace of innovation going forward; currently 4% contribution from new products.

 

* Volume trends – 2Q saw overall volume growth of 9%, adjacent business grew a little faster at 10.5% and biscuits at 8.5%.

 

* Commercial paper issue – Raised short‐term money at an attractive rate of 3.5‐4% for future commodity buying of wheat, sugar.  

 

* Farm Bill impact – Still awaiting proper implementation as some states are opposing; will result in structural procurement cost savings if implemented well.

 

View ‐ As we mentioned post results, current valuations at 40x FY23E earnings are relatively comfortable and can result in a near‐term upside of ~10% from current levels. But given that growth rates have started normalizing at a quick pace and margins are also set to come down to normal levels, we think future upside will be capped. Further, aggressive capacity expansion can bring down return ratios and dividend payouts. We therefore, continue to prefer Nestle and Tata Consumer over Britannia in the foods space given the better category growth potential and margin levers.

 

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