Add Britannia Industries Ltd For Target Rs. 3,809 - Yes Securities
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Result Highlights
* Revenue – Revenue came ahead of expectations at Rs 31.3bn, a growth of 9.2% vs our expectation of 8%, with volume growth of 8%, indicating a marginal pick‐up in growth momentum from 3Q.
* Gross margins – Gross margins surprised negatively declining 80bps to 40.5% due to a combination of higher palm oil and packing material prices and an inferior product mix.
* EBITDA margins – Weaker than expected at 16.1%, up only 30bps yoy (our expectation of 18.2%) due to GM decline and sharp 13.3% rise in other expenses.
* PAT – PAT growth was below estimates declining 3.3% yoy with PAT coming in at Rs 3.6bn (our expectation of Rs 4.09bn).
* Management commentary – Execution of a few digital transformation projects during the quarter necessitated shutdown of operations for a few days in March impacting primary billing; cost efficiency programs delivered targeted results; sharp inflation in palm oil, dairy and packing material has made company evaluate price increases
Our view:
Given the pandemic‐related uncertainties, there is limited visibility on the timing of the resumption of a double‐digit growth trajectory for the company. Even margins should settle below the exceptional levels seen in FY21 with commodity inflation and higher marketing spends, albeit continued cost efficiency and digital transformation initiatives will keep them at much above historical levels. BRIT’s innovation pipeline in biscuits and new adjacent categories remain key drivers for a pick‐up in growth trajectory which needs to be closely monitored.
Given no near‐term triggers, a high base for 1HFY22 and market’s preference for top line growth where BRIT seems to be lacking, current valuations at 39x FY23E earnings are among the cheapest in the FMCG space. Strong cost controls should ensure healthy earnings growth despite subdued topline growth which gradually get better led by innovations, new launches and distribution infrastructure expansion. The stock is currently at 39x FY23E earnings and we build in 8.9%/8.3% revenue/PAT CAGR over FY21‐23E. We initiate coverage with an ADD rating with a TP of Rs 3,809 based on 42x FY23E earnings, a 10% discount to its 5‐yr average P/E multiple.
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