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All-round beat in P&L. Can't say the same about Balance Sheet though

Britannia’s volumes +5%, price+mix +17%, revenues +22% - all surprised consensus positively. We believe amidst a not-so-buoyant demand backdrop, it continues to drive (1) market shares gains (15-year high) in weak markets and (2) distribution expansion (rural markets). We note that it has redeemed Rs7.2bn of bonus debentures in Aug-22; borrowings have been higher (in 1HFY23) with higher inventory, dividends. Raising of long-term debt may be potentially interpreted as for dividend payout.

BRIT has seen one of the most resilient (core) performance in the last three years (backed by share gains). Consensus (including us) expects Britannia to invest in new categories, till now, pressure on core margins was not providing ammunition. That said, it will now have to re-earn the (premium) multiple as consensus was generous in previous re-rating cycle (narrative of Total Foods Company precovid). Going forward, success of (at least a few) new segments and ramp-up of adjacent categories is imperative. The outlook on this appears better. Upgrade to ADD.

* Good top-line performance: Consolidated sales were up 21% YoY with a 3-year CAGR of 13%. Volume growth (domestic) came-in at about mid-single digit (4-5%), implying pricing benefit of ~17%. Given grammage reduction in price-point packs would also have weighed on volume growth print, to that extent, the mid-single digit volume growth is a good outcome. We note that the price increase benefit is as per the guidance. Even as the rural market has seen a slowdown (on an overall basis), management highlighted benefits from distribution expansion – 28,000 rural preferred dealers a key driver. Focus continues on increasing direct distribution (2.6 mn outlets; +0.4mn in last six months) and enhancing rural footprint; management has highlighted continued market share gains.

* Pricing actions and weak base drive margin expansion: Consol. gross margin expanded 140bps YoY to 38.9% on the back of the pricing actions (increases). On sequential basis, it was up 200bps. EBITDA margin expanded 80bps YoY to 16.3% with a 30% YoY increase in other expenditure. We believe Britannia has taken sufficient pricing actions to guard against near-term pressures. It continues to undertake intensified cost efficiency measures to protect margins. We note that the increased pace of NPD will require some investments.

* Valuation and risks: We increase our earnings estimates by 12-3% for FY23-24E; modelling revenue / EBITDA CAGR of 13% / 18% over FY22-24E. Upgrade to ADD (HOLD earlier) with a DCF-based revised target price of Rs4,300 (was Rs3,650 earlier). At our target price, the stock will trade at 48x Mar’24E EPS. Key upside risk to our thesis is faster-than-expected revenue growth in core biscuits. Key downside risk is sustained weakness in consumption demand.

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