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Strong growth delivery and outlook but inflation headwinds to remain an overhang; maintain ADD

Our view

Britannia’s volume growth of 5% driven by strong execution‐led market share gains, decent progress in adjacent businesses together with an aggressive capex plan for FY23 reinforces a better growth outlook than peers in this difficult demand environment. While the company has been the first mover in taking up prices to pass on inflation, further concerns on wheat and palm oil supplies are likely to keep up the pressure on margins despite an improving product and category mix, more price hikes and increased aggression on cost efficiencies. With increasing efforts to enhance rural distribution muscle to increase market share especially in the Hindi belt, increased contribution from adjacent categories and steady urban demand with increased OOH consumption, we believe double‐digit growth should be achieved by the company, albeit a bigger chunk of that will come from pricing over the next few quarters.  Other key positives were strong traction in cake, rusk, Winkin Cows and Nepal business. We expect increased marketing and distribution aggression on innovations and relaunches in addition to other adjacent businesses. Given the ongoing time correction in the stock has made valuations reasonable, we see the risk‐reward quite favorable for the stock but would still maintain our ADD rating on the stock. We would look to upgrade this to Buy once we see either see signs of inflation subsiding or rural growth picking up, which should be strong re‐rating triggers for the stock which looks set to outgrow peers in the medium‐term.

Result Highlights

 Revenue – Growth of 13.4% yoy, (above expectations of 11%) on a base of 9.2% at Rs 35.5bn indicating a volume growth of 5% on base of 8%, indicating market share gains.

 Margins – Gross margins declined 250bps to 38% due to a combination of higher palm oil, industrial fuel, packaging material. Company maintained gross margin at 38% in FY22 with aggressive price hikes without impacting volume growth. EBITDA margin came in at 15.5% vs 16.1%/15.1% YoY/QoQ due to GM decline which was partially offset by lower expenses. Britannia maintained margin by controlling expenses in FY22.

 PAT and dividend – PAT increased by 5.1% YoY with PAT coming in at Rs 3.8bn vs our estimate of 3.7bn. Declared final dividend of Rs 56.5/share.

Valuation

We now build in revenue/EBITDA/PAT CAGR of 12%/16%/20% over FY22‐24E after cutting our estimates by 3‐4% over next two years to factor in margin headwinds but higher pricing‐led revenue growth. We lower our TP to Rs 3,800 and maintain an ADD rating based on 42x FY24E earnings, still a 10% discount to its 5‐yr average P/E multiple. While we see limited downside risk from here, upside risks will be cool‐off in inflation and a couple of quarters of strong volume growth which could act as triggers to take the valuation multiple back above 40x

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