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Good (can be great); trajectory below potential

Topline print (4Q: +15% and FY21: +16%) was good in the context of (a) weak institutional business and (b) challenges in ramping-up distribution given onground issues. RM inflation impacted gross margins but price hikes and a series of measures have been taken – management appears confident of ~15% EBITDA margins by 2QFY22, in our view. While overall growth guidance of ~15% and ~6- 8% for domestic biscuits for FY22E was a tad disappointing, measures are being taken to improve the medium-term trajectory. We believe the expansion of domestic biscuits and branded breads business into new regions driven by sales initiatives will be a key driver for growth. Further, focus on premiumisation within existing product segments and provide differential offerings to customers may drive margin expansion. ADD; TP Rs450. Upsides, if any, from PLI scheme is an (unknown) option value (which we cannot model), as of now.

Decent quarter despite the QSR weakness.

Consolidated revenue / EBITDA / recurring PAT grew 15% / 15% / 41%. While a favorable base did benefit reported overall print, growth was led by (1) 27% growth in the bread and bakery segment on the back of distribution expansion and premiumisation and (2) 39% growth in the exports business. Domestic biscuits segment grew 10% yoy while Institutional bakery segment declined 10% (performance of listed QSR clients was better though). EBITDA grew by 15% YoY to Rs292mn. PBT and PAT grew by 43% YoY and 41% YoY due to higher other income and lower finance cost.

Margin print trailed the medium-term aspiration.

Gross margins declined 20bps YoY to 45.4% (down 390bps QoQ) due to inflationary RM (mainly RPO and packaging material). EBITDA margin was largely flattish YoY at 13.1% (down 450bps QoQ). With margins expected to remain weak for another quarter, management expects to return to 14-15% levels by 2Q. While some softening (in RM) has already been seen, focus has been on (1) driving costs optimization measures, (2) calibrated price hikes in premium packs and some grammage cuts at the lower end and (3) reduction of trade schemes.

Other highlights.

CFO was largely flat for the year while higher capex led to a 57% fall in FCF. Lower receivable days (partly due to weakness in CSD and railways business) led to reduction in working days (down by 4 days to 30 days). IPO proceeds reduced net debt to Rs272mn; dividend of Rs2.4/share was announced.

Valuations and risks:

We cut our FY22-23 earnings estimates by ~2%; modelling revenue / EBITDA / PAT CAGR of 16 / 12 / 8 (%) over FY21-23E. Maintain ADD with a DCF-based target price of Rs450. At our target price, the stock will trade at 31x P/E multiple March’23E. Key downside risks are delays or failures distribution expansion or steep rise in competitive intensity and raw material prices.

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