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Good broad-based (top-line) performance

Mrs. Bectors reported a good revenue performance (+17% YoY) with (1) strong recovery in the institutional bakery (QSR) segment, (2) breads business growing on the back of distribution expansion and (3) good momentum in the biscuits business (both retail and exports). RM inflation continued to impact margin print. EBITDA margin recovery was good with the print (12.6%) below the aspiration for this year (14-15%).

We believe the expansion of domestic biscuits and branded breads business into new regions driven by sales initiatives would likely be a key driver for growth. Further, focus on premiumisation within existing product segments and providing differential offerings to customers may drive margin expansion. ADD; TP Rs380. Upsides, if any, from PLI scheme is an (unknown) option value (which we cannot model), as of now.

* Good broad-based performance in 3Q.

Consolidated revenue grew 17% YoY with RM inflation weighing on operating profit growth. On a 2-year CAGR basis, revenue was up 14%. Segmental performance – (1) Biscuits segment was up 11% YoY (6% QoQ) with MT driving growth in the retail business segment and robust performance in the exports market, (2) Bakery segment was up 29% YoY led by recovery in institutional bakery business (QSR). For the retail bakery business, management has highlighted high-teens growth (led by increasing distribution and premiumisation). EBITDA declined by 16% YoY to Rs333mn and PBT was down 25% YoY to Rs209mn

* Margin print of 12.6% (below the guided range).

Gross margins declined 600bps YoY to 43.3% (down 143bps QoQ) due to inflationary RM (mainly RPO and packaging material). EBITDA margin contracted (YoY) 494bps to 12.6%. We note that in the previous quarter it had reported margin of 14.1%; it maintains the guided range of 14-15% for margins for next year. Along with increasing premiumisation, the 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.

(1) It has purchased additional land in Khopoli, Mumbai adjacent to its factory for expansion of Bakery business, (2) There have been senior level recruits including HR head, strengthening of sales team and also a digital officer.

* Valuations and risks: We cut our FY23 earnings estimates by ~13%; modelling revenue / EBITDA / PAT CAGR of 14 / 20 / 20 (%) over FY22-24E. Maintain ADD with a DCF-based revised target price of Rs380 (Rs430 earlier). At our target price, the stock will trade at 27x P/E multiple Sept’23E. Key downside risks are delays or failures distribution expansion or steep rise in competitive intensity.

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