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Bikaji’s 4QFY23 earnings print was sharply ahead of estimates, as miss on revenues was more than offset by much higher expansion in gross margins. Revenue performance was led by low double-digit volume growth; however, key positive surprise was gross margin delivery which was ahead of our expectations as well as higher vs management target of c.30%. The margin recovery process for Bikaji started in Q2FY23, however the pace and extent of improvement that it delivered turned out to be way higher vs what one could have anticipated - business has now already recouped all the margins that were lost during the hyperinflationary phase. While some of these gains might be invested back into the business to drive volume growth, we reckon that FY24 EBITDA margins (ex-PLI incentive) will still continue to improve over FY23. Bikaji has strategically added new facilities to augment its manufacturing capabilities, which should help it improve direct reach in core markets, and scale up its presence in focus markets. With favourable RM scenario, improving utilisation levels and capex largely done; profitability, return metrics and cash flow generation are expected to improve. Maintain BUY.

* Revenue growth largely driven by double-digit volume growth across key segments: Bikaji’s consolidated sales, EBITDA and Reported PAT grew by 15.5%, 52.4% and 51.6% to INR4.6bn, INR618mn and INR377mn respectively. Revenue growth performance was 4% below our estimate, primarily due to some softness in demand seen in early part of the quarter, which eventually picked up in March. The growth was primarily driven by volumes (low double-digit growth) during the quarter. In terms of segmental performance, Ethnic snacks (Bhujia & Namkeen) & Packaged snacks grew in double digits, Western snacks delivered strong performance growing at >30% in the quarter while Papad performance was relatively soft, with sales growth in high single digits. There was no PLI incentive booked in the quarter (other op income was down 36.6% yoy). Despite miss on revenues, EBITDA and adj PAT were c.12-15% ahead of our estimates, mainly on account of much higher gross margin expansion versus what we envisaged.

* Gross margin delivery sharply ahead of our forecasts, driving overall earnings beat: Gross margins improved by 521bps yoy and 412bps qoq to 34.1%, probably highest ever for the company, much higher than our forecast of 29% and ahead of management’s target of c.30% which company alluded to in Q3 concall. This is largely driven by softening of raw material prices (especially edible oils which account for c.28-30% of the COGS) and packaging material. While input prices are typically lower due to fresh crop season from Dec-Feb month, the same is likely to see some uptick in coming months. However, management target to maintain GM at c.30% over next few quarters, we believe, should be achievable. Staff cost increased by 11.3% yoy while other expenses grew by 34.1%, faster than sales growth of 15.5%, probably a function of higher power & fuel cost, A&P spends and costs related to distribution expansion. As a result, EBITDA margins saw an expansion of 323 bps yoy to 13.4% (vs JMFe: 11.5%), which drove EBITDA growth of 52.4% to INR 618mn, c.12% ahead of our estimate.

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