IGI Logo

Sales momentum healthy; ICD reduction a significant positive

* Britannia Industries (BRIT) reported flat sales and volume growth YoY in 1QFY22, despite an extremely high base of ~27% sales growth (and 21% volume growth), well ahead of expectations. Importantly, it achieved this despite no major pantry loading during the second COVID wave lockdowns.

* While margins were below expectations – leading to in-line EBITDA and PAT, despite a significant sales beat – the outlook is better going forward, with calibrated price increases.  The key positive in the post-results call was the announcement of a sharp reduction in group inter-corporate deposits (ICDs) to INR4.7b at end-Jun’21 from INR7.9b in Mar’21 – these levels were last seen in FY18. Given that higher group ICD levels were a significant overhang on the stock, such a sharp reduction, if sustained, would lead to a re-rating.

* The stock trades at inexpensive multiples of 39.7x FY23E EPS, a significant discount to the domestic Staples peer average – despite BRIT’s superior earnings track record, a stronger potential for topline and earnings growth, and significantly higher RoE levels (over 40%). Maintain BUY.

Flat sales healthy given extraordinary base; lower margins lead to in-line EBITDA and PAT

* BRIT’s consolidated sales were flat YoY at INR34b (est. INR31.1b) in 1QFY22. Consolidated EBITDA declined 22.8% YoY to INR5.5b (in-line). Consolidated PBT fell 28% YoY to INR5.3b (in-line). Consolidated adjusted PAT declined 28.7% YoY to INR3.9b (in-line).

* Growth in the base business volume came in at 1% in 1QFY22 (est. -10%).

* The consolidated gross margin contracted 300bp YoY to 38.7%.  Higher staff costs (+10bp YoY) and other expenses (+160bp YoY) resulted in a 470bp YoY contraction in the EBITDA margin to 16.3% (est. 17.5%).

Highlights from management commentary

* It continued to gain market share in 1QFY22 as well.

* While wheat and sugar costs showed a flattish / marginally declining trend, sharp inflation in milk, palm oil, and packaging costs led to inflationary pressure of 6–7% on the overall material cost basket.

* While the management was cautious of price increases in a volatile demand environment, it is now starting to take calibrated increases.

* Margin improvement would continue consistently YoY. The sharp increase in FY21 was an exception.  50:50 Potazos was launched in the Northeast region to a good response and would soon be rolled out pan-India within the next 3–4 months.

Valuation and view

* Changes to the model have resulted in a ~6% reduction to our FY22 EPS estimates on account of near-term margin pressure. Our FY23E estimates remain unchanged.

* As highlighted in our upgrade note, the base would be far less challenging in subsequent quarters, and the longer term opportunity is extremely attractive.

* The stock trades at an inexpensive valuation of 39.7x FY23E given a) ~31% EPS growth in FY21, b) a strong track record of ~20%/27% EPS growth in the preceding 5/10 years ended FY20, c) one of the best-of-breed structural growth opportunities in the sector, and d) best-of-breed RoE of over 40%. This is at a substantial discount to its historical three-/five-year average of 46x/48x and average domestic Staples peer valuations. Maintain BUY, with TP of INR4,370/share, targeting 46x Sep’23E EPS (three year historical average).

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer