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Margin trajectory visible; weak start in Q1FY23  

Britannia’s Q1FY23 print was lower than our estimates; Consolidated revenue grew 9.0%, while EBITDA/PAT declined 9.6%/13.8% YoY. We reckon, sharp price increases resulted in 2% volume decline, though absolute packets sold remained flat. Management said, given challenging environment, BRIT is vigilant and taking steps through mix of pricing and cost optimization to revive profitability. We note resilient top-line was fueled by distribution expansion in rural markets and successful new launches supported by marketing activities. Company saw sequential inflation of “7% (14% YoY) driven by industrial fuel (15%), wheat flour (+20%), and RPO (+5%). Gross margin slid to 37.3% (-194bp), causing lower EBITDA margin at 13.7% (-282bp). PAT declined to Rs3.4bn (-13.8%). Management expects margin trajectory to improve by 300bp in Q3/Q4 and also aided by easing of commodity prices. We retain BUY rating, with revised DCF-based TP of Rs4,183 (implying 45.4x FY24E EPS).

Topline was lower than estimates, volumes declined 2% 

BRIT reported consolidated revenue at Rs36.5bn (+9.0%), though sharp price increases resulted in volume decline of 2% yet absolute packets sold remained flat. Management alluded its direct distribution (2.3mn) is driven by rural distributors (27K), yielding 1.5x growth in market share in focus states resulting in widening gap in market share with Parles’ (+100bp in 2 yrs.). We believe BRIT’s growth is driven by (1) accelerating innovation funnel — make up 4.5% of sales, (2) strengthening rural reach with marketing support, (3) maximizing cost efficiencies — target 3%, (4) driving adjacencies — form 20% now, and (5) striving for sustainable profitable growth. Though upcoming capacities in UP, TN, Odisha, Bihar and Ranjangoan would drive revenues. We expect in-house commercial production for dairy could improve profitability. Further, national launch of Treat-Croissant-mix fruit and focus on Tiger crunch (Rs3bn), Wafers (Rs7.5bn category) could aid top-line as well as profits.

Expect calibrated price increases to mitigate sequential inflation at ~7% 

Britannia reported 194bp contraction in gross margin to 37.3% owing to sequential inflation of ~7% and 20% YoY led by wheat flour (+20%), industrial fuel (+15%), RPO (+5%), and PM (+20%). Management confirmed ~10% price hike taken thus far is not sufficient and planned to take further calibrated price hikes. EBITDA dropped 9.6% to Rs5.0bn; EBITDA margin at 13.7% (- 282bp) due to higher other expenses (+14.9%) and employee cost (+5.5%). Management targets to extract 3% from cost efficiency led by (1) better factory productivity, (2) reduce wastages, (3) cut distance to market, and (4) operating leverage (achieved 5.0x).

Key drivers for FY23 performance  

In FY23 we expect revenue growth of 11% driven by: (1) distribution expansion in rural, (2) growing contribution from international business in Nepal, Africa and Middle East (RsSbn), (3) dairy portfolio ~Rs7.5bn (Winkin’ Cow Rs1.4bn brand), (4) contribution from new products ~4.5%. Though ICDs to group companies lowered to Rs6.9bn vs. Rs7.4bn in Mar 22.

Valuation and risks

We believe Britannia’s long term business fundamentals are intact and growth strategy is driven by expanding footprint in middle India and innovation funnel coupled with strong execution capabilities, striving for profitable growth. Moreover, it is committed to become ‘Total Food Company’ achieving normalized margin by Q4. We retain BUY with a DCF-based TP Rs4,183 (implying 45.4x FY24E EPS). Risks to our call include rising input costs, abrupt competition, and unsecured loans to promoter group.

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