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Improving growth outlook, valuations attractive; Upgrade to BUY

Result Highlights

* Revenue – Marginal revenue decline of 0.5% (+1% volume growth) on a strong base of 27% at Rs 34bn indicating a strong resurgence in demand coupled with share gains.  

* Gross margins – Gross margins plunged 300bps to 38.7% due to sharp inflation in palm oil and crude prices which the company did not fully pass on given the environment.

* EBITDA margins – Came in‐line with expectation at 16.3%, however down 470bps yoy due to GM decline and sharp 9.2% rise in other expenses.

* Management commentary – Revenue/PAT saw a 24‐month growth of 25%/55% indicating strong distribution‐led growth, premiumization and cost efficiencies. Company will continue to take calibrated price hikes to pass on the 7‐9% inflation. Restarted marketing campaigns and market development efforts on innovations/relaunches.

Our view:

The resurgence in demand witnessed this quarter was a positive surprise which the management credited to its distribution efforts and consumer shift towards trusted brands. With the demand trends sustaining and rural demand also expected to pick up, double‐digit growth now does look achievable for the company. While the record margins of FY21 are not sustainable, the journey of continuous improvement should continue on the margins seen in FY20, with the company gradually passing on the material inflation and launching new margin‐accretive premium products.   The capex outlook for now remains cautious, but he company has identified 3‐4 projects where work will start probably in FY23. Higher marketing spends should be offset by continued cost efficiency and digital transformation initiatives. BRIT’s innovation pipeline in biscuits and new adjacent categories in addition to continued expansion in distribution infrastructure remain key drivers for a pick‐up in growth trajectory. The sharp Rs 3bn plus reduction in ICDs to group companies is another positive.

Given an improved growth and margin outlook, current valuations at 39x/34x FY23E/FY24E earnings, look quite attractive. Rolling over our valuations to FY24E, we build in 10% revenue/PAT CAGR over FY21‐24E. We upgrade our Rating to BUY from Add with a TP of Rs 4,290 based on 42x FY24E earnings, still a 10% discount to its 5‐yr average P/E multiple. A couple more quarters of strong growth delivery should help take the stock back to a 45x earnings multiple, in‐line with peers and its historic averages, driving further upside.

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