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Margin concerns taken care of, growth outlook improving but headwinds remain; retain BUY on valuation comfort

Our view

Positive volume growth in H1FY22 despite a strong base indicates a strong recovery in demand momentum and decent market share gains for Britannia. With the company actioning aggressive pricing/grammage initiatives to fully pass‐on sharp RM inflation, we believe margins have bottomed out this quarter and should start improving sequentially. With increasing efforts to enhance rural distribution muscle to increase market share coupled with a strong pick up in urban demand with increased OOH consumption, we believe double‐digit growth should continue for the company, albeit a bigger chunk of that will come from pricing over the next few quarters.  BRIT’s efforts on restructuring distribution in Middle East and setting up contract manufacturing business in Africa are other positive drivers for the International business. We also expect increased marketing and distribution aggression on the other adjacent businesses. Post the recent correction in‐line with the FMCG pack, the stock is available at attractive valuations of 41x/36x FY23E/FY24E earnings. We see good value in the stock and retain our BUY rating expecting a valuation catch‐up with peers.

Result Highlights

* Revenue – Growth of 5.5% yoy, marginally below expectations on a strong base of 12% at Rs 36bn indicating a volume growth of 2% vs 9% YoY indicating a recovery in demand coupled with market share gains.

* Gross margins – Gross margins plunged 500bps to 37.5% due to sharp inflation in palm oil and crude prices. Overall inflation at 14% with only 4% price hike taken till Q2, 10% pricing actions to be implemented by 4Q.  

* EBITDA margins – EBITDA margin came in at 15.5% vs 19.8%, down 440bps yoy due to GM decline and a sharp 14% rise in employee expenses.

* Management commentary – Revenue/PAT have seen 24‐month growth of 21%/18% for H1FY22 indicating growth resilience and solid execution. Company has offset the increase in palm oil and crude prices by aggressive price hike/grammage reduction initiatives.

Valuation

We build in revenue/EBITDA/PAT growth of 11%/7%/9% over FY21‐24E. We cut our estimates by 3‐6% to factor in margin headwinds in near‐term and lower our TP to Rs 4,166 but reiterate our BUY rating on the stock based on 42x FY24E earnings, still a 10% discount to its 5‐yr average P/E multiple. A couple more quarters of strong volume growth delivery should help take the stock back to a 45x earnings multiple.

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