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Lowering margin expectations

* Britannia reported in-line sales growth of 9%, with volume growth of 8%. However, margins were weak, resulting in EBITDA/PAT being 15-17% below expectations. EBITDA grew 11% whereas PAT declined 3% due to lower tax rate (18.6% of PBT) in the base quarter.

* Q1 is likely to be weak on very high comparables, despite the demand surge in April again, on account of Covid-19. Early closure due to digital projects had negligible impact in Q4, in our view, but these along with distribution expansion and step up in ad spends, are positive, and should help BRIT improve its growth momentum ahead.

* Margins were weak on higher input prices and ad spends. Management commentary moderated margin expectations but pointed to likely improvement from Q4FY21 and FY20 levels. We now forecast FY22/23 operating margins at 17.7%/17.8% vs. ~19% earlier. We cut earnings by 8-9%. Valuations at 40x FY23E EPS appear reasonable and should restrict short-term downside potential. Retain Buy with a revised TP of Rs4,250 (Rs4,500 earlier), rolling forward to Jun-23E.

* Sales growth in line (2-year CAGR at 4.8%); volumes grow 8%: Sales, including other operating income, grew 9% with volume growth at 8%. Realization growth was flat as price hikes were anniversarised. Management indicated some pricing actions ahead to offset input inflation. Delivery of digital projects (S4 HANA, an online dealer management system and an integrated vendor management system) resulted in an early closure, affecting primary sales for three days. As per management, its impact on Q4 was not material and expects these projects to drive improvement in growth and efficiencies ahead. Demand for biscuits has surged again in April due to Covid-19 restrictions, but this is likely to be temporary. We believe a full unlocking will be a bigger positive for Britannia, improving demand with pick-up in on-the-go consumption.

* Moderating margin expectations: Post a strong margin performance in previous quarters, margins for Q4FY21 were lower by 260bps qoq to 40.5%, impacted by higher input prices, particularly palm oil (up 24%), packaging material and dairy, and higher ad spends. Management commentary pointed out to a likely improvement in margins from current levels but they may not reach the highs seen in H1FY21. We have, hence, cut our margin forecasts from 19% to 17.5% for FY22. Besides higher input inflation, step up in ad spends may also impact margins, but it is required and will be positive for growth.

* Earnings cut by 8-9%; maintain Buy: We reduce our margin assumptions for FY22/23, resulting in an earnings cut of 8-9%. Short-term outlook remains uncertain due to Covid19, but investments in brands, technology and distribution expansion should help BRIT bounce back with normalization. We maintain Buy with a revised TP of Rs4,250 (Rs4,500 earlier), based on 47x Jun-23 EPS.

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