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Price increases to support margins

* Britannia Industries (BRIT)’s 2QFY22 topline came in ahead of our expectations, while EBITDA missed our estimates by 3–4%. Lower other income and higher-than-usual tax rates led to a ~10% miss at the adjusted PAT level.

* While the prices of raw materials are at multi-year highs (despite flat to lowsingle-digit increases in wheat and sugar costs), ongoing price increases / grammage reduction would support margins going ahead.

* a) The long-term opportunity in Foods, b) rapid distribution expansion by BRIT, c) success in low-unit packs (LUPs), d) an extremely healthy track record on the topline and earnings, e) ongoing market share gains for several years, f) high ROEs of ~40%, and g) inexpensive valuations of 43.6x FY23E lead us to maintain our BUY rating.

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

* BRIT’s consolidated sales rose 5.5% YoY to INR36.1b (est. INR34.9b) in 2QFY22. Consolidated EBITDA / PBT / Adjusted PAT declined 17.3%/22.1%/23% YoY to INR5.6b/INR5.2b/INR3.8b (est. INR5.8b/INR5.7b/INR4.3b).

* Volume growth in the base business is likely to have been 5% in 2QFY22 (est. 4%).

* The consolidated gross margin contracted 500bp YoY to 37.5% (est. 40.5%).

* Higher staff costs (+30bp YoY), but lower other expenses (-110bp YoY) meant that the EBITDA margin contracted 430bp YoY to 15.5% (est. 16.7%).

Highlights from management commentary

* BRIT has gained market share over the past eight years. While market share gains in FY21 were tepid, 1HFY22 saw stronger gains.

* The management has started taking price hikes. However, a third of the price increases are in the form of MRP hikes, while the remaining two-thirds come from grammage reduction – the latter has a longer gestation period as reducing the size of the biscuits and/or packs involves numerous steps and procedures.

* Effective price increases thus far have been 1%/4% in 1QFY22/2QFY22. The management targets an increase of 7.5%/10% for 3QFY22/4QFY22.

* Group inter-corporate deposit (ICD) levels remained stable at INR5.05b at end-Sep’21 v/s INR4.7b in Jun’21 – a substantial reduction from INR7.9b in Mar’21.

Valuation and view

* Changes to the model have resulted in a ~6% reduction to our FY22E/FY23E EPS estimates on account of near-term margin pressure.

* The base is likely to be far less challenging in subsequent quarters, and the longer term opportunity is extremely attractive.

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