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Sales outlook improving; margin disappoints

* BRIT’s 4QFY21 topline growth was in line with volume growth, slightly above our expectation (7%) at 8%, even as there seems to be some mix deterioration sequentially. The management said it is seeing healthy growth momentum in Apr’21 as well.

* While deterioration in mix and higher than usual ad spends in 4QFY21 led to EBITDA miss, the overall commodity basket inflation, at 3%, is not challenging, as the management reportedly took some price increases towards the end of 4QFY21.

* The structural story for BRIT remains strong, especially aided by: a) direct reach expansion to ~2.4m outlets (second best after HUVR) and b) further investment in IT infrastructure as highlighted in 4QFY21. The remarkable market share improvement for eight consecutive years will continue as the company widens its moats over peers. Maintain BUY.

Sales in line, profitability below our expectations

* BRIT’s consolidated sales increased 9.2% YoY to INR31.3b (v/s our estimate of INR31.6b) in 4QFY21. Standalone sales grew 9.7% YoY to INR29.5b. Base business volume growth was 8% in 4QFY21 (v/s our expectation of 7%).

* Consolidated EBITDA grew 11.3% YoY to INR5.1b (v/s our estimate of INR5.9b), consolidated PBT grew 7.6% to INR4.9b (v/s our expectation of INR6b), while consolidated adjusted PAT fell 3.5% to INR3.6b (v/s our estimate of INR4.7b).

* Consolidated gross margin expanded 80bp YoY to 40.5%. Sudden and steep inflation in palm oil and milk costs were witnessed.

* Lower staff cost (-20bp YoY), as a percentage of sales, and higher other expenses (+70bp) meant that EBITDA margin expanded 30bp to 16.1%.

Highlights from the management commentary

* There was no disruption to manufacturing and supply chain in Apr’21 and there has been a surge in demand compared to 4QFY21.

* BRIT migrated to: a) the cutting edge S4 Hana ERP, b) Arteria data management system, and c) a new vendor management system in 4QFY21, which resulted in a one-off sales impact of ~3 days.

* The three IT initiatives will give BRIT an edge over peers with benefits likely to accrue in a couple of quarters.

* Group ICDs remain in the same range as FY20 levels.

Valuation and view

* While sales were in line with our expectations, margin disappointed due to mix deterioration and higher-than-expected ad spends. We have reduced our FY22E/FY23E EPS by ~3% each.

* As highlighted in our upgrade note, the challenge for BRIT from a base perspective would only come largely in 1QFY22, with the base becoming far less challenging in subsequent quarters.

* Despite: 1) ~31% EPS growth in FY21, 2) a strong track record of ~20%/27% EPS growth in the preceding five/10 years ended FY20, 3) an improving outlook for FY22, 4) among the best-of-breed structural growth opportunities in the sector, and 5) RoE of over 40%, the stock trades at 39.8x FY23E, which is at a substantial discount to its historical three/five year average of 46x/48x. Maintain BUY, with a revised TP of INR4,450/share (from INR4,575 earlier), targeting 50x FY23E EPS.

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