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Strong Q2FY23, revised rating to Buy

Strong revenue growth: Britannia Industries (BRIT) posted strong Q2FY23 numbers, better than our expectations on both revenue and margin front. Revenue came in at Rs 4,380cr, up by 21.4% YoY and 18.3% QoQ while volume grew in mid-single digit (~4-5%). The growth was largely driven by better demand for its products as well as increasing distribution reach in rural areas, new launches in biscuits and adjacent categories and its focus on go-to-market strategy.

Margins seen improvement: Despite higher prices of the company’s key raw materials such as wheat, sugar and fuel, the company posted strong growth on the profit front. Its Gross profit/EBITDA/PAT grew by 26%/27.5%/28.5% YoY and margins increased by 142bps/77bps/62bps YoY. Comparing QoQ, Its Gross/EBITDA/PAT grew by 24.9%/42.1%/46.1% and margins improved by 205bps/272bps/213bps. In addition, margin improvement was seen because of the healthy topline, company’s focus on cost optimization measures and price hikes taken during the quarter.

Concall highlights: 1) Demand remains strong in adjacent categories such as croissants, cake, wafers, etc. and focus to grow these categories will continue. 2) BRIT took debt for capacity expansion in Tamil Nadu, UP and Maharashtra. 3) New dairy factory commercialized in October 2022. 4) Going ahead, the company has plans to invest more towards marketing and advertisements. 5) Growth in rural areas was strong as compared to urban areas. 5) ~65% of procurement of raw material is wheat, sugar and palm oil. 6) Wheat prices internationally saw a declining trend however in India prices were firm due to lower crop. 7) Procurement of wheat is usually done in the April-June period.

Valuation: Britannia is one of the strong players in the FMCG sector but post Covid along with other players it was too facing growth challenges and margin pressures due to slowdown in demand and increase in input cost. However in Q2FY23, the company witnessed strong recovery on both revenue and profit front. Going ahead, BRIT is expected to post steady growth on the back of improvement in demand, its innovation across traditional and adjacent categories and continuous focus on increasing distribution reach. Additionally, margins have seen improvement but to further improve it, the company's focus will be on innovating premium and high margin products as well as cost optimization measures. We remain positive on the long term growth plans of the company and financially we estimate its revenue/PAT growth of 12.3%/16.2% CAGR between FY22-25E and revise our rating to Buy with a target price of 4,749.

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