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Positive surprise on both margin and volumes

Britannia 4QFY22 report was a positive surprise on margin as well as on volumes front. Volumes grew c.4% despite a double-digit cumulative price-hikes (c.10-11%), and is more so commendable given that the company needed to effect two-thirds of pricing through grammage reduction. The bigger surprise to us was on margin with slight sequential uptick in gross and operating margins despite commodity costs behaving the way they did (our workings suggest 20-25% yoy inflation in Britannia’s RM index during the quarter). Some efficiencies were definitely at play – on both material costs as well as other SG&A cost items - these together helped drove a significant beat in Britannia’s 4QFY22 EBITDA vs what we expected. The challenge, however, has not ended given how commodity-costs (palm oils, crude, etc) have further spiked in recent weeks, and situation on (especially rural) demand is not all that rosy. There is no category tailwind but Mar-Q was the fourth consecutive quarter of Britannia surprising positively on growth (and did so on margin as well this time round), lending comfort on the business’ ability to navigate through near-term challenges. Valuations are reasonably supportive, in our view.

Positive surprise on topline growth again: Britannia’s 4QFY22 consolidated sales, EBITDA and net profit grew 15.5%, 8.8% and 4.3% to INR 35.1bn, INR 5.5bn and INR 3.8bn respectively. This was the fourth consecutive quarter of revenue performance surprising on the upside (3% beat in 4Q) and margin delivery also improved a tad this time round, despite worsening situation on the commodity costs front. Britannia’s growth likely benefitted from its new-to-market product innovations (Good Day Harmony, Jeera Marie and Nutrichoice Seeds & Herbs, and new variants in Croissant & Wafers to further strengthen adjacencies), robust growth in the organised trade channels as well as from doubling of e-commerce revenue

And on margin as well this time round: Britannia’s RM Index is estimated to have risen 9- 10% qoq in Dec-Q and another 6-7% in Mar-Q; the cost indices are 20-25% higher yoy against which selling prices have increased by 10-11% yoy. Gross margin declined 136bps yoy which is better cf. 400-500bps yoy decline seen over the last two quarters but one must note that Mar’21-Q’s GPM itself was 200-300bps lower vs the GPM of the three quarters preceding it. Of course, the double-digit hike in selling prices also helped, as did efficiencies extracted from both material costs as well as other SG&A lines, that helped limit EBITDA margin compression to 97bps in 4Q vs 440-470bps compression during 9MFY22. Staff costs were 17% lower vs 1H average and Other Expenses grew at less than half the rate of growth in topline

But challenge is not entirely over just yet, with RM costs having risen further: Considering the further rise in commodity costs post-4QFY22 with veg-oil yoy price inflation likely >50% for the next two quarters and wheat prices also trending upwards, we believe the bad news may not have fully ended as far as margin-pressures go. Britannia indicated that it would further take calibrated price increases and continue to drive cost-efficiencies to manage profitability going forward. It is, however, interesting to note that comparators are not as unfavourable given that GPMs through FY22 were around 37-38% vs the 41- 42% levels that were there in the earlier part of FY21.

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