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Volumes and margins disappoint in 1QFY23…

…rich valuations lead to downgrade

* After displaying resilience in 4QFY22 volumes despite steep price hikes, BRIT’s 1QFY23 result was disappointing with a low single-digit volume decline. With further price increases likely in 2QFY23 (cumulative 6-7% price hike in 1HFY23), the effective price hike will be ~20% YoY. This might delay the eventual volume recovery, especially in a price sensitive category like biscuits.

* BRIT’s 1QFY23 EBITDA margin was also notably lower than expectations at 13.5% (a level last seen in 4QFY15). Even though we estimate FY24 EBITDA margin to recoup to 16%, BRIT’s valuation is rich at 48.1x FY24E P/E given the tepid earnings CAGR of 11.7% over FY22-24E. We, therefore, downgrade BRIT to Neutral targeting 45x Jun’24E EPS, giving us a TP of INR3,670.

Sales in line; margins ahead of estimates

* BRIT’s consolidated sales rose 8.7% YoY to INR37b (in line) in 1QFY23. Consol. EBITDA/PBT/Adj. PAT decreased 9.6%/12.7%/13.1% YoY to INR5.0b/INR4.6b/INR3.3b (est. INR5.4b/INR5.0b/INR3.8b), respectively.

* Base business volume declined 2% YoY in 1QFY23 (est. +4%).

* Consolidated gross margin contracted 180bp YoY to 36.9% (in line). Lower staff cost (-10bp YoY) and higher other expenses (+100bp YoY) led to an EBITDA margin contraction of 270bp YoY to 13.5% (est. of 14.3%).

* On a standalone basis, sales were up 8.8% YoY in 1QFY23. EBITDA/PAT declined 10.3%/31% YoY, respectively. Standalone EBITDA margin contracted 280bp YoY to 13.3%.

* Imputed subsidiaries: Sales/EBITDA grew 7.3%/2.6% YoY to INR1.8b/ INR309m in 1QFY23. PAT was INR129m (v/s loss of INR763m in 1QFY22).

Highlights from the management commentary

* Volume decline was in low single-digit but the number of packets sold remained flat.

* Sequential inflation in wheat was steep (20% QoQ) and it was the largest contributor to BRIT’s RM basket inflation. It has, however, moderated recently and the RM situation is likely to ease going forward.

* Total price hikes were a cumulative 20% over the last 12 months. Some price hikes were taken in 1QFY23 and further hikes will be taken during 2Q (6-7% price hikes cumulatively in 1HFY23).

* Currently adjacencies make up 20% of BRIT’s revenue. But management expects this to move towards 40-45% of turnover in the next 4-5 years.

* Group ICDs stood at INR6.9b as of 30th Jun’22. They were at INR7.4b as of 31st Mar’22.

Valuation and view

* There is no material change to our FY23 EPS estimate however, a likely realization decline in FY24 after the over-20% YoY price hike (prudent for a price sensitive category) would translate into a muted sales growth even if volumes were to be healthy in FY24E. This leads us to cut our FY24 EPS estimate by 5% even as we expect EBITDA margin to revive to historical highs (barring an unusually high level in FY21 led by a combination of stupendous in-home demand, low A&P spends, and benign material costs).

* BRIT’s valuation at 48.1x FY24E P/E appears rich given a tepid EPS CAGR of 11.7% over FY22-24E. While we like the longer-term opportunity for BRIT in the packaged food space, its impressive direct distribution expansion, and high ROEs, its current valuation fully captures any potential upside from a one-year perspective. The stock is also considerably expensive when compared with peers like DABUR, GCPL, and MRCO which trade at 37-41x FY24E P/E. We, therefore, downgrade BRIT to Neutral targeting 45x Jun’24 EPS, giving us a TP of INR3,670.

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