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Topline outlook challenging; elevated margin unlikely to sustain

* Britannia Industries (BRIT) was aided by a confluence of positive factors in 9MFY21, such as high in-home consumption (biscuits constitute 75–80% of sales), reduction in ad spends, decline in material cost, and low promotional spends (owing to strong demand). These are likely to drive the strongest topline growth since FY12 (13.5% in FY21E) and the highest PAT growth since FY16 (40% in FY21E).

* However, the sales momentum is tapering after an extraordinary spurt of 26.1% in 1QFY21, with 12.1%/6.1% growth in 2Q/3Q. While the abovementioned factors leading to the extraordinary margin growth are still at play until 4QFY21, it presents a significant hurdle from an FY22/FY23 perspective. This is because none of these sales/EBITDA growth factors present a structural positive. To put things in perspective, BRIT reported a cumulative EBITDA margin expansion of 140bp between FY16 and FY20, and is likely to witness nearly 400bp expansion in FY21E due to factors that are unlikely to sustain going forward.

* We like the structural story, we maintain our Neutral rating on account of: a) fair valuations (43.7x/39.9x FY22E/FY23E EPS), b) sustained concerns related to elevated group inter-corporate deposits (ICDs) – currently ~INR7b (v/s INR6b at the end of FY20 when they crossed their own erstwhile stated threshold of INR5b), and c) an uncertain earnings outlook beyond FY21.

Sales disappoints, profitability in line

* Consolidated sales increased 6.1% YoY to INR31.7b (v/s our estimate of INR32.8b) in 3QFY21. Standalone sales grew 5.7% YoY to INR29.8b. Volume growth in the base business is likely to be 3% (v/s our estimate of 7%).

* Consolidated EBITDA grew 21.8% YoY to INR6.1b (in line). Consolidated PBT grew 23.5% YoY to INR6.1b (in line), while consolidated adjusted PAT grew 22.5% YoY to INR4.5b (in line).

* Consolidated gross margin expanded 220bp YoY to 43.1%. The company witnessed moderate inflation in most commodities, barring palm oil, which has seen a steep price rise.

* Flattish staff cost (+10bp YoY) and lower other expenses (-30bp YoY), as a percentage of sales, meant that EBITDA margin expanded 250bp YoY to 19.3% (v/s our estimate of 18.5%).

* Consolidated sales/EBITDA/PAT grew 14.6%/44.3%/43.7% in 9MFY21.

Highlights from the management commentary

* Diversification of the purchase basket of consumers has affected in-home consumption.

* The Hindi belt, which constitutes 35-40% of BRIT’s entire market, is doing very well for the company. BRIT’s growth in this market has seen a 30-60% increase over FY17 levels. The company has gone from ~10% market share in this market four years ago to 15% at present. Hence, there is still a long way to go.

Commodity cost saw an overall inflation of ~1% YoY in 3QFY21. Flour and milk saw a deflation of 7% and 15%, respectively. On the other hand, sugar and refined palm oil saw an inflation of 1% and 25%, respectively.

* The management will accelerate the pace of innovation after having taken a step back in 9MFY21.

Valuation and view

* There are no material changes to our EPS forecast.

* As consumers revert to a normalized lifestyle, in-home consumption is likely to normalize after the spike seen in recent quarters. This led to sequential tapering of sales growth. We trim our FY22E/FY23E sales growth outlook as they would also be coming on a high base of FY21.

* At the same time, the extraordinary factors leading to the margin expansion in FY21 are unlikely to continue. This would weigh on margin going forward.

* We like the structural story as new category traction has been impressive in FY20 (as highlighted in our AR analysis note). The opportunity in the Packaged Foods industry in India remains massive. However, we maintain our Neutral rating on account of: a) fair valuations (43.7x/39.9x FY22E/FY23E EPS), b) sustained concerns related to elevated group ICDs – currently ~INR7b (v/s INR6b at the end of FY20 when they crossed their own erstwhile stated threshold of INR5b), and c) an uncertain earnings outlook beyond FY21. Our TP of INR3,830 per share is set at 45x Dec’22E EPS.

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