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Beat on all fronts; material cost pressures persist

* BRIT performed significantly better than expected in 2QFY23. Despite an effective price increase of over 18% YoY, volumes were up by ~4%.

* High velocity consumption categories like Biscuits usually witness a lower offtake during periods of high CPI inflation, as discretionary consumption is sacrificed, but this was not the case on this occasion. Three-year sales CAGR remained in double-digits.

* All three critical raw materials (i.e. wheat, sugar, and milk) are witnessing inflation, which will cap its margin outperformance. We maintain our Neutral rating on the stock.

Better than expected performance

* Consolidated sales rose 21.4% YoY to INR43.8b (est. INR40.4b) in 2QFY23. Consolidated EBITDA/PBT/adjusted PAT grew 27.5%/26.1%/28.5% YoY to INR7.1b/INR6.6b/INR4.9b (est. INR5.9b/INR5.5b/INR4.1b).

* Volumes in the base business rose by ~4% YoY in 2QFY23 (in-line).

* Consolidated gross margin expanded by 140bp YoY and 200bp QoQ to 38.9% (est. 37.5%). Lower staff cost (-50bp YoY) and higher other expenses (+120bp YoY) restricted EBITDA margin expansion to 80bp YoY at 16.3% (est. 14.5%).

* Sales/EBITDA/adjusted PAT rose 15.3%/9%/7% to INR80.8b/INR12.1b/ INR8.3b in 1HFY23.

* On a standalone basis, sales/EBITDA/PAT rose 22.4%/29.5%/34.1% YoY in 2QFY23 to INR41.9b/INR6.9b/INR4.9b.

Highlights from the management interaction

* BRIT has been gaining market share for the past 38 quarters.

* Commodity cost inflation grew by 3% sequentially. Cumulative commodity inflation is up 32% over the past seven quarters. This has affected profitability by 23%. However, profitability was aided by ~3% from cost efficiency programs and price hikes of 21-22.5%.

* BRIT raised prices much ahead of that of the market. Prices are up 18% YoY and 7% QoQ. This has affected volumes.

* The management expects wheat prices to remain firm in 3QFY23. Milk prices continue to be on the boil and this has impacted the Dairy business. It is seeing a little upside in sugar as well.

Valuation and view

* As a result of the significant beat in its 2QFY23 EPS over our expectation; relative resilience in volumes, amid a steep price increase; as well as a high CPI inflation, our EPS forecast for FY23/FY24 have risen by 11%/8%.

* Material cost pressures, however, show no signs of abating, with ad spends likely to increase going forward. Our forecasts already factor in the highest ever annual EBITDA margin going forward (barring the unusually high margin during the COVID-led restrictions, which, as per the management, is unlikely to be replicated).

* BRIT’s valuation at 47.6x FY24E P/E appears rich. While we like the long-term opportunity for BRIT in the Packaged Food space, its impressive expansion in direct distribution, high RoE, and current valuation fully captures any potential upside from a one-year perspective. The stock is considerably expensive when compared to peers like DABUR, GCPL, and MRCO, which trade at 35-43x FY24E P/E. We maintain our Neutral rating and our TP of INR4,210 (45x Sep’24E EPS).

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