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Britannia’s 4Q performance was tad below expectation on volumes front but a way stronger gross margin for the third time in a row made up for the shortfall. The quantum of earnings beat was also led by bunched-up government incentives received, ex which EBITDA was broadly inline with what we were expecting. Volumes in terms of grammages grew in “very low single-digit” over past 6M but growth in packs sold was c.12% during Mar-Q, as per management. Going into FY24, management is confident that volume growth would pick up on the back of initiatives on distribution expansion, adjacencies scale-up and price-reversal in brands and SKUs where the same are deemed necessary; the latter would offset some of the gross margin gains expected from the benign costs trend but we reckon that FY24 operating margin could still be better vs FY23-exit excluding the excess incentives included therein. Implicit in this assumption, of course, is that Britannia’s historically-proven ability to grow SG&A at a very low clip, which did not materialise in FY23, would play out going forward. We expect the stock to do well on the back of this result.

* Volumes were tad lower-than-expected…: Britannia’s 4QFY23 consolidated sales, EBITDA and net profit grew 10.9%, 45.7% and 47.1% to INR 38.9bn, INR 8bn and INR 5.6bn respectively. Standalone sales growth was higher at 14.3% but was buoyed by 1-2% due to non-cheese Dairy sales moving to the parent entity whilst consolidated sales was adversely impacted by 1-2% due to Cheese revenue now being accounted as ‘share of profits from JV and associates’ instead of a line-by-line consolidation that used to be done earlier. Volumes likely grew 1-2% but growth in number of packs sold was much higher at 12%, as per management. Realisation per kg was still 11-12% higher yoy and management is well-cognizant of the fact that this may need to be adjusted downwards in the days ahead to maintain price-value equation in a lower commodity-costs regime.

* made up by much stronger gross margin: Britannia’s consolidated gross margin expanded 577bps yoy and 72bps qoq to an all-time high level of 43.1% - better vs our expectation of 41.5% for this quarter which was assuming that the earlier-available lower-priced wheat-flour inventory would have all been used up already. As per management, amongst its key inputs, wheat flour and dairy prices are still significantly inflationary while palm oil, laminates and corrugated boxes’ prices have deflated; the well-timed strategic buying decisions taken by the company could help bring its own costs down by a notch vs what spot prices suggest. Britannia booked INR900mn of operating other income from PLI incentives (partly pertains to earlier periods) during the quarter (was c.INR500mn in 3Q) – this by itself boosted reported operating margin by c.2ppt. Ex of this, normalised EBITDA margin was in the 18.7%-range which is c.300bps higher yoy but just a tad lower qoq. Growth in Staff costs and Other Expenses was of a much higher order than the range that we are used to seeing in Britannia, viz. +40% and +23% respectively.

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