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Consensus likely to be pleasantly surprised 

1Q revenue grew by 12% on a 2-year CAGR basis – domestic volumes were up 1% on a strong base of +22%. The second-wave-led (demand) tailwind was expected (by consensus) to be much lighter but has surprised pleasantly. Our checks suggest there was a pick-up during the lockdowns with some normalisation as mobility improved. Unaffected supply chains did help growth but we reckon the same would have limited gains from unorganised segment (faced disruption last year).

BRIT continued to benefit from strong brand positioning, direct distribution expansion and execution edge. Going forward, we believe success of (at least few) new segments – Salty Snacks, Wafers, Croissants and ramp-up of adjacent categories – Dairy, Rusks, Cakes and now Milk Bikis in biscuits are imperative for re-rating. While lower ad-spends in FY21 have driven higher profit growth vs revenue growth, FY22 is likely to be a low-profit-growth year. Approach on price increases (inflationary RM) will be key. REDUCE rating (a case of fundamentals vs rest) stays, for now.

* Strong revenue performance: Consolidated sales / EBITDA / PAT declined (just) 1% / 23% / 29%. However, on a 2-year CAGR basis (given strong base), performance was good with 12% revenue growth and 18% EBITDA growth. Standalone revenue was flat (but grew 11.6% on a 2-year CAGR basis) with volume growth of 1% (11% on a 2-year CAGR basis). To give a context, the 1% growth was volume was far superior compared to 8-10% decline expected by consensus (including us). While there were expectations that second wave of Covid will lead to increase in biscuit consumption, the category tailwind was expected to be much lighter as compared to last year.

Our checks suggest (1) Second wave of Covid did benefit in-home consumption; however, demand trends have normalised from mid-June, (2) Britannia has initiated price hikes in only select SKUs, (3) Some trade schemes have been trimmed while there is no change in channel margin. While there seems to be doubts (for consensus) of some channel filling at the end of the quarter, we didn’t gather any such indication.

* Margin impacted due to higher input cost and normalisation of costs: Gross margin contracted 300bps YoY to 38.7% due to inflationary palm oil and crude. EBITDA margin contraction was higher at 470bps YoY to 16.3% due to normalisation of costs (and brand spends) even as the focus continues on driving efficiencies; operating expenditure was up 160bps YoY. BRIT (in the past) has also given indications of calibrated price increases going forward.

* Valuation and risks: We cut our earnings estimates by ~2%; modelling revenue / EBITDA / PAT CAGR of 11% / 8% / 7% over FY21-23E. Maintain REDUCE with a DCF-based unchanged target price of Rs3,200. At our target price, the stock will trade at 36x March’23E. Key upside risk to our thesis is faster-than-expected revenue growth in core biscuits.

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