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Growth moderates; margin remains elevated

Britannia reported a mixed result as the company clocked a miss on revenue but a marginal beat in margins. Revenue growth decelerated to 11% YoY in 2QFY21, after posting 26% YoY growth in 1QFY21, which further moderated to 6% YoY in 3QFY21 (HSIE 9%). Domestic volume growth of ~4% was much slower than ~17% in 1HFY21. Demand for essentials and in-home categories remained muted as consumer buying shifted from essentials to non-essentials. Non-biscuits (wafers, dairy, value added cake) saw double-digit growth, reflecting even lower growth for biscuits. The company saw robust margin expansion (249bps YoY), led by benign commodity inflation and effective cost management. We continue to believe that most consumer categories will see mean-reversion, discretionary will see pick-up and essentials will remain at moderated level (particularly biscuits). We maintain our EPS estimate for FY22/23. Rising debt, inter group transactions and modest FY22 earnings growth will keep valuations in check. We value Britannia at 40x P/E on Mar-23 EPS to derive a TP of Rs 3,589. Maintain REDUCE.

* Growth deceleration continues: Consolidated revenue grew by 6% YoY (+4% in 3QFY20 and +11% in 2QFY21), vs. HSIE 9% growth. Standalone revenue clocked 6% YoY growth (+4% in 3QFY20 and +11% in 2QFY21). Volume growth was close to 4% YoY (9% in 2QFY21 and 2% in 3QFY20). GT, which is the largest channel for Britannia, continued to grow well, driven by strong growth in rural and recovery in urban. MT remained under stress due to lower footfalls, although sequential recovery continued. The company enjoyed the benefit of pantry loading during 1HFY21 which has begun to normalise now. It continued to focus on expanding its distribution reach, especially in rural areas, and resumed investing behind its brands.

* Margin expansion continued, watchful for FY22: GM expanded by 224bps YoY to 43.1% (-44bps in 3QFY20 and +236bps in 2QFY21) vs. HSIEI 175bps YoY. RM inflation remained soft, except Palm Oil which saw high inflation. Employee/Other expenses grew by 8/4% YoY as the company enhanced its focus on cost control to overcome the impact from RM inflation. EBITDA margin expanded by 249bps YoY to 19.3% (+94bps in 3QFY20 and +361bps in 2QFY21) vs. expectation of 154bps YoY expansion. EBITDA grew by 22% YoY (HSIE 19%). With a sharp EBITDA margin expansion in 9MFY21, we expect margin pressure in FY22 (several costs will be restored).

* Call takeaways: (1) Britannia has sustained the efficiencies attained during 1HFY21; (2) direct reach grew to 2.3mn and 22% of dispatches are now direct to distributors vs. 8% earlier; (3) overall inflation has been moderate, barring palm oil; (4) MT revenue mix stood at 10% while e-comm mix was 1% (up from 0.5% earlier); and (5) the company is constructing production facilities for dairy (Pune) and cakes (Tamil Nadu).

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