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Peak quarter; further upgrades not visible

* BRGR recorded strong sales growth of 50% to Rs20.3bn in Q4FY21, driven by 53% growth in the domestic business (7% beat). EBITDA/PAT grew 61%/102%, largely in line with expectations on account of a slight miss on margins due to higher overheads.

* Domestic performance looks better than peers’ due to low comparables. Two-year sales CAGR is in line with APNT (15% for BRGR vs. 16% for APNT). Strong growth momentum indicates buoyant rural demand, pick-up in tier 1/metros and further market share gains.

* Gross margins were better, possibly driven by one-off inventory gains. Operating margin miss was likely a result of one-offs driving higher overhead costs. We expect margin pressure to increase ahead with the sharp rise in input inflation and slower pricing actions.

* Growth and execution remain impressive but earnings surprises are likely behind now, given rising margin pressures. Valuations at 68x FY23E EPS (20% premium to APNT) are expensive. Retain Sell with a TP of Rs585 (from Rs560), rolling forward to Jun’23 EPS.

Strong performance led by domestic business:

Berger’s Q4 sales growth was higher than that of peers (Asian and Kansai) at 53% on account of lower comparables (13% decline in Q4FY20 vs. 8% decline for APNT). Two-year sales CAGR for the Domestic business stands at 15% vs. 16% for APNT. Growth trends are similar with strong traction in the domestic business indicating stronger rural demand, recovery in metros and market share gains from unorganized. Q4 numbers are indicative of a steady performance from subsidiaries with 27% sales growth and improvement in EBITDA margins to mid-teens, resulting in strong 1.8x EBITDA growth on low comparables. While recent lockdowns will have a short-term impact on the performance, we expect pent-up demand and sustained growth trends in Tier 2/3 towns to drive 15%+ revenue growth.

Operating margins impacted by high overheads; input cost pressure to increase ahead:

Despite higher input inflation, gross margins were flat YoY and only 50bps lower qoq (vs. peer witnessing a sharper decline), possibly on account of low-priced inventory, better mix and price hikes in industrial. EBITDA margins were up 120bps due to operating leverage but were lower than estimates due to a sharp 63% increase in other overheads, likely due to some oneoff spends. Similar to APNT, BRGR has taken a price hike in May’21; however, given the high inflation, we expect margin pressure to increase ahead.

Expensive valuations; Sell:

BRGR has continued to grow strongly, largely in line with the leader, with the performance indicating market share gains. While growth and execution remain impressive, valuations at 68x FY23 EPS (at 20% premium to APNT) are expensive and unjustified. We maintain Sell with a revised TP of Rs585 (from Rs560), rolling forward to Jun’23 EPS.

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