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Soft demand outlook would be the headline, but strong margins and attractive valuation cannot be overlooked  

* View – While growth performance was disappointing, even the outlook going forward looks a bit soft with no sustainable demand tailwinds. The new adjacent categories remain the key driver for a pick‐up in growth trajectory which needs to be closely watched. Margins, however, can offset that with most cost efficiency measures sustaining which can stabilize margins at much above historical levels. With no significant change to estimates, the stock is currently at 39x FY23E earnings which is among the cheapest in the FMCG pack and hence should gradually re‐rate towards 45x indicating a fair value of close to Rs 4,050.

* Operating environment – Robust GT and rural growth but MT and institutional business muted, diversification of consumer purchase basket, normalization of pantry stocking and diet diversification, steep palm oil inflation while others commodities in control.

* Quarter highlights – 6% topline growth, 250bps margin improvement and 22% PAT growth (9MFY21 11% volume and 14% revenue growth), market share gains for 36 straight quarters.  

* Distribution ramp‐up restarted – Strong increase in direct reach post March lows, rural ramp‐up continues unabated, double‐digit growth continues in Hindi belt with 1.3x‐1.6x growth of FY18 growth rates.

* Marketing and innovation normalizing – Marketing activities levels back to normal, promotions started on few recent launches, muted new launches as of now.

* Key cost efficiencies sustained – 7% better factory productivity, 30% lower wastages, 50% higher direct dispatches from factories to distributors and 10% lesser depot space of pre‐COVID levels.

* Adjacent businesses – Healthy growth in Middle East and Africa, better margins in bread, stable growth and better margins in rusk, cheese growth in double‐digits, some pick‐up in drinks, better margins given lower milk prices.

* Commodity costs – Broadly in control with flour down 7%, milk down 15%, sugar up 1% and palm oil up 25%.

* Consumer behavior trends – Higher in‐home consumption, shift towards top brands, preference for comfort foods at reasonable prices, some level of downtrading, multiple cost saving opportunities, health & wellness focus.

* Demand outlook – Should get back to pre‐COVID growth rates of 9‐10% for next few quarters, significant impact on MT channel especially Big Bazaar issue plus softness in alternate channels like offices, hotels, railways etc led to lower than expected growth; will take more time for large cities, MT channels and transit channels to normalize; will get more growth momentum once those normalize and rural and GT continue with momentum.

* Rusk and cake ‐ Rusk has seen strong double‐digit growth but cake is muted given its urban centricity and high share from schools.  

* Market share – Strong execution from No.2 player and better value for money has helped them gain more market share in last 3 quarters, while No.3 and unorganized players have lost significant share.

* Margin outlook‐ Will endeavor to maintain current level of margins; brand extensions and new innovative products should be margin accretive.

* Wafers and crossiants – Strong 30% plus growth in wafers from a small base, croissants also saw growth but only in test markets post fine tuning of the product.

* E‐commerce and MT contribution– E‐commerce contribution very low still at only 1%, MT contributes about 10% which has come off.

* Capex – FY21 capex would be 60% of normal about 200crs, FY22 yet to be finalized.

* Small packs – Rural growth has driven increase in share of small packs, weak MT channel has also contributed to that; should normalize in next 3‐4 months.

* Wafer competition – Some large organized players have increased competition; trying differentiated strategy by reducing dealer margins, lowering promotions and differentiated product quality; have become No. 2 player in the category.

* Hindi belt opportunity – 4 largest states are 35‐40% Of entire biscuits market, company still relatively weak which means large growth opportunity as company started at 33% of its national market share 4 years back which has now increased to 50% of national market share.

* IT transformation project – Investing in a new updated ERP system, revamped dealer management system and a new vendor management system which should be complete in 3‐ 4 months.

* Ranjangaon mega project status – Have invested 700crs till now, target total of 1500crs investment till FY24 including dairy project; will get incentives from Maharashtra government.

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