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Cost savings accelerated to protect margins

Britannia Industries Ltd. (BRIT) 3QFY25 base business volume growth of 5.5% YoY (overall volume growth at 6%YoY) was largely in-line with our estimate. Sharp savings in staff cost led by stock depreciation (revaluation of Phantom stocks basis share price) and accelerated cost efficiencies meant that EBITDA margin for the quarter came at 18.4% (~120bps above our estimate) even while there was ~11% commodity inflation (gross margins were down 510bps YoY & 280bps QoQ). Flattish realizations will move into positive territory in the coming quarter led by fresh price actions initiated by BRIT (2% in 3QFY25 & another 2.5% expected in 4QFY25). In the near-term, we expect some impact on volume growth compared to earlier expectations due to grammage changes and impact from pricing actions as BRIT aims to maintain stable margins. While we expect soft earnings for the very near-term, reasonable valuations makes us maintain our ADD rating on a one-year forward basis. We now derive a revised target price (TP) of Rs5,620 (Rs5,770 earlier) targeting ~46.5x (3yr/5yr avg fwd. multiple: ~49x) on our March’27E EPS.

Stock performance

3QFY25 Result Highlights

* Headline performance: Consolidated sales was up 6.5% YoY while revenues (including OOI which was up ~100.5% YoY) was up 7.9% YoY to Rs45.9bn (vs est. of Rs46.2bn). EBITDA was up 2.9% YoY to Rs8.4bn (vs est. Rs8.0bn). Adjusted PAT (APAT) was up by 4% YoY to Rs5.8bn (vs est. Rs5.4bn).

* Standalone revenue grew by 7.7% YoY to Rs44bn (sales up 6.2% YoY). Volumes grew by 6%, in-line with our estimate. EBITDA margin stood at 18.4% (down 90bps YoY).

* Consolidated gross margin was down 510bps YoY to 38.7% (down 280bps QoQ). Sharp cut in overheads: Other overheads down 190bps YoY and Employee cost down 240bps YoY meant that consolidated EBITDA margin was down by just 90bps YoY to 18.4% (vs est. 17.2%).

* 9MFY25: Revenue, EBITDA & APAT grew by 6.4%, flat & 2.4% YoY, respectively. Gross margin down 180bps YoY to 41.2% while EBITDA margin was down 110bps to 17.6%.

Key Conference Call Highlights

(1) Phantom stocks being revalued based on share price led to sharp cut in staff costs reversing the impact seen in 2QFY25.

(2) Price increase of ~2% taken in 3QFY25. BRIT will take further price increase of ~2.5% in 4QFY25 and another round of ~1.5% in 1QFY26.

(3) Pause in Capex for now: ~Rs1.5-2bn capex expected in FY26.

View & Valuation

There is 2.3%/1.5%/1.5% downward revision in our FY25E/FY26E/FY27E EPS. Over FY24- 27E, we are now building revenue CAGR of 9% driven by volume CAGR of 6.5%. Drivers: (a) Expecting maintenance of decent volume growth, even after baking impact of grammage reductions in near-term, led by rural recovery and benefits from distribution expansion. (b) Better growth expected in adjacent businesses compared to the base business led by company’s initiatives will add delta. (c) While innovation led premiumization efforts continues, value growth will be supported by price actions. We build 9.2% EBITDA CAGR over FY24-FY27E (only ~10bps EBITDA margin improvement over FY24-27E but almost 140bps improvement from FY25E levels). We believe company will now looking to prioritize growing topline while maintaining the peak level of margin profile band without cutting on A&SP spends. After recent correction, the stock is now trading at ~53x/44x/40x FY25E/FY26E/FY27E EPS as we build in 11.2% earnings CAGR over FY24-27E (15.9% CAGR over FY25E-27E). While we expect earnings to remain subdued for the very nearterm, reasonable valuations makes us maintain our ADD rating on a one-year forward basis. We now derive a revised TP of Rs5,620 (Rs5,770 earlier) targeting ~46.5x (3yr/5yr avg fwd. multiple: ~49x) on our March’27E EPS, due to decent return ratios with improvement over next two years and healthy dividend payout.

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