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Britannia Industries Ltd. (BRIT) 2QFY25 volume growth of 8% YoY was slightly lower than our estimate. Margins saw a sharp miss led by higher COGS. In a tough demand scenario, YoY volume growth continues to be robust for BRIT led by gradual recovery in rural as urban remains under pressure. Negative realizations will reverse in the coming quarter led by anniversarization of earlier cuts along with fresh price actions initiated by BRIT. Few more months of strategic forward covers and price hikes should make the margins better, but food inflation is also unexpectedly high and choppy. In the near-term, we expect some impact on volume growth compared to earlier expectations due to pricing actions as BRIT aims to maintain stable margins. We expect earnings to remain subdued for the very nearterm, but reasonable valuations make us maintain our ADD rating with a revised target price (TP) of Rs5,770.

2QFY25 Result Highlights

* Headline performance: Consolidated sales was up 4.5% YoY while revenues (including OOI which was up ~62.4% YoY) was up 5.3% YoY to Rs46.7bn (vs est. of Rs47.9bn). Consol. EBITDA was down 10.2% YoY to Rs7.8bn (vs est. Rs9.3bn). Adjusted PAT (APAT) was down by 9.5% YoY to Rs5.3bn (vs est. Rs6.6bn).

* Standalone revenues grew by 4.9% YoY to Rs45bn (sales up 4.1% YoY). Volume growth for the quarter by 8% versus our estimate of 10% growth YoY. EBITDA margin stood at 16.6% (down 300bps YoY).

* Consolidated gross margin was down 140bps YoY to 41.5% (down 190bps QoQ). Higher overheads: Other overheads up 20bps YoY and Employee cost up 140bps YoY meant that consolidated EBITDA margin was down by 290bps YoY to 16.8% (vs est. 19.5%).

* 1HFY25: Revenue, EBITDA and APAT grew by +5.6%, -1.6% and +1.6% YoY. Gross margin was flat YoY at 42.4% while EBITDA margin was down 130bps to 17.2%.

Key Conference Call Highlights

(1) Phantom stocks being revalued based on share price led to sharp rise in staff costs. Impact in 2QFY25 was around Rs500mn.

(2) There could be some impact on volumes in the very near-term due to price actions.

(3) BRIT has initiated focused pricing actions in specific channels and brand to counter inflation. BRIT will look to take 4-5% price increase (will be executed before Dec’24- Jan’25) over and above some pricing which is already executed.

(4) In the near-term, management is looking to maintain a stable margin profile.

View & Valuation

There is 8.6%/5.4% downward revision in our FY25E/FY26E EPS. Over FY24-27E, we are building revenue CAGR of 9.6% driven by volume CAGR of 7.2%. Drivers: (a) Expecting maintenance of robust volume growth 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 reversal of negative realization starting 3Q. We build ~10% EBITDA CAGR over FY24-FY27E (only ~10bps EBITDA margin improvement on high base) 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 ~54x/45x/41x FY25E/FY26E/FY27E EPS as we build in 11.7% earnings CAGR over FY24-27E. While we expect earnings to remain subdued for the very near-term, reasonable valuations makes us maintain our ADD rating on a one-year forward basis. We now derive a revised TP of Rs5,770 (Rs Rs6,300 earlier) as we roll-forward to Mar’2027E EPS, assigning a target multiple of ~46.5x (3yr/5yr avg fwd. multiple: ~49x) due to relatively strong volume growth expectation in near-term, decent return ratios with improvement over next two years and healthy dividend payout.

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