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Prioritizing volume growth over margins

Britannia Industries Ltd. (BRIT) 1QFY25 volumes were exactly in-line with our estimate but margin came in lower than anticipated. Volume growth came in at ~8% YoY with rural markets doing better. Towards the end of 1QFY25, BRIT witnessed double-digit volume growth which augurs well for 2QFY25 but negative realizations will stay for atleast one more quarter. High operating income led to minor beat on topline, but sharper QoQ gross margin contraction (down 150bps QoQ) led to operating miss for the quarter. A&SP was also higher for the quarter YoY, which supported volume growth in a quarter where focused states/Hindi belt growth was below average. Going ahead, as expected, volume growth momentum will improve in rest of FY25. We also expect BRIT to maintain current margin while not holding back on spends. We maintain our ADD with a revised target price (TP) of Rs6,300 (Rs5,570 earlier), targeting ~50x on Sep’26E EPS.

1QFY25 Result Highlights

* Headline performance: Consolidated sales was up 4% YoY while revenues (including OOI which was up ~194% YoY) was up 6% YoY to Rs42.5bn (vs est. of Rs42.1bn). Consol. EBITDA was up 9.4% YoY to Rs7.5bn (vs est. Rs8bn). Adjusted PAT (APAT) was up by 15.9% YoY to Rs5.3bn (vs est. Rs5.4bn).

* Standalone grew by 5.8% YoY to Rs40.9bn (sales up 3.7% YoY). Volume growth for the quarter grew in high-single digits at ~8% YoY in-line with our estimate. EBITDA margin stood at 17.7% (up 60bps YoY).

* Consolidated gross margin was up 150bps YoY to 43.4% (but down 150bps QoQ). Higher overheads: Other overheads up 90bps YoY and Employee cost up 10bps YoY meant that consolidated EBITDA margin was restricted to 60bps YoY to 17.7% (vs est. 19%).

Key Conference Call Highlights

(1) Current priority is to drive topline over margins. (2) Expected commodity inflation for rest of FY25 to be at 4-5%. (3) Negative pricing due to rollbacks might even-out after a quarter. BRIT might have to take some pricing in select brands and sku’s to combat inflation in near-term. (4) Tangible gains from project with Bain & Co. will start coming from 4QFY25/1QFY26 onwards.

View & Valuation

There is -2.1%/2.0% change in our FY25E/FY26E EPS. Over FY24-26E, we are now currently building revenue CAGR of ~10% driven by volume CAGR of ~8.5%. Drivers: (a) Volume growth expected to touch double digits in FY25 led by low base, rural recovery and distribution expansion. (b) Sharp 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, realization in the base business on a full year basis would be slightly negative due to earlier rollbacks. We build 12.3% EBITDA CAGR over FY24-FY26E (~70bps EBITDA margin expansion as we expect gross margin to expand by ~120bps over FY24-FY26E) as company is now looking to prioritize grow topline aggressively while maintaining the current peak level of margin profile band without cutting on A&SP spends. The stock is trading at ~56x/49x FY25E/FY26E EPS as we build in 14.9% earnings CAGR over FY24-26E. We had recently upgraded our rating a notch to ADD and we now maintain it with a revised TP of Rs6,300 (Rs Rs5,570 earlier) as we roll-forward to Sep’2026E EPS and assign a target multiple of ~50x (3yr/5yr avg fwd. multiple: ~47x) due to strong volume growth expectation in near term, continues market share gains, decent return ratios with improvement over next two years and healthy dividend payout.

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