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We have upheld our positive stance on Britannia, thanks to the management thrust on expanding TAM (now at ~Rs1trn; 11% of the Indian packaged food & beverage market) in adjacencies and preserving profitability. The focus ahead is likely to be on driving consumption in penetrated segments (biscuits, bread, rusk), while propelling penetration for cakes, wafers and dairy products. As a consequence of the muted demand setting, along with high revenue base and surge in regional competition, Britannia has delivered a lackluster topline show with 1% revenue growth (0.2% volume growth); but it surprised positively on EBITDA margin (up 340bps YoY to 19.7%), which helped to clock 23% EBITDA and 19% adj. PAT growth. Building-in the demand stress, we cut topline by 3% for FY24E. We maintain BUY, with new Sep-24E TP of Rs5,250 (on 48x PER).

Britannia Industries: Financial Snapshot (Consolidated)

Demand trajectory key for growth; premiumization thrust continues to aid

After ~22% price hikes (in past inflationary settings, since Covid-19), the company has effected ~1.5% price correction so far. The subdued demand environment has been a key factor for its flat volume growth in Q2; surge in regional competition (which had a greater impact in the initial 45 days of Q2) and a high base were the other two reasons for the modest growth. With necessary actions to counter regional competition already in place, Britannia awaits demand recovery in 2H. Notably, despite the demand weakness, there has been no down-trading; rather, premium offerings continue to do well. The company has been able to protect its shares and exit Q2 with share gains.

Margin trajectory depends on demand setting

In the poor demand conditions, the company has focused on margin which, according to the management, is an apt strategy, as effecting price cuts/increases in advertising is unlikely to help garner incremental revenue. Assessing the Management commentary, we see the company turning aggressive on any improvement in the demand setting. In Q2FY24, its gross margin expansion of 375bps YoY (to 42.1%) aided EBITDA margin expansion of 340bps to 19.7%. EBITDA grew 23% YoY, while earnings grew 19% YoY. The focus ahead is likely to be on stepping up topline growth, which the management is confident would be better in 2H.

Fundamentals firm, rural recovery key for growth acceleration; maintain BUY

We remain positive on the stock from the fundamentals viewpoint and on the packedfood opportunity. Factoring-in the near-term demand weakness, we cut topline by ~3% for FY24E, while maintaining growth estimates for FY25–26. Considering the muted 1H show, we raise our margin for FY24E, while lowering it for FY26E. As we enter H2FY24 on a high base, the company is likely to log weaker earnings. We see any stock weakness due to the muted show as an entry opportunity. We maintain BUY, with new Sep-24E TP of Rs5,250/share (Rs5,350 earlier) on 48x P/E (in line with its last 5Y avg. fwd. P/E).

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