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Sluggish revenue growth: Britannia reported Q2FY24 revenue at Rs 4,433cr which increased by 10.5% QoQ and as compared to last year growth was just up by 1.2% YoY. The growth was largely impacted because of muted demand for the overall FMCG sector as the rural economy is still not contributing to the growth, besides, the company posted flattish volume growth (~20bps increase) as well as the growth was higher in the base year (last year).

Healthy improvement in margins: Britannia’s gross profit grew by 11.5%/13% YoY/ QoQ to Rs 1,901cr with margin at 42.9% which saw healthy improvement of 396bps/95bps YoY/QoQ because of decline in raw material price mainly palm oil while flour & sugar was marginally higher. Moreover, its EBITDA improved by 22.6%/26.6% YoY/QoQ to Rs 872cr and increase in margin by 343bps/250bps YoY/ QoQ to 19.7% because of decrease in overall expenses. Further, PAT grew by 19.6%/28.8% and margin came in at improved by 203bps/187bps YoY/QoQ to 13.2%.

Concall highlights: 1) Britannia’s management strategy is to continue its innovations, scaling up products in adjacent segments, spending on advertisements (to remain competitive and also aid in brand recall) and increasing distribution reach. 2) Management believes other than Biscuits there is good opportunity for categories such as cakes, dairy drinks, cheese, wafer cream biscuits, Makhana and croissants as penetration varies for each of them from low of 3% to 50% penetration. 3) Innovation contribution towards revenue stands at ~10% over the last 10 years. It launched products such as JimJam pops, GolMaal 50-50, different packaging for cheese. 4) Plan is to stay in the snacking & baking space and explore more categories. 5) Agenda is to grow topline much faster and bring in volume growth. 6) Volume growth was flattish for the quarter and to remain competitive the company took strategic pricing corrections in some of its key brands & SKUs. 7) Total reach is 66.2 lakh outlets with direct & indirect outlet reach of 27.3 lakh/38.9 lakh. 8) Have commercialized 2nd factory with 3 product lines in Bihar and its recent addition of factories in UP and Tamil Nadu are operating as per the company desired efficiencies. 9) Flour & sugar prices remain flat to higher while on the other hand palm oil saw healthy correction which is positive and aided margin improvement. 10) Key things to watch are the prices of commodities due to on-going concerns in the Middle-East & in Russia

Outlook & Valuation: In Q2FY24 as well, Britannia reported mixed numbers in continuation of trend like last quarter because of rural is yet to pick-up pace and volumes were flat while on the flip side the management focus will be on driving volumes and gaining market share by way of innovation, branding and increasing spends on advertisements as well as scaling up its distribution reach both in urban and rural areas. From a medium to long term perspective we expect Britannia to drive topline volume led growth as rural areas catch up pace. Meanwhile, on the financial front, we expect its revenue/EBITDA to grow by 15%/20% CAGR over FY23-25E and maintain a Buy rating with a target price of Rs 5,348.

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