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Healthy volume growth; miss on margin

* Britannia Industries (BRIT) posted revenue growth of 5% YoY in 2QFY25 (est. 7%) and volume growth of 8%. Other operating income surged 62%, mainly due to the incentive received from the Ranjangaon plant, which qualified as an ultra-mega plant this year.

* GM contracted 135bp/190bp YoY/QoQ to 41.5%. Employee costs were up 45% on phantom stocks being revalued based on the share price (impact of INR500m). EBITDA margin saw a sharp decline of 290bp YoY to 16.8% (est. 19.7%). EBITDA decreased 10% YoY (est. +7%). We estimate EBITDA margin of 18-18.5% for FY25-FY27 (vs. 19% in FY24).

* The management has guided for 4-5% price hike in 2HFY25. Volume is witnessing healthy improvement, which is expected to continue in the coming quarters. We previously highlighted a risk for BRIT in sustaining such a high operating margin. The operating margin remains a key monitorable, as it missed expectations to drive volumes in 1HFY25. We reiterate our Neutral rating with a TP of INR5,500 (premised on 50x Sep’26E EPS).

In-line revenue; miss on EBITDA

* Volume growth in high single-digit: Consolidated net sales (excluding other operating income) rose 4.5% YoY to INR45.7b (est. INR46.7b) during the quarter. Other operating income increased 62% YoY to INR1b. Consolidated revenue rose 5% YoY to INR46.7b (est. INR47.4b). The company has delivered ~8% volume growth in 2Q (8% in 1QFY25, est of 9%).

* Commodity pressure on margin: Consolidated gross margin contracted 135bp/190bp YoY/QoQ to 41.5% (est. 43.7%). Employee and other expenses were up 45% and 4% YoY. EBITDA margin declined 290bp/90bp YoY/QoQ to 16.8% (est. of 19.7%).

* Miss on profitability: BRIT’s consol. EBITDA/PBT/Adj. PAT declined 10%/10%/9% YoY to INR7.8b/INR7.2b/INR5.3b (est. INR9.3b/INR8.7b/INR6.5b).

* In 1HFY25, net sales increased 6% while EBITDA remained flat and APAT saw an increase of 2%.

Highlights from the management commentary

* The demand environment remains challenging, impacted by a combination of weak demand and high inflation.

* According to NIQ, FMCG market growth is the lowest in metro areas, where it has remained nearly flat.

* Rural growth was at a high single-digit and is growing 2x more than urban growth. Metro areas contribute ~30% to the total FMCG business.

* Commodity costs are on the rise, with palm oil prices increasing 45% in Q2FY25 compared to Q1FY25. This surge is driven by a 40% import duty, along with demand and supply challenges in key producing countries such as Malaysia and Indonesia.

* BRIT expects inflation of 4-5% in the coming months, driven by an increase in the prices of flour, sugar, and cocoa. To offset increasing material costs, the company is implementing a 4-5% price adjustment during the next two months, with targeted pricing strategies across different channels and brands.

* Direct reach now stands at 2.82m outlets. BRIT has also strengthened its rural distribution reach to 30k distributors.

Valuation and view

* We cut our EPS by 6-7% for FY25/FY26 to factor in lower operating margin.

* BRIT focuses on expanding distribution, primarily in rural areas, innovating products, and scaling up in related categories. Rural demand is reviving and should gradually start driving volume growth in FY25. We expect healthy volume growth to sustain in 2HFY25.

* We had highlighted the margin as a risk in BRIT given the rising inflation, focus on volume growth (increase in promotional, marketing, and other activities), and a high margin base. The margin pressure is likely to sustain in the near term. We model EBITDA margin of 18-18.5% for FY25-FY27 (vs. ~19% for FY24).

* Packaged food companies have outperformed personal care companies over the last two years since they have maintained positive volume growth despite a steep price increase. We do not foresee such growth divergence going forward. We reiterate a Neutral rating with a TP of INR5,500 (premised on 50x Sep’26E EPS).

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