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Britannia’s Sep-Q earnings print was below expectation, especially on the operating profitability – Revenue growth was 2% below estimate, however, lower GM (due to -ve price/mix & RM inflation) and higher staff cost (INR 500mn impact due to revaluation of phantom stocks) led to 9-12% miss on EBITDA/PAT. Volume growth at 8% (lower than double digit growth seen at end of 1QFY25) – impacted by tough demand environment (especially in urban metro markets) coupled with high inflation. While Britannia has maintained market share in1H vs last year, some market share gains are seen for largest competitor from other players. In the near term, operating environment is likely to remain challenging – elevated RM costs will require c.4-5% price hikes at portfolio level which will be implemented over 2HFY25 & can have ST impact on volumes (grammage reductions). We expect 2H sales trajectory to be better than 1H. With RM prices inching up & high margin in base, yoy margin compression will continue. However, on qoq basis –benefit of price hike & increased cost saving initiatives should help sustain current adj. EBITDA margins. Factoring weakness, especially on margins, we trim our FY25-27E EPS by c.8-10%. Maintain BUY with revised TP of INR 5,610 (50x Sep’26 EPS).

* Revenue tad below expectation, volume growth remained stable: Britannia’s 2QFY25 consolidated revenue (excl. other op income) grew 4.5% yoy to INR 45.6bn (c.2% below our estimates), while EBITDA and adjusted net profit declined 10.2% yoy and 9.5% yoy to INR 7.8bn and INR 5.3bn respectively. While volumes grew by 8% (vs our est of 9%), price/mix impact was higher (c.-4%) resulting in sales growth of 4.5% yoy. Rural markets (FMCG market grew by 6.7%) continued to see recovery, while urban-metro (FMCG market grew by 2%) saw relatively muted growth – mgmt. attributed the urban weakness to inflation in household essentials, housing costs and tepid growth in income growth. Going forward, management stated that a gradual price hike of 4-5% will be undertaken over next two quarters to offset current RM inflation which will have a shortterm impact on volumes.

* Weak gross profit and high staff cost led to sharp miss on EBITDA: Britannia’s consolidated gross margin performance was below expectation and contracted 185bps to 40.2% (vs JMFe: 40.9%), owing to inflationary trends in key commodities. While strategic covers in flour/palm oil enabled lower input price vs market prices for the company, it were still higher on yoy basis which along with inflation in other RMs & lack of commensurate price hike led to margin contraction. Sharp uptick in staff cost of +45.3% yoy, was due to revaluation of phantom stocks basis the run-up seen in stock price during Mar-Sep’24 (impact of INR 500mn). Other expenses were controlled well & grew 6.2% yoy. Other operating income was up 62.4% yoy – due to PLI benefit. Reported EBITDA declined 10.2% yoy and margin contracted c.280bps to 17.2% (vs JMFe: 18.5%) on account of weak gross margin progression and operating deleverage. With RM inflation remaining elevated vs base quarters along with tough demand scenario, yoy margin expansion is unlikely and mgmt. doesn’t expect margin band to dramatically change and aims to sustain margins at 1H levels.

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