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Britannia’s Q3FY24 print was below our estimates; Consolidated revenue/EBITDA/PAT grew 1.4%/0.4%/0.3% YoY. Given high base, the transaction (packet) growth was flat, though biscuits volumes grew 5.5%. Despite weak rural demand management alluded growth to, (1) direct reach of 2.76mn outlets with 26k preferred rural distributors, (2) judicious pricing actions, (3) faster growth in focus states at 2.4x, (4) NPD contribution ~4% and (5) double digit growth in international markets. BRIT has widened gap in market share to Parles further. Gross margins stable at 43.9% (-18bp), though employee/other expenses grew 11.3%/1.4% resulted in EBITDA margin at 19.3% (-19bp). Management said it will execute pricing action to remain competitive and reinvest accrued benefits in ad-spends and promotions. With stable EBITDA margin (~19%) BRIT aims to drive double digit volume growth and increase market share in focus states. We tweak earnings and retain BUY with a revised DCF-based TP Rs5,854 (implying 46.5x avg. FY25E/FY26E EPS).

Despite high base topline grew 1.4%; with flat transaction growth volumes grew 5.5%

BRIT’s Q3FY24 consolidated revenue grew at Rs42.6bn (+1.4%) led by price cuts driving 5.5% volumes growth. Despite weak rural demand management alluded growth to, (1) direct reach of 2.76mn outlets with 26k preferred rural distributors, (2) judicious pricing actions, (3) faster growth in focus states at 2.4x, (4) NPD contribution ~4%, and (5) double digit growth in international markets. BRIT has widened gap in market share to Parles further. We note BRIT’s strategic pillars for growth driven by, (1) distribution expansion in rural with sustained marketing investments, (2) lead innovation in non-biscuits and snacking portfolio, (3) maximizing cost efficiencies, and (4) expand adjacent business to deliver consistent profitable growth. Further scale up in operation at two greenfield biscuit units in UP/Bihar to show up in revenues in Q4. BRIT launched four new products holding ~Rs2bn revenue potential and remained confident to building nutritional and healthy snacking portfolio. Further management committed to scale up cheese, drinks/dairy portfolio with cheddar and processed cheese in Q4 to achieve 10% revenue contribution from Bel SA JV by FY25E. 

Despite calibrated price cuts/grammage increase, BRIT held its margin profile

As commodity inflation receded BRIT took pricing action yet reported stable gross margin at 43.9% (-18bp), even though wheat flour/sugar prices risen 10%/8% YoY and declined for palm oil/laminates by 18%/9%. Management said, it saved margin due to forward cover in wheat and sugar yet maintained fine balance in value and volume. Despite higher employee cost (+11.3%, other expenses (+1.4%) and ad-spends (~3.5% of sales) EBITDA margin settled at 19.5% (-19bp). Management expects to maintain operating margin at ~19% driven by cost efficiencies: (1) step up cost reduction efforts/better factory productivity, (2) reduce wastages, (3) cut distance to market – new capacities in UP/TN, and (5) margin recovery in the international business.  

Valuation and risks

We had argued in the past, BRIT’s strategy driven by balancing growth vs profitability also echoed in Q3FY24 results. We expect BEL SA JV to drive drinks/dairy and cheese portfolio. Further capacity addition in high growth markets such as UP/Bihar/TN indicate faster growth and cost savings on account of reduction in distance travelled, yet PLI incentive/state incentive could lift margins. With receding commodity inflation management said to reinvest savings driving consumer promotions and ad-spends that could reflect in higher volume growth. With steady margin guidance by the company we cut FY24E by 2.8% and increase for FY25E by 1.4% and retain BUY, with a revised DCF-based TP Rs5,854 (implying 46.5x avg. FY25E/FY26E EPS). Risks – higher input costs, competition & NCD loan given to group companies.

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