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Volumes flat; prices cut to remain competitive

* Britannia Industries (BRIT) reported muted revenue growth in 2QFY24 due to a high base, a slowdown in rural markets and competition from local players. GP margin and EBITDA margin expanded (YoY/QoQ) as RM prices declined, which led to profit growth of 19.8%.

* BRIT gained market share in 2QFY24 through price cuts in certain SKUs. The price cuts also helped it maintain competitiveness.

* Volume growth was flat (+20bp) and growth in Focus States also came down amid weak consumer sentiment, mainly in rural markets.

* BRIT continued to incur capex for setting up superior factories and capacity enhancement. Currently, it has in-house manufacturing capacity of 65%.

* Although we like the company’s structural investment case accompanied by healthy return ratios, valuations at ~51xFY24E EPS/~44xFY25E EPS price in these factors. We reiterate our Neutral rating on the stock with a TP of INR4,680 (premised on 45x FY25E EPS).

Miss on sales; higher operating margin led to a slight beat on profit

* BRIT’s consolidated sales rose 1.2% YoY to INR44.3b (est. INR46.4b) in 2QFY24. Consol. EBITDA/PBT/Adj. PAT increased by 22.6%/21.3%/19.8% YoY to INR8.7b/INR8.0b/INR5.9b (est. INR8.3b/INR7.6b/INR5.7b).

* The base business volume was flat in 2QFY24 (est. +3%).

* Consolidated gross margin grew 400bp YoY/100bp QoQ to 42.9% (est. 42.0%).

* EBITDA margin expanded 340bp YoY/250bp QoQ to 19.7% (est. of 17.8%).

* In 1HFY24, net sales/EBITDA/PAT grew 4.5%/28.8%/25.8%.

* On a standalone basis, sales/EBITDA/PAT grew 2.3%/22.3%/15.8% YoY in 2QFY24 to INR42.9b/INR8.4b/5.7b.

* 1HFY24 CFO/FCF increased by ~21%/107% YoY to INR9.7b/INR7.3b. BRIT incurred a capex of INR2.4b in 1HFY24 (vs. INR3.8b in 1HFY23). Cash and cash equivalent as of Sep’23 stood at INR1.2b (vs. INR1.0b as on Sep’22).

Highlights from the management commentary

* Overall commodity costs softened YoY in 2QFY24 as flour prices inched up and prices of sugar, palm oil, laminates and corrugated boxes softened YoY.

* The company has reduced prices by 1.5% from the peak level after increasing them by 22% during the inflationary environment. Hence, the overall price growth is still above 20%.

* Growth in Focus States declined in 2Q. As they are mainly rural-focused markets, overall rural growth is also down during the year.

* Four BRIT’s brands fall into the INR 10b plus category, collectively contributing INR 9.7b to the overall turnover.

* BRIT plans to enhance capacity in the mega food park in Ranjangaon, which accounts for 15% of total capacity requirements.

Valuation and view

* We broadly maintain our FY24/FY25 EPS estimates.

* BRIT’s valuations at ~51xFY24E P/E and ~44xFY25E P/E appear rich. Although we are optimistic about its potential in the Packaged Food space in the long run, as well as its remarkable progress in direct distribution and high RoE, we believe the current valuations already price in these positive factors. We reiterate our Neutral rating on the stock with a TP of INR4,680 (premised on 45x FY25E EPS).

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