IGI Logo

Mixed bag; Heavy earnings base ahead

Britannia Industries Ltd. (BRIT) 2QFY24 performance was a mixed bag as volume were flat while margins surprised us positively. Continued sluggishness in rural markets, high base effect, regional competitive intensity, pricing tailing off and promotions through grammage looks to have been the key reasons behind the subdued revenue growth this quarter. On the other hand, soft commodity cost meant that gross margin has improved further from 1Q levels to 42.9%. This along with no major uptick in overheads has meant that operating margin were ahead of our estimate for 2QFY24. Going ahead, we expect volume growth momentum to improve but there won’t be any meaningful pricing growth (anniversarization of price hikes along with recent pricing actions). Heavy margin base will mean that earnings growth will likely be subdued in 2HFY24. We continue to maintain our NEUTRAL rating with a revised target price (TP) of Rs4,920.

Result Highlights (Consolidated)

* 2QFY24 headline performance: Consolidated sales was up 0.8% YoY while revenues (including OOI) were up 1.2% YoY to Rs44.3bn (vs est. of Rs45.6bn). Consol. EBITDA up 22.6% YoY to Rs8.7bn (vs est. Rs7.98bn). Adjusted PAT (APAT) up by 19.1% YoY to Rs5.9bn (vs est. Rs5.5bn).

* Standalone grew by 2.3% YoY to Rs42.9bn (sales up 1.8% YoY). EBITDA margin stood at 19.6% (up 320bps YoY). We believe volumes to be flattish YoY (vs est. 4% growth).

* Consolidated gross margin expanded by 400bps YoY to 42.9% (up 90bps QoQ). Other overheads were up 60bps YoY while employee cost was slightly down (- 10bps YoY). EBITDA margin thus saw an expansion of 340bps YoY to 19.7% (vs est. 17.5%).

* 1HFY24: Revenues, EBITDA & APAT up 4.5%, 28.8% & 25.8% YoY, respectively. Gross/EBITDA margin up 440bps/350bps YoY to 42.4%/18.5%, resp.

Key Conference Call Highlights

(1) Market share got stagnated last quarter but exit of the quarter saw some recovery due to price actions taken by BRIT in some of their key brands & SKUs.

(2) Price cuts done by BRIT are about 1.5% from peak levels.

(3) While basket level commodity cost remains soft, BRIT is closely monitoring stockprice situation of commodities amidst ongoing strife in Middle East & Russia.

View & Valuation

Over FY23-26E, we are currently building a subdued revenue CAGR of ~6.6% led by ~4% base-business volume CAGR. Drivers: (a) Tonnage growth is expected to improve going forward, but it won’t be able to compensate for tailing-off of pricing component. Rural recovery and distribution expansion would be key drivers of volume growth. (b) Sharp price interventions taken by the company to counter inflation comes into the base. Also, BRIT is deploying necessary pricing strategies to remain competitive and gain back share. Thus, reducing the revenue growth trajectory compared to FY23. (c) Contribution from non-biscuit portfolio will add some delta to growth as scale and innovations picks up further. We expect ~9.2% EBITDA CAGR over FY23-FY26E (~130bps EBITDA margin expansion as we expect gross margin to expand by 150bps over FY23-FY26E led largely by easing input cost). At CMP, the stock is trading at ~50x/45x/41x FY24E/FY25E/FY26E EPS as we build in ~10.3% earnings CAGR over FY23-26E. We continue to maintain our NEUTRAL rating with a revised TP of Rs4,920 valuing it at ~47x Sept’2025E EPS (3yr/5yr avg fwd. multiple: ~47x) due to the structural opportunity in the packaged foods space, decent return ratios, healthy dividend payout and continues market share gains

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632