Neutral Britannia Industries Ltd For Target Rs.5,200 by Motilal Oswal Financial Services Ltd
High inflation impacts volume growth and margins
* Britannia Industries (BRIT) posted operating revenue growth of 6% YoY in 3QFY25 (in line) and volume growth of 6% (est. 5%). Other operating income surged 101% due to government grants related to Ranjangaon factory.
* GM contracted 510bp YoY/280bp QoQ to 38.7% (est. 42%), impacted by rising commodity prices, mainly palm oil (+43% YoY) and Cocoa (+103% YoY). Employee costs dropped 47% in 3Q due to phantom stock revaluation impact of INR750m (employee cost rose 45% in 2QFY25). While quarterly fluctuations persist, annual employee costs remained stable. The company implemented strategic price hikes (2% in 3Q, further 2.5% in 4Q and 1.5% likely in 1QFY26) and cost efficiency (~2.5% in FY26) to offset inflation.
* EBITDA margin declined 90bp YoY to 18.4% (est. 17.7%). EBITDA rose 3% YoY (est. -2%). Management highlighted that EBITDA margin will be maintained at 17-18%. We model EBITDA margin of 17.5% for FY25 and ~18% for FY26/FY27 (vs. 19% in FY24).
* BRIT’s focus on innovation, distribution expansion, urban GTM overhaul, marketing, pricing actions, and dairy capacity expansion will drive growth. However, we await a stable demand recovery in core categories amid high inflation and price hike while closely monitoring margins. We reiterate our Neutral rating with a TP of INR5,200 (premised on 45x Dec’26E EPS).
In-line revenue; sharp cut in employee expenses lead to EBITDA beat
* Volume growth at 6%: BRIT’s consolidated net sales (excluding other operating income) rose 6.5% YoY to INR44.6b (est. INR44.6b) in 3Q. Other operating income jumped 100% YoY to INR1.3b. Consolidated revenue rose 8% YoY to INR45.9b (est. INR45.5b). The company delivered ~6% volume growth in 3Q (est. 5%, 8% in 2QFY25).
* Commodity pressure on margin: Consolidated gross margin contracted by 510bp YoY and 280bp QoQ to 38.7% (est. 42%) due to a rise in commodity prices. Employee expenses declined sharply by 47% YoY and other expenses fell 2% YoY. EBITDA margin declined 90bp YoY to 18.4% (est. of 17.7%).
* Low-single-digit growth in profitability: EBITDA rose 3% YoY to INR8.4b (est. INR8.1b). APAT was up 4% YoY at INR5.8b (est. INR5.6b).
* In 9MFY25, net sales grew 6% YoY, EBITDA was flat YoY and APAT rose 3% YoY.
Highlights from the management commentary
* An economic slowdown and high food inflation have led to subdued consumer demand. The Consumer Price Index (CPI) rose to 5.2% in 3Q, with food inflation at 8.4%.
* BRIT's commodity inflation stood at ~11%, primarily driven by rising cocoa and palm oil prices.
* Focus states, including Madhya Pradesh, Rajasthan, Uttar Pradesh, and Gujarat, grew 2.6x faster than the rest of India in 3Q, contributing 15% of total revenue, with rural markets showing stronger growth.
* No major capital expenditure is planned, with only INR1.5-2b allocated for FY26.
* The e-commerce mix for BRIT’s product categories stands at ~ 4% for biscuits, 17% for croissants, 9% for cakes, and 11% for dairy, showing a higher share for adjacent businesses.
Valuation and view
* We largely maintain our EPS estimates for FY25/FY26.
* BRIT focuses on expanding distribution, primarily in rural areas, innovating products, and scaling up in related categories.
* We had highlighted the margin as a risk in BRIT given high inflation, focus on volume growth (increase in promotional, marketing, and other activities), and a high margin base. Operating margin can be volatile in the near term owing to RM inflation, a calibrated price hike and employee expenses. The margin pressure is likely to sustain in the near term. We model EBITDA margin of 17.5% for FY25 and ~18% for FY26/FY27 (vs. 19% in FY24).
* We believe urban demand will recover gradually and growth in packaged food categories will also improve. With pricing action initiated, we expect revenue growth to remain healthy, along with a gradual recovery in gross margin. We reiterate a Neutral rating with a TP of INR5,200 (premised on 45x Dec’26E EPS).
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