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Improving volume trajectory; miss on EBITDA

* Britannia Industries (BRIT) posted revenue growth of 4% YoY in 1QFY25 (est. 5%) and volume growth of 8%. Price actions continued to affect value growth for the company. Other operating income surged 195%, mainly due to the incentive received from the Ranjangaon plant, which qualified as an ultra-mega plant this year.

* Non-biscuit portfolio (rusk, cake, bread, etc.) remained the key growth driver and contributed 25% to total revenue. Rusk delivered double-digit volume growth, while cheese posted double-digit revenue growth. The management remains positive about the growth outlook of its non-biscuit portfolio and expects it to sustain outperformance by 1.5x vs. the biscuit portfolio.

* GM expanded by 150bp YoY to 43.4%. EBITDA margin improved 50bp YoY to 17.7% (est. 18.6%). EBITDA increased 9% YoY (est. 14%). We estimate EBITDA margin of 19-19.5% for FY25/FY26 (vs. 18.9% in FY24).

* The management has guided for double-digit volume growth in 2HFY25, along with price hikes. Volume is witnessing healthy improvement, which is expected to continue in the coming quarters. Operating margin is key monitorable, which missed out in 1Q to drive volumes. We reiterate our Neutral with a TP of INR5,850 (premised on 50x Jun’26E EPS).

In-line revenue; miss on EBITDA

* Volume growth in high-single digit: Consolidated net sales (excluding other operating income) rose 4% YoY to INR41.3b (est. INR41.7b). Other operating income jumped 195% YoY to INR1,204mn. Consolidated total sales rose 6% YoY to INR42.5b (est. INR42.3b); the four-year CAGR was 6%. The company delivered high single-digit volume growth in 1Q.

* Margin improvement: Consolidated gross margin improved by 150bp YoY but contracted 150bp QoQ to 43.4% (est. 43.5%). Employee/other expenses rose 7%/10% YoY. EBITDA margin slightly improved to 55bp YoY to 17.7% (est. 18. 6%). EBITDA increased 9% YoY (est. +14%).

* Double-digit growth: Consol. EBITDA/PBT/Adj. PAT grew 9%/14%/16% YoY to INR7.5b/INR7.1b/INR5.3b (est. INR7.8b/INR7.3b/INR5.3b).

Highlights from the management commentary

* FMCG industry posted value growth of 6.6% and volume growth of 6.5%.

* Rural growth, which lagged urban growth, has started improving, driven by better monsoons and moderate inflation. BRIT has a higher market share in urban areas vs. rural markets.

* Volume growth during the quarter was 8%.

* The company has previously implemented price rollbacks but is now focusing on consolidation and may only offer occasional promotions.

* Overall commodity costs remained benign in 1Q. Inflation in flour, sugar, cocoa and milk was offset by a softening in the prices of palm oil, laminates, and corrugated boxes.

* BRIT expects inflation of 4-5% in the coming months, driven by an increase in the prices of flour, sugar, and cocoa.

* Direct reach now stands at 2.82m outlets. BRIT has also strengthened its rural distribution reach to 30k distributors.

Valuation and view

* We broadly retain our FY24/FY25 EPS estimates.

* BRIT focuses on expanding distribution, primarily in the rural, innovating products, and scaling up in related categories. Rural demand is reviving and it should gradually start driving volume growth in FY25. We expect the volume recovery trend to continue in FY25.

* The company is operating at a peak margin; we do not see any margin catalysts in the near term. We estimate EBITDA margin of 19-19.5% for FY25/FY26 (vs. ~19% for FY24).

* Packaged food companies have outperformed personal care companies over the last two years, since they have maintained positive volume growth despite a steep price increase. We do not foresee such growth divergence going forward. BRIT is already trading at fair valuations. Reiterate Neutral with a TP of INR5,850 (premised on 50x Jun’26E EPS, earlier 45x).

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