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We downgrade Britannia to REDUCE from Add, cutting Sep-25E TP to Rs5,200 from Rs6,750 earlier. Britannia's near-term outlook has turned weak, given the double whammy of demand slowdown and inflationary pressures. The inflationary setting ahead is likely to have a bearing on volume and margin delivery. The company is looking at 4-5% price hikes to address the inflationary stress, but as the strategic cover ends, we sense inflationary stress persisting in the business. We cut earnings by 9-13% ahead, to factor in the near-term demand pressure/margin headwind. Q2 results were weaker than expected, with consolidated topline growth at 4.5% (8% volume growth; biscuits market share steady in 1HFY25), and 10% drop in earnings. Q2 OPM contracted by 290bps YoY to 16.8%, with gross margin down by 135bps YoY to 41.5%.

Urban slowdown with inflationary pressure to hurt volume delivery ahead

Britannia reported 4.5% consol revenue growth in Q2FY25, with 8% volume growth. Its Biscuits market-share was steady YoY in 1HFY25. Mgmt attributes the slowdown in sector growth to demand weakness in the metro segment, which represents 30% of sales, entailing 2.4x contribution to the slowdown. Mgmt, after analyzing the Urban CPI basket, highlighted that 22% of the CPI weight is in housing, wherein real estate prices have surged and rentals seen expansion. On income, the salaried workforce has seen 6.5% income growth YoY, while the non-salaried (51% of the urban workforce) has seen 3.4% income growth YoY. Amid a weak demand setting, the management sounded concerned about its adjacent businesses. Going ahead, with 4-5% price hikes in the business, the management is looking at balanced growth. We now see 9% sales CAGR over FY25-27E.

Margin headwinds to have a bearing on profitability

Management called out the severe raw material inflation in the business, where so far stress is controlled given that the company has strategic covers in place. Palm oil prices, which saw 45% inflation QoQ (22% inflation due to duty increases), stand 12% lower for Britannia in Q2, given its strategic covers. The overall raw-material basket remains inflationary. While the management has taken price actions, thus showcasing its competitiveness, these are likely to lead to margin pressure ahead. We build in ~100bps YoY EBITDA margin contraction in 2HFY25. Focus on topline will have a bearing on margin delivery ahead; as such, we cut earnings by 9-13% over FY25-27E. On a low base of FY25 (-6%), we see 13% earnings CAGR over FY25-27E.

Valuations factor in demand/inflationary stress; downgrade to REDUCE

After the ~16% stock price correction in the last 1M, we note that valuations factor in business stress in the near term. We roll back the 15% valuation premium and cut our target valuation multiple to 48x (in line with the 5YF avg P/E) from 55x. After these changes, Sep-25E TP is cut to Rs5,200. Given limited upside, we downgrade to REDUCE.

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