Britannia Industries Rating: ADD; Most resilient performance in the last three years | The Financial Express

Britannia Industries Rating: ADD; Most resilient performance in the last three years

FMCG major continues to undertake intensified cost efficiency measures

Britannia Industries Rating: ADD; Most resilient performance in the last three years
Even as the rural market has seen a slowdown (on an overall basis), management highlighted benefits from distribution expansion.

Britannia Industries’ consolidated sales were up 21% y-o-y with a three year compound annual growth rate (Cagr)of 13%. The volume growth (domestic) came-in at about mid-single digit (4-5%), implying pricing benefit of ~17%. Given grammage reduction in price-point packs would also have weighed on volume growth print, to that extent, the mid-single digit volume growth shows it is a good outcome.

Even as the rural market has seen a slowdown (on an overall basis), management highlighted benefits from distribution expansion. It has has appointed 28,000 rural preferred dealersas a key driver. The focus continues on increasing direct distribution (2.6 mn outlets; +0.4mn in last six months) and enhancing rural footprint.

Britannia has witnessed one of the most resilient (core) performance in the last three years (backed by share gains). The consensus expects the FMCG major to invest in new categories. Till now, pressure on core margins was not providing ammunition. It will now have to re-earn the (premium) multiple as consensus was generous in previous re-rating cycle. Going forward, success of new segments and ramp-up of adjacent categories is imperative. The outlook on this appears better. We upgrade the rating to ADD.

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The consolidated gross margin expanded 140bps y-o-y to 38.9% on the back of the pricing actions (increases). On sequential basis, it was up 200bps. Ebitda margin expanded 80bps y-o-y to 16.3% with a 30% y-o-y increase in other expenditure. We believe Britannia has taken sufficient pricing actions to guard against near-term pressures. It continues to undertake intensified cost efficiency measures to protect margins. The increased pace of new product development will require some investments in the near future.

We increase our earnings estimates by 12-3% for FY23-24E; modelling revenue/Ebitda CAGR of 13%/18% over FY22-24e. At our target price, the stock will trade at 48x Mar’24E EPS. We upgrade to Add with a DCF-based revised TP of Rs 4,300. Key upside risk to our thesis is faster-than-expected revenue growth in core biscuits. Key downside risk is sustained weakness in consumption demand.

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First published on: 08-11-2022 at 04:40 IST