Britannia Industries Rating: Buy | Better times await the company

Margin decline behind miss in quarter; FY23e EPS cut by 3%; target price revised to Rs 4,380; ‘Buy’ retained

Put together, Ebitda margin dipped 270bps y-o-y to 13.5%, nearly 160bps below estimates. Resultant Ebitda declined 10% y-o-y.
Put together, Ebitda margin dipped 270bps y-o-y to 13.5%, nearly 160bps below estimates. Resultant Ebitda declined 10% y-o-y.

Heightened inflationary pressures impacted GM which was down to the lowest level in at least 40 quarters. This drove Ebitda margins also down to a multi-quarter low. 3-Y volume CAGR at around mid-single digit was respectable in the current context. Correction in some of the key input prices from the peak should help, and margins are likely to see a strong bounceback starting H2FY23. While Q1 margin delivery would weigh on near-term share price, we hold 12M Buy.

Ebitda below: Q1 Ebitda declined 10% y-o-y to Rs 5.0 bn, 10% below est. Miss was driven by sharper-than-expected margin decline (Ebitda margin: -270bps y-o-y), even as revenue growth (+9%) was in line. Pre-ex EPS declined 13% y-o-y, 13% below est.

RM inflation: Prices of several inputs inched up sequentially, led by wheat flour (+20% q-o-q), industrial fuel (+15% q-o-q), packing materials and palm oil (+5% q-o-q). This inflation in RM basket led to a 120bps q-o-q decline in gross margin to 36.1%, down 170bps y-o-y and ~400bps from 2019 levels. GM dip was further exacerbated by ~15% y-o-y growth in other expenses. Employee costs too grew 6% y-o-y. Put together, Ebitda margin dipped 270bps y-o-y to 13.5%, nearly 160bps below estimates. Resultant Ebitda declined 10% y-o-y.

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Better times ahead: Prices of key inputs, such as wheat and palm oil, have seen signs of cooling down towards the end of Q1 and thereafter. Further, mgmt. has initiated further product price hikes of 6-7%, a large part of which would accrue in Q2FY23. Britannia has also accelerated its cost savings programme. Put together, management expects margins to improve and is confident of covering most of the inflation by Q2. Despite ~20% cumulative price hike in the last few quarters, mgmt. is confident of demand remaining resilient.

Slightly cut EPS; retain BUY: We cut our FY23e EPS by 3% to factor in Q1 miss. We roll over to Jun-24 and retain Buy with a revised PT of Rs 4,380 (vs. Rs 3,950 earlier).

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