Ebitda margin was below estimate; FY22/23e EPS down 3-4% due to margin pressure; ‘Neutral’ retained
Britannia (BRIT) Q1 volume/value growth (+1%/-0.5% y-o-y; two-year CAGRs +11%/+12%) was much above our forecast and the Bloomberg consensus estimate (-7% y-o-y) despite a high base. While there was no evidence of any increase in consumption or pantry up-stocking in Q1, and with its direct reach impacted (2.1mn in Q122 vs 2.4mn outlets in Q421), we believe strong sales performance would have been aided by wholesale channel push which may not be recurring, in our view. Also, Q1 would have seen some pipeline filling (Q4 sales impacted) due to ERP upgrade to S4/HANA.
BRIT mentioned that front-end sales GTM is now back to c.90% recovery, and sees stable demand trends in July. It has a ready pipeline of new product launches as it awaits normal demand, and launched new subcategory of ‘Potazos’ in potato wafers. Online sales contribution is at c.2% currently (vs 10% for HUVR (Buy), 9% for MRCO (Buy), 6.5% for NEST (Buy), 5% for HMN) and BRIT management indicated it could potentially reach 5%. ICDs to group companies significantly declined to c.Rs 4.7 bn (vs Rs 7.9 bn in March-21).
Margin pressure to continue as BRIT cautious on taking price increases: GPMs declined by 300bp y-o-y to 38.7%, lower than our forecast of -140bp y-o-y, due to significant input cost inflation in fats (RPO c.+50% y-o-y), crude (c.+117% y-o-y) and milk (c.+13% y-o-y), and higher promotions to support launches. BRIT indicated that given the relatively weak demand environment, it is cautious with price increases. We expect pricing actions to come with a lag and to continue to pressure GPMs.
OPMs declined by 470bp y-o-y to 16.3%, below our/consensus estimates of -405bp/-380bp y-o-y, due to normalisation in A&P cost. We expect A&P costs to remain elevated to support new launches, while cost efficiencies from the recently implemented digital transformation platform (factory productivity, direct dispatches, lower wastage) could cushion some impact on margins. However, BRIT indicated that FY22 OPMs will likely be lower y-o-y.
We lower FY22F/23F EPS by 3-4% to factor in margin pressure and delayed price increases. We maintain our Neutral rating with FY21-24F EPS CAGR of 7% (one of the lowest in our coverage).
Maintain Neutral with TP of Rs 4,000; BRIT trades at 39x Sep-23F EPS.
We roll over valuation to Sep-23F EPS (from Mar-23F) and value BRIT at a P/E of 45x (unchanged), at a c.5% discount to its past three-year average trading multiple, implying a TP of Rs 4,000 (unchanged).