Volume print weak; EPS for FY22-23e down ~9-6%; TP revised to Rs 3,400 from Rs 3,200; ‘Reduce’ retained
Broadly in-line revenue print (2-year CAGR of 8.8%) but weak (and a miss) volume print (possibly) highlights the perils of a (largely) price-point product portfolio – price hikes for Britannia would have been a combination of (i) higher MRPs and (ii) lower grammage. We had highlighted in our channel checks that demand after being strong in Q1 (second wave-led) had normalised as mobility improved.
BRIT continues to benefit from strong brand positioning, direct distribution expansion and execution edge. Going forward, we believe success of (at least few) new segments—Salty Snacks, Wafers, Croissants and ramp-up of adjacent categories—Dairy, Rusks, Cakes and now Milk Bikis in biscuits are imperative for re-rating. We believe the consensus was generous in previous re-rating cycle (narrative of Total Foods Company pre-Covid) but will now require more concrete evidence for sustained re-rating.
While lower ad-spends in FY21 have driven higher profit growth vs revenue growth, FY22 is likely to be a low-profit-growth year. Approach on price increases (inflationary RM) will be key. Reduce rating (a case of fundamentals vs rest) stays, for now.
Decent top-line performance: Consolidated sales were up 6% y-o-y with a healthy 2-year CAGR of 8.8%. However, (domestic) volume growth was weaker-than-expected at 2% (2-year CAGR of 5.4%), implying price/mix growth of 4.6% – standalone revenues were up ~7% y-o-y. While there was benefit of price/mix growth, we believe grammage reduction in price-point packs would also have weighed on volume growth print.
Management highlighted that (i) this year there has been higher growth in market shares, (ii) focus continues on increasing direct distribution and enhancing rural footprint and (iii) price hikes have been initiated across the portfolio.
Margin impacted due to inflationary RM: Consolidated gross margin contracted (to lowest level in 8+ years) 500bps y-o-y to 37.5% due to inflationary palm oil (+54%) and crude (industrial fuel and packaging material up 30-35%); overall RM inflation for the quarter is highlighted to be 14%. Ebitda margin contracted 430bps y-o-y to 15.5%. There is a 14% y-o-y and 10% q-o-q increase in employee costs. Mgmt believes that margins should recover well led by (i) recent price increases (across the portfolio) and (ii) efficiency measures.
Valuation and risks: We cut our earnings estimates by ~9-6% for FY22-23e; modelling revenue/Ebitda/PAT CAGR of 9%/5%/4% over FY21-23e. Maintain Reduce with a DCF-based revised TP of Rs 3,400 (Rs 3,200 earlier). At our TP, the stock will trade at 40x March’23e EPS. Key upside risk to our thesis is faster-than-expected revenue growth in core biscuits.