Britannia Industries - Q4FY21 Result Update - YES Securities

Result Highlights

- Revenue - Revenue came ahead of expectations at Rs 31.3bn, a growth of 9.2% vs our expectation of 8%, with volume growth of 8%, indicating a marginal pick-up in growth momentum from 3Q.

- Gross margins - Gross margins surprised negatively declining 80bps to 40.5% due to a combination of higher palm oil and packing material prices and an inferior product mix.

- EBITDA margins - Weaker than expected at 16.1%, up only 30bps yoy (our expectation of 18.2%) due to GM decline and sharp 13.3% rise in other expenses.

- PAT - PAT growth was below estimates declining 3.3% yoy with PAT coming in at Rs 3.6bn (our expectation of Rs 4.09bn).

- Management commentary - Execution of a few digital transformation projects during the quarter necessitated shutdown of operations for a few days in March impacting primary billing; cost efficiency programs delivered targeted results; sharp inflation in palm oil, dairy and packing material has made company evaluate price increases

Our view: Given the pandemic-related uncertainties, there is limited visibility on the timing of the resumption of a double-digit growth trajectory for the company. Even margins should settle below the exceptional levels seen in FY21 with commodity inflation and higher marketing spends, albeit continued cost efficiency and digital transformation initiatives will keep them at much above historical levels. BRIT's innovation pipeline in biscuits and new adjacent categories remain key drivers for a pick-up in growth trajectory which needs to be closely monitored. Given no near-term triggers, a high base for 1HFY22 and market's preference for top line growth where BRIT seems to be lacking, current valuations at 39x FY23E earnings are among the cheapest in the FMCG space. Strong cost controls should ensure healthy earnings growth despite subdued topline growth which gradually get better led by innovations, new launches and distribution infrastructure expansion. The stock is currently at 39x FY23E earnings and we build in 8.9%/8.3% revenue/PAT CAGR over FY21-23E. We initiate coverage with an ADD rating with a TP of Rs 3,809 based on 42x FY23E earnings, a 10% discount to its 5-yr average P/E multiple.

CON-CALL HIGHLIGHTS

- Margin impact of commodity inflation - Have started taking some price hikes towards end of quarter, confident of fully passing on the 3% material inflation over FY22; FY21 margins of 17.9% look difficult to sustain but should definitely sustain margins above FY20 levels of 15.9%.

- Near-term demand and production trends - Witnessing a surge in demand again in April, some amount of pantry loading and higher demand for in-home consumption products visible in the near term; companies seem better prepared than last year so expect minimal production and supply chain issues.

- Milk Bikis strategy - Pricing of non-milk variant at premium to Parle-G; Milk Bikis will remain most profitable brand and not worried about any hit on margins due to expansion in this sub-premium product (gross margins 2.5x of glucose segment) ; looking to upgrade consumers of base glucose products like Tiger and Parle-G.

- Capex plans and update - Currently running at more than 90% utilization and spent a lesser than planned 200crs in FY21; looking at increasing biscuit capacity (4 factories in UP, Bihar, Orissa and TN will come up but might see some delays depending on environment), dairy plant remains on track; current third party manufacturing contribution is 35%.

- International business - New factories coming up (in tie-up with contract manufacturers) in Egypt and Uganda in international business with both capable of doing more than USD 11mn annual revenue.

- Medium term growth outlook - High single digit category growth should come back for the industry gradually as things settle down, market share gains can get back double-digit growth for Britannia, have a strong product pipeline which could not be executed in FY21 and will be done as normalcy returns.

- Digital transformation - Had to close quarter 3 days in advance which impacted primary billing; will improve fill rates with new dealer management system, also improve ability to analyze data and improve decision making ability, small expense but benefits can be large over long term with strong edge over competitors; benefits already visible via real-time analytics for 20 lakh outlets.

- PLI for processed foods manufacturing - Ready-To-Eat food products including biscuits is included in the PLI for food manufacturing, scheme details not yet finalized by the government; benefits should accrue to companies like Britannia.

- Distribution update - Asking salespeople to not physically visit markets and do more telesales and increase wholesale trade; distribution reach will drop in near-term till the pandemic subsides.

- Adspends - FY21 advertising spends 150bps lower in FY21 over FY20, but 3Q spends were flattish and 4Q spends higher yoy.

PRESENTATION HIGHLIGHTS

- FY21 summary - 13% revenue growth, 340bps margin improvement in a difficult year; market share has remained stable for Britannia while Parle seems to have gained significant share from ITC in FY21.

- Distribution update - Number of rural dealers increased to 23,500 after dipping to 19,300 in March 2020 vs 21,300 in FY19; direct reach increased to 23.7 lakh outlets after dipping to 19.7 in FY20 vs 21 lakh in FY19; focus states grew 25% higher than other markets and eCom business is up 4.1x on base of FY19 after growing 1.9x in FY20.

- Marketing update - Multiple new brand campaigns and activations in biscuits, relaunch of Milk Bikis 100% Atta with focus on creating a large brand in Hindi belt, new campaigns for adjacent categories like rusk, wafers and milk shakes which saw highest ever volumes.

- COVID efficiencies being sustained - Factory productivity 8% higher, wastages 20% lesser, direct dispatch from factories to distributors 50% higher and depot space used 10% lower than pre-COVID levels.

- Digital transformation - Implemented 3 major projects to create large digital platform and increase efficiencies - S4 Hana as core ERP, Arteria for integrated dealer management and a new vendor management system.

- Cost efficiencies continue to deliver - Cost savings at 4.6x using FY14 as base vs 5.7x in FY20 (one-time benefit due to extra incentives) and 4.8x in FY19.

- Commodity inflation - Sharp sequential inflation in milk and palm oil, 3% yoy deflation in flour, 2% deflation in sugar, 24% inflation in RPO and 11% deflation yoy in milk.

Shares of BRITANNIA INDUSTRIES LTD. was last trading in BSE at Rs.3540 as compared to the previous close of Rs. 3539.7. The total number of shares traded during the day was 59580 in over 4562 trades.

The stock hit an intraday high of Rs. 3570.5 and intraday low of 3517.5. The net turnover during the day was Rs. 210819365.

Source : Equity Bulls

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