Maintain REDUCE on Britannia Industries - Uninspiring show - HDFC Securities

Mr. Varun Lohchab, Institutional Research Analyst, HDFC Securities and Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

Britannia clocked an in-line revenue while EBITDA margin was lower than our as well as street's expectation. Revenue growth remained moderated in 2HFY21 and clocked 6/8% in 3Q/4QFY21, after posting 18% in 1HFY21. Domestic volume growth at 8% (negligible price hike) was much slower than ~17% in 1HFY21. Demand for essentials and in-home categories remained benign in 2HFY21 as consumer buying saw a shift from essentials to non- essentials. EBITDA margin expansion of 30bps YoY saw a sharper moderation after clocking a robust 400bps YoY expansion in 9MFY21. Commodity inflation and resumption of other variable costs (particularly marketing spend) impacted margins. EBITDA grew by 11% (HSIE 25%). Amidst COVID- led localised lockdown, there can be near-term acceleration in packaged food category but it will be unlike that in the previous year. We maintain our EPS estimate for FY22/23. High debt, inter group transactions, and modest FY22 earnings growth will keep the valuation in check. We value Britannia at 40x P/E on Mar-23 EPS to derive a target price of INR 3,589. Maintain REDUCE.

In-line revenue: Consolidated revenue grew by 8% YoY (+2% in 4QFY20 and +6% in 3QFY21), vs. HSIE 8% growth. Standalone revenue clocked 9% YoY growth (flat in 4QFY20 and +5% in 3QFY21). Volume growth was close to 8% YoY (flat in 4QFY20 and 4% in 3QFY21). General trade continued to grow well, driven by rural and recovery in urban. E-commerce channel saw 4x jump in FY21. Britannia continued to focus on expanding its distribution reach, especially in rural areas, and resumed investing in its brands.

Miss in margin, company remains watchful for FY22: GM saw sharp moderation and was up by only 80bps YoY to 40.5% (-152bps in 4QFY20 and +224bps in 3QFY21) vs. HSIE +333bps YoY. RM inflation was at 3% YoY (high palm oil) and delayed price hike impacted margin. Employee cost was up by 3% and other expenses were up 13% YoY, owing to increase in A&P spends. EBITDA margin expanded by a slow 30bps YoY to 16.1% (+24bps in 4QFY20 and +248bps in 3QFY21) vs. expectation of +230bps YoY expansion. EBITDA grew by a slow 11% YoY. With sharp EBITDA margin expansion in 9MFY21, we expect margin pressure in FY22 (several costs will be restored).

Call and BS/CF takeaways: (1) Domestic revenue and volume growth are similar, while a price hike was taken at the end of the quarter; (2) company is focusing on distribution expansion (particularly in rural); (3) commodity inflation was at 3% (INR 1bn QoQ incremental raw material pressure); (4) company launched a new marketing campaign for Milk Bikis to make it a pan-India brand (as of now, it is south-focused); (5) Milk+Glucose is a INR 73bn market where Britannia has a mere 4% share; (6) FY21 EBITDA margin of 19% will be difficult to sustain in FY22, while it will be higher than that in FY20 (16%); (7) lockdown has accelerated demand for packaged food but the trend could be unlike last year's; (8) Group level ICDs are at a similar range as last year's; (9) FCF was at INR16bn vs. INR 12bn in FY20.

Shares of BRITANNIA INDUSTRIES LTD. was last trading in BSE at Rs.3480.05 as compared to the previous close of Rs. 3540. The total number of shares traded during the day was 80253 in over 6293 trades.

The stock hit an intraday high of Rs. 3540 and intraday low of 3469.2. The net turnover during the day was Rs. 280398579.

Source : Equity Bulls

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