Britannia Industries rating – Neutral: Q4 numbers were below expectations

An employee counts Indian rupee banknotes at a Walmart Inc. Best Price Modern Wholesale store in Hyderabad, India, on Saturday, March 16, 2019. Walmart is making friends in India with the kind of competitors that it spent decades putting out of business in the U.S. — mom and pop stores. These unlikely allies are part of the retailer’s latest attempt to crack the country’s giant consumer market, taking on e-commerce arch-rival Amazon.com Inc. and Asia’s richest man, Mukesh Ambani. Photographer: Dhiraj Singh/Bloomberg

We downgrade Britannia (BRIT) to Neutral (from Buy) and lower our FY22-23F EPS forecasts by c.6%, as we see demand moderating due to: (i) a delay in the return to normalised volume/sales growth; (ii) lower/delay in contribution from new product launches; (iii) sales push impacted as salesforce works from home on account of the rising number of COVID-19 cases; and (iv) the absence of meaningful pantry up-stocking during the second wave of the pandemic, as stocks are adequately available given there has been no disruption in manufacturing/supply chains.

We also lower our margin estimates given rising input cost pressures and delayed pricing actions due to a weak demand environment.

We see gross margins contracting in H1FY22 and normalising in H2. We also expect A&P spending to remain elevated, as BRIT will need to maintain high visibility to push sales (given a relatively lesser salesforce in the marketplace), limiting OPM gains. However, it has recently implemented the digital transformation platform, and we expect cost efficiencies (factory productivity, direct dispatches, lower wastage) to cushion the impact on OPMs.

BRIT is attempting to counter weak demand conditions with the national launch of Milk Bikis (addressing the large milk+glucose category, where it is underindexed with 4% share), targeting bottom-of-pyramid consumers and upgrades in Hindi heartland markets. We do not expect any meaningful margin dilution from this. BRIT’s ICDs to group remain in the same range. We downgrade our rating to Neutral on a weak outlook, and forecast FY21-23F EPS CAGR of 7%.

Q421 below estimates; miss on GPM, in-line revenue; volume growth 8%
Consolidated revenue/Ebitda/PAT grew 9%/11%/7% y-o-y vs our forecast of +9%/ +29%/ +24% y-o-y and Bloomberg consensus estimates of +9%/+24%/+22% y-o-y. GPM expanded by 80bp y-y (vs our estimate of +280bp y-o-y), impacted by elevated input cost inflation, and OPM expanded by 30bp y-o-y to 16.1%, due to a step-up in ad spending. Adjusted PAT growth was lower mainly due to lower other income and higher tax rate. Standalone revenue/ Ebitda/PAT grew 10%/13%/8% y-o-y.

Downgrade to Neutral with a lower TP of Rs 4,000; BRIT trades at 40x Mar-23F EPS
We value BRIT at a P/E of 45x Mar-23F EPS (vs 47x earlier), at a c.5% discount to its past three-year average trading multiple, as we expect its elevated sales’ growth phase to moderate to a normalised trajectory, with demand for ready-to-eat packaged foods (biscuits, etc) not witnessing the super-normal growth of last year, as manufacturing and supply chains are better equipped to deal with the pandemic. Our valuation implies a target price of Rs 4,000 (vs Rs 4,460 previously). Key risks include slower/faster volume growth in biscuits.