EQUITIES

Britannia rating: Buy — Quarter performance came as positive surprise

While Britannia Industries’ (BRIT’s) Q4FY20 revenue was in line with the Bloomberg consensus estimate, Ebitda was a tad better. March witnessed a decline of 7-10% on revenue/net income due to the COVID-19-related lockdown. However, April and May garnered very strong sales growth of 20%/28%, driven by:

(i) pantry stocking during the lockdown and an increase in in-home consumption; (ii) inventory fill-up in the distribution channel; and (iii) one-off distribution of biscuits to migrant population by charitable organisations. Raw material prices have corrected sharply in Q1FY21 due to weak demand conditions, and could aid in gross margin expansion near term.

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While BRIT’s results and the Q1FY21 commentary were a positive surprise, overall performance was in sync with our medium/long term positive thesis on the company. BRIT is likely in its sector to be least impacted by the consumption downturn, in our view. We expect it to be a beneficiary of: (i) the shift to in-home, packaged food consumption; (ii) a wide portfolio of new products/new categories (salted snacks, milk shakes, cream wafers, croissants); (iii) stronger direct reach; (iv) share gains from regional/local players; and (v ) gradual margin expansion driven by R&D, value engineering and cost-efficiency initiatives. We reiterate Buy rating.

Q4FY20: Marginally better than estimates; volume growth of c.1%
Consolidated sales/Ebitda/PBT/PAT grew 2%/4%/2%/26%y-o-y vs Bloomberg consensus estimates of +2%/ +2%/ +2%/ +8%. Volume grew c.1%, while pricing was stable. GPM contracted 150bp y-o-y to 39.7% due to input cost inflation, while OPM inched up by 20bps y-o-y at 15.8% due to lower other expenses. PAT growth was higher, largely due to a lower tax rate (due to the corporate tax rate cut and also some tax settlement credit from a government amnesty scheme). Standalone sales/ Ebitda/PBT/PAT grew by 1%/2%/ 0.5%/32% y-y.

Maintain Buy with revised target price of Rs 4,000
We increase FY20F/21F/22F PAT by 4%/10%/11% as we factor in the better-than-expected Q4FY20 and extremely strong Q1FY21 commentary. We value Britannia at a P/E of 52x FY22F EPS (unchanged), in line with its past three-year average trading multiple. We maintain our Buy rating with a revised target price of Rs 4,000 (from Rs 3,595). The stock trades at 45x FY22F EPS. Risks: slower-than-expected volume growth in biscuits, weak demand traction in new product categories, higher-than-estimated input cost inflation

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