The Britannia story is one of significant contrasts during COVID-19. When the crisis began, it surprised with strong Q1 sales (26% y-o-y) as the rest of the sector dealt with lockdowns. But now tailwinds have waned, and Q3 growth of 6% is below expectations at a time the economy is recovering.
Britannia says that its market share has increased, rural growth remains strong, and disruption in Modern Trade and Institutional channels is temporary – as the situation normalises, revenue growth should recover.
We tend to agree. Its operational excellence is commendable, distribution expansion continues, its brands are formidable and revenue growth has the potential for imminent revival, which would be the key catalyst for stock performance. Valuation is undemanding: Britannia has been a sector laggard in the past 12 months.
Revenue miss, margins led earnings beat
(i) Britannia’s consolidated sales/Ebitda /clean PAT grew by 5.8%/21.8%/22.3% y-o-y (ii) gross margin expanded (209bp) due to benign input costs and better mix while cost efficiency achieved in Q2 sustained, leading to 259bp y-o-y expansion in Ebitda margins to 19.7%. Sales were 4% below consensus estimate while Ebitda/PAT were 4-7% above consensus; (iii) although the early COVID-19 tailwinds of pantry loading, etc. have now waned, general trade continues to grow at a good pace, led by the rural economy and recovery in urban markets. Modern Trade and Institutional businesses remain impacted and have largely been the reason for the revenue miss; (iv) outlook for margins remains benign and gradual but imminent demand revival for MT, institutional channels suggest that earnings growth outlook should remain strong.
We stay Buy on the stock
(i) We like Britannia for its leading position in biscuits and bakery, where it has dominant share in the growing premium and mid-premium biscuits and cookies segments; (ii) Britannia is consistently deepening its rural penetration and in Hindi heartland where its market share is less than half the national average, which should also augment structural growth; (iii) Britannia is now intensifying its innovation-led new product launches; (iv) it is among the sector laggards (up 8% in the last year vs 12% gain in Nifty FMCG index) and presents a favourable risk-reward at current valuations.
TP revised to Rs 4,000 (from Rs 4,300): Britannia’s current share price implies long-term earnings growth expectations of c12%, which in our view is a surmountable hurdle. We reiterate Buy with a lower TP of Rs 4,000. Volume revival will be a key near-term catalyst for the stock.