We downgrade Britannia (BRIT) to Impartial (from Purchase) and decrease our FY22-23F EPS forecasts by c.6%, as we see demand moderating on account of: (i) a delay within the return to normalised quantity/gross sales development; (ii) decrease/delay in contribution from new product launches; (iii) gross sales push impacted as salesforce works from house on account of the rising variety of COVID-19 instances; and (iv) the absence of significant pantry up-stocking in the course of the second wave of the pandemic, as shares are adequately obtainable given there was no disruption in manufacturing/provide chains.
We additionally decrease our margin estimates given rising enter value pressures and delayed pricing actions on account of a weak demand atmosphere.
We see gross margins contracting in H1FY22 and normalising in H2. We additionally anticipate A&P spending to stay elevated, as BRIT might want to preserve excessive visibility to push gross sales (given a comparatively lesser salesforce within the market), limiting OPM beneficial properties. Nevertheless, it has not too long ago carried out the digital transformation platform, and we anticipate value efficiencies (manufacturing facility productiveness, direct dispatches, decrease wastage) to cushion the affect on OPMs.
BRIT is trying to counter weak demand situations with the nationwide launch of Milk Bikis (addressing the massive milk+glucose class, the place it’s underindexed with 4% share), concentrating on bottom-of-pyramid shoppers and upgrades in Hindi heartland markets. We don’t anticipate any significant margin dilution from this. BRIT’s ICDs to group stay in the identical vary. We downgrade our ranking to Impartial on a weak outlook, and forecast FY21-23F EPS CAGR of seven%.
Q421 under estimates; miss on GPM, in-line income; quantity development 8%
Consolidated income/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 enter value inflation, and OPM expanded by 30bp y-o-y to 16.1%, on account of a step-up in advert spending. Adjusted PAT development was decrease primarily on account of decrease different revenue and better tax fee. Standalone income/ Ebitda/PAT grew 10%/13%/8% y-o-y.
Downgrade to Impartial with a decrease TP of Rs 4,000; BRIT trades at 40x Mar-23F EPS
We worth BRIT at a P/E of 45x Mar-23F EPS (vs 47x earlier), at a c.5% low cost to its previous three-year common buying and selling a number of, as we anticipate its elevated gross sales’ development part to average to a normalised trajectory, with demand for ready-to-eat packaged meals (biscuits, and so forth) not witnessing the super-normal development of final yr, as manufacturing and provide chains are higher outfitted to take care of the pandemic. Our valuation implies a goal value of Rs 4,000 (vs Rs 4,460 beforehand). Key dangers embrace slower/sooner quantity development in biscuits.