Britannia 4QFY21 investor call takeaways - YES Securities

Himanshu Nayyar, Lead Analyst - Institutional Equities, YES SECURITIES

No triggers in near-term, but attractive valuations merit a buy on any result-driven weakness

Our view - Management commentary on growth in FY22 was not very encouraging with uncertainties on account of the pandemic. But near-term demand improving is a positive, which in addition to a strong product pipeline should help improve the growth trajectory once the situation normalized. While FY21 margins might be difficult to sustain, they should normalize much above FY20 levels. While we do not see any near term triggers for the company, reasonable valuations at 39x FY23 earnings are attractive and we see good value in the stock especially in case of any correction on the back of these results.

Presentation highlights

FY21 summary - 13% revenue growth, 340bps margin improvement in a difficult year; market share has remained stable for Britannia while Parle seems to have gained significant share from ITC in FY21.

Distribution update - Number of rural dealers increased to 23,500 after dipping to 19,300 in March 2020 vs 21,300 in FY19; direct reach increased to 23.7 lakh outlets after dipping to 19.7 in FY20 vs 21 lakh in FY19; focus states grew 25% higher than other markets and eCom business is up 4.1x on base of FY19 after growing 1.9x in FY20.

Marketing update - Multiple new brand campaigns and activations in biscuits, relaunch of Milk Bikis 100% Atta with focus on creating a large brand in Hindi belt, new campaigns for adjacent categories like rusk, wafers and milk shakes which saw highest ever volumes.

COVID efficiencies being sustained - Factory productivity 8% higher, wastages 20% lesser, direct dispatch from factories to distributors 50% higher and depot space used 10% lower than pre-COVID levels.

Digital transformation - Implemented 3 major projects to create large digital platform and increase efficiencies - S4 Hana as core ERP, Arteria for integrated dealer management and a new vendor management system.

Cost efficiencies continue to deliver - Cost savings at 4.6x using FY14 as base vs 5.7x in FY20 (one-time benefit due to extra incentives) and 4.8x in FY19.

Commodity inflation - Sharp sequential inflation in milk and palm oil, 3% yoy deflation in flour, 2% deflation in sugar, 24% inflation in RPO and 11% deflation yoy in milk.

Q&A highlights

Margin impact of commodity inflation - Have started taking some price hikes towards end of quarter, confident of fully passing on the 3% material inflation over FY22; FY21 margins of 17.9% look difficult to sustain but should definitely sustain margins above FY20 levels of 15.9%.

Near-term demand and production trends - Witnessing a surge in demand again in April, some amount of pantry loading and higher demand for in-home consumption products visible in the near term; companies seem better prepared than last year so expect minimal production and supply chain issues.

Milk Bikis strategy - Pricing of non-milk variant at premium to Parle-G; Milk Bikis will remain most profitable brand and not worried about any hit on margins due to expansion in this sub-premium product (gross margins 2.5x of glucose segment) ; looking to upgrade consumers of base glucose products like Tiger and Parle-G.

Capex plans and update - Currently running at more than 90% utilization and spent a lesser than planned 200crs in FY21; looking at increasing biscuit capacity (4 factories in UP, Bihar, Orissa and TN will come up but might see some delays depending on environment), dairy plant remains on track; current third party manufacturing contribution is 35%.

International business - New factories coming up (in tie-up with contract manufacturers) in Egypt and Uganda in international business with both capable of doing more than USD 11mn annual revenue.

Medium term growth outlook - High single digit category growth should come back for the industry gradually as things settle down, market share gains can get back double-digit growth for Britannia, have a strong product pipeline which could not be executed in FY21 and will be done as normalcy returns.

Digital transformation - Had to close quarter 3 days in advance which impacted primary billing; will improve fill rates with new dealer management system, also improve ability to analyze data and improve decision making ability, small expense but benefits can be large over long term with strong edge over competitors; benefits already visible via real-time analytics for 20 lakh outlets.

PLI for processed foods manufacturing - Ready-To-Eat food products including biscuits is included in the PLI for food manufacturing, scheme details not yet finalized by the government; benefits should accrue to companies like Britannia.

Distribution update - Asking salespeople to not physically visit markets and do more telesales and increase wholesale trade; distribution reach will drop in near-term till the pandemic subsides.

Adspends - FY21 advertising spends 150bps lower in FY21 over FY20, but 3Q spends were flattish and 4Q spends higher yoy.

Britannia 4QFY21 results first cut - Muted results with negative surprise on margins while growth marginally beats estimates

Revenue - Came ahead of expectations at Rs 31.3bn, a growth of 9.2% vs our expectation of 8%, with volume growth of about 8%, indicating some pick-up in growth momentum from 3Q.

Gross margins - Gross margins surprised negatively declining 80bps to 40.5% due to a combination of higher palm oil, dairy and packing material prices and an inferior product mix.

EBITDA margins - Weaker than expected at 16.1%, up only 30bps yoy (our expectation of 18.2%) due to GM decline and sharp 13.3% rise in other expenses.

PAT - PAT growth was below estimates declining 3.3% yoy with PAT coming in at Rs 3.6bn (our expectation of Rs 4.09bn).

Management commentary - Execution of a few digital transformation projects during the quarter necessitated shutdown of operations for a few days in March impacting primary billing; cost efficiency programs delivered targeted results; sharp inflation in palm oil, dairy and packing material has made company evaluate price increases.

View - We find the growth trajectory quite encouraging in the current environment but margin performance was disappointing given the company's track record of strong overhead controls. Given an improving outlook and currently reasonable valuations at 39x FY23 earnings, we see good value in the stock especially in case of any correction on the back of these results.

Shares of BRITANNIA INDUSTRIES LTD. was last trading in BSE at Rs.3540 as compared to the previous close of Rs. 3539.7. The total number of shares traded during the day was 59580 in over 4562 trades.

The stock hit an intraday high of Rs. 3570.5 and intraday low of 3517.5. The net turnover during the day was Rs. 210819365.

Source : Equity Bulls

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