Britannia Share price: Sharekhan maintains Buy rating with an unchanged price target of Rs 4200

Britannia Industries' Q3 FY21 results were mixed, with revenues growing in mid-single digits, while a strong 249 bps rise in OPM drove up PAT by 23%. Revenue grew by 6.1% yoy to Rs 3166 cr (lower than our expectation of Rs 3259 cr). Domestic volumes grew by 4-5% as against ours and the street’s expectation of 6-8%. The general trade and rural markets are growing ahead of pre-COVID levels, while urban markets are recovering. Sharekhan maintains Buy rating on Britannia with an unchanged price target of Rs 4200.

The modern trade, institutional businesses (with lower footfalls in railway service, offices, schools, etc) are yet to recover to pre-COVID levels says Britannia. Hindi-speaking belt (40% of domestic revenues) such as Rajasthan, Uttar Pradesh, Madhya Pradesh and Gujarat registered revenue growth of 1.3 - 1.6x as compared to FY2018 levels highlights Britannia. Adjacent products (part of subsidiaries) such as breads and cheese continue to perform well with a revenue growth of 14% and OPM of 22% (vs. 12% in Q3 FY20).

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Gross margins improved by 224 bps to 43.1% driven benign input prices (including milk prices). This along with efficiencies led to a 249 bps improvement to 19.3%. Britannia’s Product innovation, recovering in alternate channels/urban markets, a strong growth in adjacencies and market share gains in Hindi-speaking regions will be key revenue growth drivers in the near to medium term. Input cost inflation stood at just 1% in Q3 with a deflation in flour and milk prices.

However, with palm oil prices increasing significantly and milk prices gradually rising, inflation will be higher in the coming quarters. Britannia will mitigate input cost inflation through cost efficiencies and would like to maintain margins at the current levels. The company has invested Rs 700 cr in its phase capital expenditure of the Ranjangaon facility (total capex of Rs 1500 cr by FY2024).

Britannia’s Key positives:

Britannia gained market for sixth consecutive quarter in the domestic market
Factory productivity improved by 1.07x, wastage down by 0.7x and direct dispatches up by 1.5x result in cost efficiencies
New products such as wafers are performing well with 30%+ growth and achieved No 2 position in the category

Britannia’s Key negatives:

Domestic volumes grew by 4-5%, lagging ours as well as the street expectations

Britannia’s Key risk:

Any further moderation in volume growth from current levels or significant increase in key input prices from the current level would act as a key risk.