Britannia Industries Rating: Buy- Performance was in line with estimates

Britannia Industries’ Q2FY21 revenue (up 12.1% y-o-y ) and adjusted PAT (up 22.8% y-o-y ) came in line, while Ebitda (up 37.2% y-o-y) surpassed our estimate. Though volumes came off q-o-q due to pick up in out-of-home consumption, they were still robust at 9% y-o-y on a base of 3% y-o-y. Despite moderate inflationary pressure in the raw material basket, mix improvement drove 176bps y-o-y gross margin expansion. Cost optimisation and efficiency benefits drove 361bps y-o-y Ebitda margin expansion.

With adjacencies doing well, Britannia’s journey towards becoming a total foods company continues to gain heft, in our view. Retain Buy with TP of Rs 4,345.

Biscuit growth normalises
After a strong Q1FY21, volume growth came off q-o-q from 21.5% y-o-y to 9% y-o-y in Q2FY21 reaffirming our thesis—biscuits growth will normalise as out-of-home consumption recovers. Adjacent businesses continued to deliver healthy growth. Rusk surpassed overall growth. Bread’s profitability improved significantly. In dairy, cheese led growth for second straight quarter; however, drinks portfolio continued to be impacted.

ICD, currently at Rs 7 bn, is broadly at the same level as FY20 end. On the balance sheet front, Britannia’s short-term borrowings doubled due to working capital needs and bonus debenture issue. To meet future demand, the company is planning investment in three greenfield facilities (Tamil Nadu, UP, Bihar) and two brownfield facilities (Odisha, Ranjangaon).

Q2FY21 conference call: Key takeaways
New products contributed 4% to revenue in Q2FY21. 25% of revenue came from non-biscuit portfolio. While traditional trade growth remained strong, modern trade (10% of revenue) was slower. The company posted double-digit growth in July, low single-digit growth in August and good growth (high single digit) in September.

Outlook: Going strong
A robust product pipeline, entry in new categories & geographies and deepening reach will help Britannia sustain its outperformance. We maintain ‘BUY/ SO’ with TP of Rs 4,345 and continue to keep it among our top picks. The stock is trading at 52.1x FY22e EPS.