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MOSL: BRITANNIA INDUSTRIES (Buy)-Sustained growth with margin improvement-Moderate RM inflation outlook

Britannia Industries: Sustained growth with margin improvement; Moderate RM inflation outlook

(BRIT IN, Mkt Cap USD10.5b, CMP INR3113, TP INR3630, 17% Upside, Buy)

 

• sales grew 10.7% YoY to INR28.4b (our estimate: INR28.1b) in 3QFY19. Base business volume growth stood at 7% YoY (our estimate: 6% YoY). EBITDA increased 13.4% YoY to INR4.5b (our estimate: INR4.5b), while PAT grew 14.1% YoY to INR3b (our estimate: INR3b).
• gross margin expanded 260bp YoY to 41.3%. RM inflation was at 4%, with inflation in flour (9%) and refined palm oil (RPO; 10%) marginally offset by deflation in sugar and milk. EBITDA margin expansion was restricted to 40bp YoY to 15.9% (our estimate: 16.1%) due to higher other expenses (+180bp YoY to 21.3%) and staff costs (+50bp YoY to 4.1%).
• 9MFY19 consol. performance: Sales, EBITDA and adj. PAT grew 11.9%, 17.3% and 16.4% YoY, respectively. EBITDA margin expanded 70bp YoY to 15.7%.
• Concall highlights: (1) RM inflation was at 4% in 3QFY19; expecting 4-5% inflation for FY20 as well. (2) Expected to take 3-4% price hike.
• Valuation view: Changes to the model have resulted in a 0.9%/1.2% cut in our FY19/20E EPS. We are enthused about healthy volume growth (despite a high base), rapid distribution expansion, sustained strong growth in the erstwhile weak-performing states and the rapid pace of new launches in biscuits/other packaged F&B products. Continuing premiumization, significant incremental cost savings and a moderate commodity cost outlook relative to earlier years signify bright EBITDA margin prospects. We maintain Buy with a TP of INR3,630 - 52x FY21E EPS, a 10% premium to three-year average, with EPS expected to grow faster (CAGR: 20.1%) over FY19-21 than over FY16-19 (12.1%).