Thursday, June 1, 2017

Britannia Industries (BRIT IN): Q4

Britannia Industries (BRIT) reported Q4 FY3/17 results that came in slightly below our estimates. Volumes in the core business (biscuits, cakes and rusks) in India grew by 2% YoY, which was below our and consensus estimates of 3–4% YoY growth. Management attributed the slow growth to challenging market environment and sluggish consumer demand. In the quarter, the company managed to see 10bps YoY improvement in its EBITDA margin on account of its cost-saving efforts and cuts in advertising and promotion (A&P) spending by 20–22% YoY which helped minimize the impact of over 10% inflation in key raw material prices. We expect the company to start delivering uptick in volume growth from H2 FY3/18 onwards, once the overhang with respect to GST implementation is behind it. We have roughly maintained our EPS forecasts over FY3/18–19, raise our target price by10% and retain our BUY rating on the shares.

Summary: Britannia Industries (BRIT) reported Q4 FY3/17 results that came in slightly below our estimates. Volumes in the core business (biscuits, cakes and rusks) in India grew by 2% YoY, which was below our and consensus estimates of 3–4% YoY growth. Management attributed the slow growth to challenging market environment and sluggish consumer demand. In the quarter, the company managed to see 10bps YoY improvement in its EBITDA margin on account of its cost-saving efforts and cuts in advertising and promotion (A&P) spending by 20–22% YoY which helped minimize the impact of over 10% inflation in key raw material prices. We expect the company to start delivering uptick in volume growth from H2 FY3/18 onwards, once the overhang with respect to GST implementation is behind it. We have roughly maintained our EPS forecasts over FY3/18–19 and retain our BUY rating on the shares. Target Price and Catalyst: We raise our target price to Rs4,100 (from Rs3,725) as we increase our PER to 36x (from 33x earlier) applied to our new FY3/19 EPS estimate as we expect BRIT to be favorably impacted with a likely lower GST rate than the current 18% revenue-neutral rate as well as higher share of unorganized segment (36%). Key catalysts would be higher volume growth and inflation moderation in raw material prices.

Earnings: Q4 FY3/17 consolidated revenues grew by 5.2%, EBITDA by 6.1% and NP by 6% YoY with international business (contributing about 7% of total sales) impacted by deteriorating geopolitics and currency volatility in the Middle East and Africa region. For its standalone business, revenue (which includes the key domestic businesses of biscuits, bread, cakes and rusks) grew by 6.6% YoY led by core business volume growth of 2% YoY (we estimated a 3–4% growth). The consolidated gross margin declined by 165bps YoY due to raw material price inflation, but cost cutting coupled with cuts in A&P spending helped the EBITDA margin expansion of 10bps YoY to 13.7% (versus our estimate of 13.4%). Standalone gross and EBITDA margins declined by 150bps and 10bps YoY to 37.8% and 13.7%, respectively. Lower other income (down 7.5% YoY) partially offset by a lower tax rate (down 80bps YoY to 21.6%), boosted by benefits coming from recently commissioned R&D facility, resulted in overall NP growth of 6% YoY to Rs2.1bn and standalone NP growth of 2.5% YoY to Rs1.97bn. Valuation: We raise our target price to Rs4,100 (previously Rs3,725), based on a PER of 36x (previously 33x) our FY3/19 EPS estimate. The main risks to our rating and target price include sharp inflation in key raw materials prices, and sluggish consumer demand along with a GST trade disruption if any, which would further impact volume growth.

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