Britannia Q4 Review: Analysts Cut Price Targets On Margin Disappointment

Most analysts cut target prices for Britannia Industries Ltd. citing a disappointment in gross margin on an increase in ad spends and higher cost inflation.

The maker of Good Day and Tiger biscuits also saw its profit fall for the first time in six quarters amid rising input costs and a shutdown last month to implement three digital projects. Its revenue and operating income, however, rose over the year earlier in the three months ended March.

Varun Berry, managing director at Britannia, said the year has been “difficult and challenging in every possible way” for the company. The shutdown of operations due to three transformational digital projects impacted primary billing for the quarter. “Despite the adverse conditions, we managed to deliver good results in terms of top-line growth, profitability improvement and market share gains.”

Berry also said the company’s evaluating the long-term impact of rising input costs to action necessary price increases. “On the commodity cost front, palm oil, packing material and dairy products witnessed sudden and steep increases while strategic buying helped the company manage the cost increases better.”

Shares of Britannia Industries were trading down 1.12% around 1 p.m. on Wednesday compared with a 1.41% gain in the benchmark Nifty 50.

Here’s what analysts made of Britannia’s Q4 performance:

Motilal Oswal

• Maintains ‘buy’ with a target price of Rs 4,450 apiece.
• Overall commodity basket inflation at 3% is not challenging as the management reportedly took some price increases towards the end of 4QFY21.
• Structural story remains strong especially aided by direct reach expansion and further investment in IT infrastructure.
• The remarkable market share improvement for eight consecutive years will continue as the company widens its moats over peers.
• Sudden and steep inflation in palm oil and milk costs were witnessed.
• No disruption to manufacturing and supply chain in April and there has been a surge in demand compared to 4QFY21.
• Margin disappointed due to mix deterioration and higher-than-expected ad spends.

Jefferies

• Maintains ‘hold’ rating with a target price of Rs 3,800 apiece.
• “Britannia managed to meet our revenue forecasts, but there is a big miss on operating margins.”
• Gross margin surprised negatively, management attributed this to a sharp and sudden increase in prices of edible oil, packaging materials and milk.
• Britannia did initiate some price hikes, although management refrained from quantifying the impact at the portfolio level.
• With the onset of second Covid wave, biscuit category is seeing some tailwinds due to pantry stocking. However, unlike last year, there has not been a major supply disruption.
• Britannia saw some share gains in FY21; albeit lower than that gained by Parle.
• Britannia has re-launched Milk Bikis nationally to grow in the mass milk+glucose category where it has only 4% share.

Elara Capital

• Downgrades to ‘reduce’ from ‘accumulate’, cuts target price to Rs 3,385 from Rs 3,798 apiece.
• Rough road ahead, quarter impacted by operations shutdown and inflation.
• Digital projects should help in reducing market returns, inventory holding, improving fill rates and reducing stock returns.
• Gross margin declined due to nearly 3% inflation, led by edible oils, dairy, packaging material and diesel prices.
• Milk Bikis rollout to the Hindi speaking belt (glucose dominated) so as to tap into the milk & glucose segment. The company believes this can be premiumised in the future.
• Company expects the biscuits category to grow in high single-digit and aims to achieve early double-digit sales growth with market share gains.
• Cuts FY22/23 earnings estimate by 20.6%/11.4% on gross margin contraction of 200 basis points and 150 basis points rise in ad spends.

Emkay Financial

• Maintains ‘buy’, cuts target price to Rs 4,250 from Rs 4,500 apiece.
• Margins were weak, resulting in Ebitda/profit after tax being 15-17% below expectations.
• Demand for biscuits has surged again in April due to Covid-19 restrictions, but this is likely to be temporary.
• Besides higher input inflation, step-up in ad spends may also impact margins, but it is required and will be positive for growth.
• A full unlocking will be a bigger positive for Britannia, improving demand with pick-up in on-the-go consumption.

Investec

• Downgrades to ‘hold’ from ‘buy’, cuts target price to Rs 3,773 from Rs 3,896 apiece.
• In spite of a harsher second Covid wave, the outcome for Britannia will be different given its greater preparedness among competitors, absence of a national lockdown resulting in more snacking options and higher material cost inflation which will impact near-term margins.
• Company’s innovation drive will get further pushed out as it looks to deal with the current environment with the existing portfolio.
• There was a marginal impact on primary sales as the company implemented digital projects in the supply chain.
• Due to the second wave, focus of the management is on execution of the current portfolio.
• While the company is looking at an aggressive national launch of its Milk Bikis brand to premiumise the glucose biscuit consumer, non-biscuit launches are likely to get pushed out a little further into the year owing to the Covid wave.

Nomura

• Downgrades to ‘neutral’ from ‘buy’, cuts target price to Rs 4,000 from Rs 4,460 apiece.
• Demand will moderate due to delay in the return to normalised volume/sales growth, lower or delay in contribution from new product launches, sales push impacted as salesforce works from home on account of the rising number of Covid-19 and the absence of meaningful pantry up-stocking during the second wave of the pandemic
• “We also lower our margin estimates given rising input cost pressures and delayed pricing actions due to a weak demand environment.”

UBS

• Maintains ‘buy’ rating with a target price of Rs 4,500 apiece.
• According to the management, Britannia is yet to realise the effect of price increases taken during Q4FY21.
• Dairy factory in Ranjangaon, Maharashtra should be operational in FY22-23.
• Britannia is setting up factories in Egypt and Uganda to cater to the regional demand, aiding potential growth in the international business.
• “We call for ‘buy’ rating as we have decent revenue and earnings growth visibility compared to peers.”

Morgan Stanley

• Downgrades from ‘overweight’ (buy) to ‘equal-weight’ (hold) rating, cuts target price to Rs 3,742 from Rs 4,287 apiece.
• Britannia's distribution expansion has been weaker than expected, affected by the pandemic. Even the innovation pace has been much slower than that of peers.
• Company will work on taking the growth back to double-digit levels. However, the company believes that at 90% capacity utilisation levels, it is well placed to meet current demand requirements.
• “Faster innovation and distribution expansion; successful expansion into non-biscuit food categories could make us bullish.”
• “Sharp macroeconomic slowdown impacting growth in the packaged food industry, increased competitive intensity and market share loss in biscuits could make us bearish.”

Kotak Institutional Equities

• Maintains ‘add’ rating, cuts target price from Rs 3,875 to Rs 3,650 apiece.
• Profitability much weaker than expected owing to raw material headwinds.
• Moderate underlying growth trends, raw material inflation and a decline in net interest income will likely constrain earnings growth in the short term..
• “We maintain revenues, trim margins, lower net interest income and cut FY2022-23E earnings by 4-5%.”

JM Financial

• Maintains ‘buy’ rating, cuts target price to Rs 3,910 from Rs 4,095 apiece.
• Disappointed on margin front, even as the much-feared deceleration in biscuits growth was not as bad as one imagined.
• Intrinsic sales growth would, have been higher than the reported 8.2%, had it not been for the three-day planned shutdown towards March-end.
• “We fear some mix-erosion given that Milk Bikis’ pricing is very close to Glucose, but management stated that the brand’s gross margin is in fact 2.5x better.”
• Stock may remain sluggish for now, in the absence of any concrete trigger, though Q1FY22’s comparative performance (base is tough) may not be as bad as earlier feared.