Buy Britannia Industries; target of Rs 4180: Motilal Oswal

Motilal Oswal's research report on Britannia Industries

Though BRIT’s 3QFY22 result was broadly in line with expectations, the recovery on margins is likely to take longer than anticipated. Positives from the results were: a) about 6% base business volume growth, which was creditable given that grammage reduction has played a key role in the 8% effective price increase YTD; b) overall volume growth of 6% and sales growth of 13% that were still better than staple peers; and c) continued market share gains, with healthy performance in rural India (unlike staples peers). BRIT also saw good traction in Milk Bikis and Potazos. Conversely, the key overhangs included: a) higher-than-expected material cost inflation that escalated pressure on gross margin (especially for a business with ~40% gross margin) and b) sequential increase in ICDs for two quarters (albeit still down v/s Mar’21 level).

Outlook

We believe massive investments in distribution and capacity expansion (both of which are largely complete) in recent years would lead to double- digit sales growth. Margin will bounce back once the ongoing commodity cost pressures abate leading to high teens earnings growth. Maintain BUY.