Sharekhan has maintained a Buy rating on Britannia Industries with a price target of Rs. 5,995. The company delivered better-than-expected Q3FY25 results, recording an 8% year-on-year (YoY) revenue growth driven by strong 6% volume expansion. However, inflationary pressures on raw materials impacted margins, leading to a contraction in gross margin by 515 basis points (bps) and operating profit margin (OPM) by 89 bps. Britannia remains committed to innovation, market expansion, and pricing strategies to sustain growth, but near-term headwinds persist due to high raw material costs. The management remains confident in maintaining 17-18% OPM levels, with price hikes planned to offset cost pressures.

Q3FY25 Financial Performance

Revenue Growth Outpaces Market Estimates
Britannia’s consolidated revenue rose by 7.9% YoY to Rs. 4,593 crore, exceeding analyst expectations.
Domestic volume growth stood at 6%, significantly above the estimated 3-5%.
Subsidiary revenues saw a 13.3% YoY increase, further contributing to the company’s solid performance.
Impact of Rising Raw Material Costs on Margins
Gross margin fell by 515 bps YoY to 38.7%, impacted by raw material inflation.
Operating profit margin (OPM) declined by 89 bps YoY but remained resilient at 18.4%, supported by operational efficiencies.
Adjusted Profit After Tax (PAT) increased by 4.4% YoY to Rs. 582 crore, surpassing consensus estimates.

Key Growth Drivers

Market Expansion and Distribution Strength
The company’s focus states—Madhya Pradesh, Rajasthan, Uttar Pradesh, and Gujarat—grew at 2.6x the rest of India, reinforcing its market penetration strategy.
Direct distribution expanded to 28.8 lakh outlets, with rural outreach growing to 31,000 retail points.
E-commerce sales continue to grow, with higher adoption in newer categories like croissants, cakes, and dairy.
Pricing Strategy to Offset Inflation
A 6-6.5% price increase is planned to counter an estimated 11% raw material cost hike.
Previous price hikes in Q3FY25 already contributed to maintaining profitability despite higher wheat, palm oil, and cocoa prices.
Innovations and New Product Growth
Adjoining categories such as rusk, wafers, and croissants are witnessing strong double-digit growth.
The croissant business is on track to hit Rs. 200 crore revenue by FY26.
Milkshake and dairy products continue their growth trajectory, with revenues exceeding Rs. 200 crore annually.

Stock Valuation and Outlook

Stock Correction Creates Buying Opportunity
Britannia’s stock has corrected by 24% from its recent highs, presenting a compelling investment case.
The stock trades at 56x/48x/43x its FY25E/FY26E/FY27E EPS, making it attractive given its leadership position in the Indian packaged food market.
Management Confidence and Future Growth
Management remains optimistic about maintaining 17-18% OPM through cost controls and price adjustments.
Expansion into new markets, rural penetration, and distribution revamps are expected to fuel long-term growth.

Potential Risks

Margin Pressure Due to Inflation
Sustained raw material inflation could challenge profitability if price hikes fail to fully offset rising costs.
Increased Competition in the FMCG Space
The entry of new domestic and international players in India’s packaged food market could intensify competition, affecting market share and pricing power.
Demand Slowdown in Key Product Segments
Any weakness in consumer sentiment could delay volume growth recovery, particularly in rural markets.

Final Verdict: A Long-Term Growth Story

Despite near-term inflationary challenges, Britannia remains a solid long-term investment. Its strong brand equity, market leadership in the biscuit segment, expanding product portfolio, and aggressive distribution strategy make it a resilient player in the Indian FMCG space. With an unchanged price target of Rs. 5,995, Sharekhan maintains a Buy rating, reinforcing confidence in Britannia’s growth potential over the coming years.

Disclaimer

Investors should conduct their own due diligence before making investment decisions.