Britannia’s standalone Q1 FY13 revenues recorded mere 10.8% yoy growth at Rs12.2bn - below our expectations of Rs12.9bn. We believe this was mainly due to an unfavorable sales mix (lower proportion of high-end products, increase in sales of low price point products) and lower consumer offtake. The revenue growth has been lower compared to 18-21% witnessed in the past. Considering the price hikes implemented as well as grammage reduction over the past year, the volume growth is expected to be muted at ~3-4%.

Operating margins expanded by 100bps to 5.3% fuelled by a 380bps drop in raw material cost (on a low base). An 180bps/60bps increase in overhead and advertising cost respectively restricted further margin expansion. We believe increasing competitive intensity will compel the company to increase adspend in the coming quarters. This coupled with firm input prices (due to weak monsoon expectation) will keep margins under check.

Net profit for the quarter was much below our expectations of Rs649mn at Rs435mn partly due to lower revenue growth and 41% yoy decline in other income at Rs179mn (against Rs304mn in Q1 FY12 - included profit on sale of property of Rs153.3mn)

Britannia is the largest player in the fast growing biscuits category with a market share of over 30% with a strong portfolio of brands like – Tiger, 50:50, MarieGold, Good Day, Milk Bikis, Treat and NutriChoice. However, due to rising competition, the company is facing pressure in both discount and premium segments. Requirement of higher adspend due to increased competitive activity are keeping operating margins under check. We don’t expect operating margins to revert to FY09 levels of 8.4% over the next 2-3 years. At the current market price of Rs454, the stock is trading at 19.9x FY14E EPS of Rs22.8. We maintain Market Performer rating on the stock with a revised 9-month price target of Rs489 (earlier Rs544).