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Britannia: Steady performance

Jan 27, 2005

Performance summary
Bakery products major, Britannia Industries, has reported a 6% revenue growth during the December quarter. The performance is lower than the 15% growth it had reported in the first half of FY05. However, operating margins continued to improve, enabling net profit growth to outpace revenue growth at 11%. For the nine month period, the company clocked 12% revenue and 56% bottomline growth (owing to profit on sale of investments).

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net Sales 3,608 3,828 6.1% 10,769 12,046 11.9%
Expenditure 3,146 3,311 5.2% 9,414 10,499 11.5%
Operating Profit (EBDITA) 462 517 11.9% 1,355 1,547 14.2%
EBDITA margin (%) 12.8% 13.5%   12.6% 12.8%  
Other income 39 30 -23.1% 240 668 178.3%
Interest 13 6 -53.8% 53 17 -67.9%
Depreciation 56 47 -16.1% 167 143 -14.4%
Profit before Tax 432 494 14.4% 1,375 2,055 49.5%
Tax 143 165 15.4% 454 570 25.6%
Extraordinary income/(expense) (21) (32) - (37) (103) -
Profit after Tax 268 297 10.8% 884 1,382 56.3%
Net profit margin (%) 7.4% 7.8%   8.2% 11.5%  
No. of Shares (m) 25.1 23.9   25.1 23.9  
Diluted Earnings per share (Rs)* 44.9 49.7   49.3 77.1  
P/E ratio (x)         11.2  
(* annualised)            

What is the company's business?
Britannia, promoted by Danone and Nusli Wadia (joint stake - 51%), is the second largest biscuit manufacturer, next only to Parle, in the Indian market. Danone is the world's largest producer of fresh dairy products and the second largest producer of biscuits and mineral water. Britannia recently hived off its dairy business effective March 27, 2002 to Britannia New Zealand Foods Pvt. Ltd., a joint venture with Fonterra Group, New Zealand. The primary business of the company is now bakery, which consists of biscuits, bread and cakes. Biscuits account for 93% of the company's revenues.

What has driven performance in 9mFY05?
Consistent show at the topline level:  The key reason for the strength in topline is believed to be the increasing affordability of branded biscuits that aided volume growth in 9mFY05. The company's focus on the bakery products business combined with its marketing strengths seem largely responsible for this drive is sales. The company repackaged and relaunched most of its biscuit brands in FY04. Apart from this, Britannia continued to focus on ways to bring down its costs. VRS and lower cost of debt has helped the company improve profitability. The performance in 3QFY05 seems to have slowed down due to inventory correction, as well as increasing competition in the 'Glucose' biscuit segment from ITC and Parle.

Operating margins:  The margins of the company have improved owing largely to the reduction in staff cost as a percentage of sales. The hiving off of properties has led to lower depreciation provisioning. The company also received an order in favour of closure of its Mumbai plant. The matter though is still sub-judice. After the break away from the dairy business, the company's cash flows seemed to have improved significantly. The company reported a strong growth in other income during 9mFY05, led by sale of the company's investments (to the tune of Rs 579 m). However, sale of investments has been a continuous exercise at Britannia. The important thing is that the operating profit has gone up by 12% during the quarter and 14% during 9mFY05.

Cost break-up
as a % of net sales 3QFY04 3QFY05 9mFY04 9mFY05
Total Cost of goods 54.2% 56.0% 52.6% 56.5%
Staff Cost 5.1% 3.5% 5.6% 4.3%
Other Expenditure 27.9% 27.0% 29.2% 26.3%
Total expenditure 87.2% 86.5% 87.4% 87.2%

Net profit:  As part of its buyback programme, Britannia reduced its shares outstanding by about 0.8 m shares during FY04. The company has further bought back 1.22 m shares as part of its June 17 - August 7, 2004 buyback programme. The buyback has further reduced the company's shares outstanding to 23.9 m shares. This of course, has pepped up the company's earnings per share. The company has reduced its number of shares outstanding for the fourth year in a row, indicating the management's desire to up its stake in the company (promoter joint stake up, to nearly 51%). The extraordinary expense shown in the results table pertains to VRS write off.

Over the last five quarters
  3QFY04 4QFY04 1QFY05 2QFY05 3QFY05
Sales growth (YoY) 8.6% 14.5% 17.2% 12.6% 6.1%
OPM (%) 12.8% 9.5% 12.0% 13.0% 13.5%
Net profit growth (YoY) 6.8% 4.1% 109.8% 47.0% 10.8%

What to expect?
At Rs 866, the stock trades at a P/E of 11.2 times annualised 9mFY05 earnings, market cap. to sales of 1.3x. We had recommended the stock as a BUY in October 2004, with a target price of Rs 990. We maintain this target price over the medium term.

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