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Britannia: Bigger, better and stronger - Views on News from Equitymaster

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Britannia: Bigger, better and stronger
Jan 28, 2008

Performance summary
  • The company reported topline growth of 16% YoY in 3QFY08. For 9mFY08, it jumped 18% YoY.

  • Inspite of higher labour and advertising expenses, lower raw material costs has led the operating margins to jump by 4.3% YoY in 3QFY08.

  • Excluding the extraordinary item (VRS), the profits are up by 148% YoY. For 9mFY08, the profits grew by 86% YoY excluding the extraordinary item.

(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 5,676 6,564 15.6% 16,001 18,920 18.2%
Expenditure 5,416 5,976 10.3% 15,149 17,200 13.5%
Operating profit (EBDITA) 260 588 126.2% 852 1,720 101.9%
EBDITA margin (%) 4.6% 9.0%   5.3% 9.1%  
Other income 47 63 34.0% 204 229 12.3%
Interest 23 30 30.4% 46 64 39.1%
Depreciation 65 73 12.3% 187 214 14.4%
Profit before tax 219 548 150.2% 823 1,671 103.0%
Extraordinary item (33) (34)   (71) (96)  
Tax 22 60 172.7% 74 275 271.6%
Profit after tax/(loss) 164 454 176.8% 678 1,300 91.7%
Net profit margin (%) 2.9% 6.9%   4.2% 6.9%  
No. of shares (m) 23.9 23.9   23.9 23.9  
Diluted earnings per share (Rs)*         71.0  
Price to earnings ratio (x)*         20.4  
* 12 month trailing earnings.

What has driven performance in 3QFY08?
  • The company reported topline growth of 16% YoY in 3QFY08. For 9mFY08, it jumped 18% YoY. On a consolidated basis, the turnover touched Rs 20.6 bn, while profits were at Rs 1.1 bn in 9mFY08. The company’s acquisitions have contributed 8% to the total sales in 9mFY08. Britannia is synonymous with 'biscuits' and its product portfolio includes successful brands right from the entry-level segment to the premium segment. Given the company’s focus on new product development and heavy investments in advertising, the efforts are paying off and this is being reflected in strong sales. The company’s other segments (bread, cakes and rusks) are also showing a lot of promise giving the growth momentum an additional boost. It is clawing its way back through new launches, better distribution and newer formats, thus making us enthused about the company’s medium to long-term growth prospects.

    Cost break-up
    As a % of net sales 3QFY07 3QFY08 9mFY07 9mFY08
    Total Cost of goods 66.3% 59.4% 64.5% 60.0%
    Staff Cost 3.1% 3.5% 3.4% 3.5%
    Advertisement 5.1% 7.8% 5.6% 7.0%
    Other Expenditure 20.9% 20.4% 21.1% 20.4%

  • Inspite of higher labour and advertising expenses, lower raw material costs led the operating margins to jump by 4.3% YoY in 3QFY08. Raw material costs as percentage of sales fell from 66% in 3QFY07 to 59% in this quarter. Sale of higher margin products led to the strong expansion in margins. The margins are above our expectations.

  • The bottomline for 3QFY08 jumped 177% YoY led by higher operating margins. Excluding the extraordinary item (VRS), the profits are up by 148% YoY. For 9mFY08, the profits grew by 86% YoY excluding the extraordinary item. Also, the tax rates were higher (16.5% in 9mFY08 as compared to 9% in 9mFY07), thereby reducing the profits to that extent.

What to expect?
At the current price of Rs 1,450, the stock is trading at a price to earnings multiple of 10.8 times our FY10 estimates. The company yet again reported a strong growth in topline and margins. The company’s ability to pass on the higher input costs to consumers indicates its strong brand strength. A pick up in volumes in both rural and urban areas, the company' strong portfolio, distribution reach and inorganic moves position it favorably to capitalise on the industry growth story. We had recommended a ‘BUY’ on the company in October 2007, with a target price of Rs 2,150. We maintain our view.

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