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Britannia: Pressure on margins - Views on News from Equitymaster

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Britannia: Pressure on margins
Jan 29, 2010

Performance summary
  • Topline for Britannia during the December 2009 quarter grew by 8% YoY.
  • Operating (EBITDA) margins for the company fell by 3.4% to 4.8% during 3QFY10. This lacklustre performance is due to heavy higher raw material costs as well as higher advertisement spending as a percentage of sales.
  • Net profit fell by 37% YoY during the quarter.
  • Net profit for 9mFY10 fell by 3% YoY while net margins fell by 0.4%. This fall comes on the back of fall in operating income partly offset by higher other income, lower interest costs and lower tax expense.

Standalone Financial snapshot
(Rs m) 3QFY09 3QFY10 % change 9mFY09 9mFY10 % change
Net Sales 8,199 8,856 8.0% 23,613 24,822 5.1%
Expenditure 7,527 8,434 12.1% 21,598 22,995 6.5%
Operating profit (EBDITA) 673 422 -37.3% 2,015 1,828 -9.3%
EBDITA margin (%) 8.2% 4.8%   8.5% 7.4%  
Other income 57 70 23.7% 208 281 34.9%
Interest 30 8 -73.0% 110 25 -77.1%
Depreciation 86 95 10.5% 247 280 13.3%
Profit before tax 614 389 -36.5% 1,867 1,804 -3.4%
Exceptional items (64) (70) 8.6% (183) (209) 14.2%
Tax 88 29 -67.3% 286 239 -16.4%
Profit after tax/(loss) 461 291 -36.9% 1,398 1,355 -3.0%
Net profit margin (%) 5.6% 3.3%   5.9% 5.5%  
No. of shares (m) 24 24   24 24  
Diluted earnings per share (Rs)*         73.7  
Price to earnings ratio (x)*         21.2  
* On a 12-month trailing basis

What has driven growth in 3QFY10?
  • As noted, the sales of the company grew by 8%. This comes on the back of 25% growth registered over the corresponding quarter last year. The company launched Actimind a milk based health drink on a limited basis during the quarter.

  • Operating income for the company fell by 37% YoY. This was on the back of rise in commodity prices specially sugar and milk. Raw material costs increased by 10% YoY while spending on advertisement for brand building was up by 30% YoY.

  • Net margins for Britannia fell by 2.3% to stand at 3.3%. This performance comes on the back of fall in operating income partly offset by higher other income, lower interest costs and lower tax expense. The tax expense was lower as the company shifted more production to tax exempt zones.

What we expect?
At the price of Rs. 1,560, the stock is trading at 14 times our estimated FY12 earnings. The company is suffering from rising commodities prices. So far the company has not increased the prices of the packs by absorbing the costs. This was done in the face of competition. However, if the prices continue to rise, Britannia may be forced to go for price hikes. We will revisit our assumptions after meeting the management of the company.

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