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Britannia: High ad-spends clip margins - Views on News from Equitymaster

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Britannia: High ad-spends clip margins
Feb 14, 2013

Britannia Industries Limited declared its results for the third quarter of financial year 2012-13 (3QFY13). The company has reported 17% YoY growth in sales and a 5% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Backed by 5-5.5% volume growth and better product-mix, Britannia clocked a 17.5% jump in revenues in 3QFY13. For 9mFY13, the topline was up by 12.6%.
  • Despite easing input prices and rationalization in other expenses, operating margins were marginally hit by a jump in ad-spends. During 9mFY13, operating margin improved slightly by 0.3%.
  • Net profits grew by a muted 5% on account of higher depreciation charges as well as lower other income earned during the quarter. For 9mFY13, earnings increased by 9%.

Standalone Financial snapshot
(Rs m) 3QFY12 3QFY13 % change 9mFY12 9mFY13 % change
Total income 12,491 14,676 17.5% 36527 41127.1 12.6%
Expenditure 11,659 13,752 18.0% 34535 38734 12.2%
Operating profit (EBITDA) 832 924 11.0% 1992 2393 20.1%
EBITDA margin (%) 6.7% 6.3%   5.5% 5.8%  
Other income 131 114 -13.2% 479 347 -27.5%
Interest 95 91 -4.1% 285 274 -4.0%
Depreciation 122 149 22.7% 348 422 21.2%
Profit before tax 747 797 6.8% 1,838 2,044 11.2%
Exceptional items - - - -
Tax 206 228 10.6% 501.2 584.3 16.6%
Profit after tax/(loss) 541 570 5.3% 1,337 1,460 9.2%
Net profit margin (%) 4.3% 3.9%   3.7% 3.6%  
No. of shares (m)         120  
Diluted earnings per share (Rs)*       16.6  
Price to earnings ratio (x)*         29.6  
* On a 12-month trailing basis

What has driven growth in 3QFY13?
  • On the back of a 5-5.5% growth in volumes, 6-7% higher realisation and an improved product-mix, Britannia posted a huge pick-up in its topline growth in December 2012 quarter. Its turnover grew by 17% as compared to less than 12% rise registered in the each of the preceding two quarters.

    Cost break-up
    As a % of net sales 3QFY12 3QFY13
    Total cost of goods 63.3% 62.7%
    Employee costs 2.7% 2.7%
    Conversion and other charges 8.6% 9.0%
    Advertisement costs 7.0% 8.4%
    Other expenditure 11.7% 10.9%

  • However, a steep rise in advertisement & promotional spends led to a small contraction in operating margin during the quarter. Cost savings from moderating price of refined palm oil, skimmed milk powder, butter and manufacturing fuel were offset by sudden and unexpected jump in price of flour and sugar. As a result, the cost of goods to sales ratio dropped by a mere 0.6% whereas other expenses to sales ratio fell by 0.8%. But, the proportion of ad-spends in sales rose by 1.4% during the quarter and coupled with higher conversion charges, the operating margin reduced by 0.4%.

  • Profits grew by a subdued 5.3% on account of lower other income earned and a 23% jump in depreciation charges. Britannia completed two new greenfield units in Patna and Khurda in Orissa and also extended and expanded lines in some existing manufacturing units. The company is also setting up a greenfield unit in Jhagadia in Gujarat.

What to expect?
Slowdown in demand for discretionary food items has led to sluggish growth in volumes for Britannia. However, aided by price-hikes and an improved product-mix consisting of premium offerings, the company has been able to report a smart recovery in sales momentum. But with inflationary pressures persisting, concerns of demand slowdown remain.

Britannia's margins remained under stress as the company has been aggressively investing in brands as well as boosting capacities. With the premium biscuit segment remaining competitive, the company's ad-spends are expected to remain high in future and exert pressure on margins.

At the price of Rs. 493, the stock is trading at 17 times our estimated FY15 earnings. At current valuations, the stock is overvalued and therefore we re-iterate a SELL on the stock.

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