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Britannia: Cost optimization boosts margins - Views on News from Equitymaster

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Britannia: Cost optimization boosts margins
Feb 18, 2014

Britannia Industries Limited declared its results for the third quarter of financial year 2013-14 (2QFY14). The company has reported 10% YoY growth in sales and a 62% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Britannia clocked a 10.7% YoY revenue growth in 3QFY14. The topline grew by 12.5% YoY during 9mFY14.
  • The operating margin expanded by 2.5% YoY in 3QFY13 aided by easing commodity prices coupled with saving in other expenses. For 9mFY14, the operating margin increased by 2.9% YoY.
  • At the net level, margin expanded by a mere 1.8% due to higher tax outgo and steep fall in other income during the quarter. The net margin increased by 1.9% during 9mFY14.

Consolidated Financial snapshot
(Rs m) 3QFY13 3QFY14 % change 9mFY13 9mFY14 % change
Total income 16,204 17,930 10.7% 45,337 51,002.7 12.5%
Expenditure 15,169 16,332 7.7% 42,584 46,416 9.0%
Operating profit (EBITDA) 1,035 1,598 54.4% 2,753 4,587 66.6%
EBITDA margin (%) 6.4% 8.9% 2.5% 6.1% 9.0% 2.9%
Other income 129 46 -64.5% 361 226 -37.5%
Interest 125 15 -87.7% 317 68 -78.6%
Depreciation 189 212 11.7% 537 618 15.1%
Profit before tax 849 1,417 66.8% 2,261 4,127 82.6%
Exceptional items - -   - -  
Tax 228 414 81.2% 584.7 1251.1 114.0%
Profit after tax/(loss) 621 1,003 61.5% 1,676 2,876 71.6%
Share of profit/(loss) of associates - (1)   (0) (2)  
Minority interest (1) 3   (2) 3  
Net profit/ (loss) 620 1,006 62.1% 1,674 2,877 71.8%
Net profit margin (%) 3.8% 5.6% 1.8% 3.7% 5.6% 1.9%
No. of shares (m)         120  
Diluted earnings per share (Rs)*         31.7  
Price to earnings ratio (x)*         28.9  
* On a 12-month trailing basis

What has driven growth in 3QFY14?
  • Britannia registered a 11% YoY increase in revenues.

    Cost break-up
    As a % of net sales 3QFY13 3QFY14 Change in basis points
    Total cost of goods 62.7% 60.7% -196.7
    Employee costs 3.8% 3.7% -9.7
    Conversion and other charges 7.0% 6.9% -6.4
    Advertisement costs 8.8% 8.7% -9.6
    Other expenditure 11.4% 11.1% -30.2

  • The benefit of benign commodity prices and better product-mix enabled the company to post a 1.9% YoY drop in raw material-to-sales ratio for the quarter. This along with controlled other operating expenses (as a proportion of sales) have resulted in a 2.5% YoY expansion in operating margin during the quarter.

  • Net profits saw a jump of 62% YoY on a 54% YoY increase in operating profit coupled with 88% reduction in interest charges. Operating income earned was lower by 64.5% YoY during the quarter. Even the tax incidence rose to 29% in 3QFY14 compared to 26.9% in 3QFY13.
What to expect?
Britannia has been witnessing improved profitability on better product-mix as well as lower conversion charges. The company has been focussing on reduction in contract manufacturing. The company has spent Rs 3 bn in the last two years in setting up three plants, one each in Odisha, Bihar and Gujarat. Another plant is being set up in Tamil Nadu. As a result of these initiatives, the company now manufactures 50% of its products in-house as compared to 33% in 2010.

Apart from cost optimization, Britannia is working towards launching innovative products in bakery and aims to achieve 6-8% of revenues from new products. The company is also widening reach in key markets of Gujarat, Maharashtra, Rajasthan, Madhya Pradesh, Bihar and Uttar Pradesh. These efforts are expected to improve the margin profile of the company, going ahead. But rising competition and high ad-spends remain headwinds

At the price of Rs. 917, the stock is trading at 21 times our estimated FY16 earnings. At current valuations, the stock remains overvalued and therefore we re-iterate a SELL on the stock.

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