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Britannia: Excise hits the Tiger

Mar 19, 2001

Britannia, the biscuit king with a market share of over 85% (in the organized sector), has reported excellent growth in its financials during the first nine months of the current year. The company is quietly transforming itself from a biscuit company to a ‘complete food company’ by making an aggressive entry into the dairy segment. Over the years Britannia has launched several successful brands under its umbrella brand including ‘Milkman’, ‘Good Day’, ‘Tiger’ and ‘Snax’. In terms of understanding the Indian consumer psyche, it has been one of the smartest companies in the FMCG peer group.

The company’s sales during the past 5 years witnessed a compounded annual growth rate of 18%. During the same period profits grew at a faster rate of 35%. The higher growth rate of profits was due to continuous improvement in profit margins, new product launches and foray into new business areas (like high margins dairy products business). Britannia’s operating margins at 8.5% are comparatively lower than its peers in the industry. This indicates a further growth opportunity in the earnings of the company through operating efficiencies.

Britannia has reported an outstanding performance during the nine months ended December ’00. The company’s topline increased by 17% and the profits jumped by 42%. Even if we exclude the extraordinary income of Rs 50 m, its profits showed a growth of 23%. This was in line with the bottomline growth figures of most of the FMCG companies. What is more encouraging is the fact that when revenue growth of the FMCG majors slowed down to a single digit, Britannia bucked the trend by reporting a double-digit growth.

The reason behind Britannia’s success is its key brand ‘Tiger’, which contributes over 20% of its turnover and is growing at about 25% annually. The brand has shown an impressive growth rate in the past few months in terms of volumes. This has been made possible by the launch of small size packs.

The current budget proposals are however likely to hit the volume growth of the brand. Excise duty on the biscuit with a pack size of less than 100 gms and maximum retail price (MRP) of less than Rs 5 is increased to 16% (from 8% earlier) with effect from March 2001. This could impact its volume growth or margins in the coming months.

However, volumes of another brand ‘50:50’ have jumped by about 20% after the company decided to sponsor the game show ‘Kaun Banega Crorepati’ (October ’00 to January ’01), through a co-branding initiative. Further, the expansion of dairy product portfolio with the launch of Milkman Sweet Lassi and Cold Coffee is expected to compensate for the low revenue growth in Tiger brand to a certain extent.

At the current market price of Rs 673, Britannia is trading at a P/E of 28 times its FY01 projected earnings, with a market cap to sales ratio of 1.4 times. We have projected a growth of over 30% in its bottomline on a revenue growth in the range of 12-14%. The company is expected to maintain its outstanding performance in the fourth quarter of the year ending March ’01 and is likely to outperform the entire FMCG industry with its successful brand portfolio. The stock is all set for appreciation, looking at its current and expected financial performance.

Comparative valuations
Particulars Britannia Cadbury Nestle HLL
Price (Rs) 673 449 508 220
P/E (x) 28.0 30.8 41.3 36.7
Market Cap/Sales (x) 1.4 2.8 3.1 4.6

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