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Britannia: Higher sales, lower profits
May 28, 2009

Performance summary
  • Consolidated sales grow by 23% YoY during the fiscal. This is higher than our estimates by 7%.
  • Operating margins fall by 1.5% for the fiscal as higher expenses take toll.
  • Bottomline for the full year suffers a 30% YoY fall as lower other income and higher depreciation charges compound the company’s woes further.
  • Net profits for FY09 decline by 22% YoY (excluding extraordinary items) on the back of lower operating profits, higher depreciation and interest charges.
  • The Board of Directors recommends an interim dividend of Rs 40 per share (dividend yield of 2.3%).


Financial performance
Standalone sales Consolidated sales
Rs m FY08 FY09 % change FY08 FY09 % change
Net sales 25,903 31,271 20.7% 27,840 34,362 23.4%
Expenditure 23,560 28,534 21.1% 25,441 31,915 25.4%
Operating profit (EBDITA) 2343 2737 16.8% 2,398 2,447 2.0%
EBDITA margin (%) 9.0% 8.8%   8.6% 7.1%  
Other income 256 245 -4.2% 253 233 -7.9%
Interest 64 117 82.8% 151 239 58.4%
Depreciation 291 335 15.1% 394 659 67.5%
Profit before tax 2,245 2,531 12.7% 2,107 1,782 -15.4%
Tax 413 521 26.3% 416 530 27.4%
Extraordinary item 78 (206)   75 180 141.1%
Profit after tax/(loss) 1,910 1,803 -5.6% 1,765 1,432 -18.9%
Share of Loss / (Profit) of Minority - -   9 80 802.2%
Share of Profits / (Losses) of Associates (Net) - -   0.4 2 425.0%
Net profit 1,910 1,803 -5.6% 1,774 1,514 -14.7%
Net profit margin (%) 7.4% 5.8%   6.4% 4.2%  
No. of shares (m) 23.9 23.9   23.9 23.9  
Diluted earnings per share (Rs)*   75.5     63.4  
Price to earnings ratio (x)*         26.9  
* 12 month trailing earnings

What has driven performance in FY09?
  • Britannia reported a consolidated topline growth of 23% YoY during FY09. This is higher than our estimates by 7%. In line with its focus on adding health to taste, the company is reworking its product range. Despite commodity prices going up, the company recorded a steady rise in sales. The standalone sales saw a growth of 21% YoY, contributing 91% to the total sales. The subsidiaries and associates sales witnessed an increase of 60% YoY.

  • Britannia took full control of Daily Bread during the quarter. It had earlier acquired 50% stake in June 2006. It further mopped up the remaining shares, taking over the operational reins fully from the original promoter. Daily Bread is a manufacturer and retailer of bakery products, including specialty breads, across the institutional and retail segments. It also operates standalone retail outlets and kiosks in markets like Bangalore and Goa. Currently not a very large contributor to Britannia’s topline, the company is looking at expanding this venture, though not at a hurried pace. The company is also restructuring its joint venture dairy business in India, whereby Britannia will acquire the entire stake of Fonterra.

  • Cost pressures led to the 1.5% contraction in consolidated operating margins during the year. All the cost heads grew at a faster rate as compared to sales. Further, high commodity inflation coupled with intense competition made price hikes difficult. The company’s subsidiaries posted losses during FY09, further impacting the operating profits. On a standalone basis, the margins improved from 8.8% in FY08 to 9% during FY09. The company has underperformed our estimates on the margin front.

  • Apart from lower operating profits, higher depreciation and interest charges coupled with higher tax outgo further impacted the performance of the company, leading to a 15% YoY decline in the consolidated bottomline. Excluding the extraordinary items (VRS), the consolidated profits were down 22% YoY during the year. Also, the subsidiaries reported losses to the tune of Rs 289 m, up from Rs 136 m during FY08. This further impacted the company’s performance. The standalone profits (excluding extraordinary items) were up 9.7% YoY. The company has underperformed our estimates.

  • For the last quarter of the year, Britannia reported net sales of Rs. 7.6 bn and profit from operations of Rs 625 m, up 10% YoY and 17% YoY respectively.

  • The Board of Britannia has approved a scheme for the issue of bonus debentures by drawing upon the General Reserves of the company which have been created through retained earnings / undistributed profits. The debentures will be secured, and redeemable at par on the third anniversary of the issue. Bonus debentures of the face value of Rs 170 will be issued and allotted in the ratio of one fully paid debenture of Rs 170 each for every Rs 10 equity share. The debentures would carry an interest rate not exceeding 8.5% per annum.

What to expect?
At the current price of Rs 1,703 the stock is trading at a price to earnings multiple of 12.2 times our FY11 estimates. While the management expects margins in the current fiscal year to be under pressure due to rising input costs, it is stepping up its cost reduction and market segmenting initiatives this year to counter the price rise. On the growth front, the investments made in innovation, marketing, manufacturing have all started paying off. Its power brands have continued witnessing robust demand. The management has indicated that the dairy business will be the next growth vector. Currently earning around Rs 2 bn, the company is hoping to outpace the market growth in the dairy segment over the next couple of years. Britannia is also looking at inorganic growth and has acquired increased stakes in Daily Breads and in the JV with Fonterra. Over a longer time frame, the management has indicated its vision to transform the company form a pure biscuit manufacturer to a holistic food company. We maintain our positive view on the stock.

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