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Britannia FY07: 50-50 - Views on News from Equitymaster

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Britannia FY07: 50-50
May 30, 2007

Performance summary
Biscuits major, Britannia announced its fourth quarter and full year numbers late evening yesterday. For the full year, revenues grew by 28.4% YoY. However, the bottomline performance was lackluster, dipping by 26.5% YoY, mainly due to margin erosion to the tune of 590 basis points (5.9%), along with some extraordinary items. While the topline is higher by 7% than our estimates, the bottomline is lower by 4%. The Board has recommended a dividend of Rs 15 per share (dividend yield of 1%).

(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Gross sales 4,790 6,291 31.3% 18,179 23,171 27.5%
less: excise duty 250 299 19.6% 1,046 1,178 12.6%
Net sales 4,540 5,992 32.0% 17,133 21,993 28.4%
Expenditure 4,315 5,605 29.9% 15,154 20,741 36.9%
Operating profit (EBDITA) 225 387 72.0% 1,979 1,252 -36.7%
EBDITA margin (%) 5.0% 6.5%   11.6% 5.7%  
Other income 122 87 -28.7% 217 293 35.0%
Interest 6 8 33.3% 21 54 157.1%
Depreciation 57 66 15.8% 217 253 16.6%
Profit before tax 284 400 40.8% 1,958 1,238 -36.8%
Extraordinary item 49 32 -34.7% 49 (54)  
Tax 55 34 -38.2% 543 108 -80.1%
Profit after tax/(loss) 278 398 43.2% 1,464 1,076 -26.5%
Net profit margin (%) 6.1% 6.6%   8.5% 4.9%  
No. of shares (m) 23.9 23.9   23.9 23.9  
Diluted earnings per share (Rs)*         45.0  
Price to earnings ratio (x)*         34.8  

What is the company’s business?
Britannia, promoted by the France based Danone and Nusli Wadia, is the second largest biscuit manufacturer in India, next only to Parle. Danone is the world's largest producer of fresh dairy products and the second largest producer of biscuits and mineral water. Britannia hived off its dairy business in March 2002 to Britannia New Zealand Foods Pvt. Ltd., a joint venture with Fonterra Group, New Zealand. The primary business of the company is now bakery, which consists of biscuits, bread and cakes. Biscuits account for 92% of the company's FY06 revenues. The company’s market share stands at nearly 38% in value terms and 31% in volume terms.

What has driven performance in FY07?
Growth continues: The company reported a strong revenue growth of 32% YoY for the quarter, its highest ever in the past 8 to 10 quarters. It must be noted that biscuits as a segment is currently the fastest growing in the FMCG space, especially the mid-priced cream biscuits segment. For the year, the sales have grown by 28.4% YoY led by new launches and better distribution channels. Britannia has presence across all segments, from the low-end glucose biscuit to the premium ones. It has consistently introduced new products and packaging thereby outpacing industry growth. Although the market share had come under pressure in recent times, the company is clawing its way back by new launches, better distribution and newer formats. Our sales estimates are lower than the actual performance in FY07. However, seeing the growth of the segment and with its acquisitions in the last year of Daily Bread and two bakery companies in West Asia, the topline performance is expected to remain strong.

Cost break-up
As a % of net sales 4QFY06 4QFY07 FY06 FY07
Total Cost of goods 61.4% 61.0% 58.7% 63.6%
Staff Cost 4.3% 3.9% 4.3% 3.5%
Advertisement 7.6% 7.5% 6.3% 6.3%
Other Expenditure 21.7% 21.2% 19.3% 21.0%

Rising input costs: Britannia’s margins in recent quarters have been severely dented by a huge 15% to 20% rise in input costs, especially wheat, sugar and edible oils. As a consequence, the bottomline of the company has been reasonably hurt. For the whole year, the operating margins fell to 5.7% from 11.6% in FY06. The company's main inputs are all agri-based which have witnessed a wide fluctuation in recent times. Prices of these commodities are dependant on uncontrollable factors like good and timely monsoons. Going forward, we expect the margins to improve on the back of easing of raw material prices.

Lackluster bottomline: Margin expansion by 150 basis points (1.5%), mainly due to lower other expenditure, resulted in the bottomline growth (up 43% YoY) outpacing revenue growth in the quarter. Declining operating profits and higher interest cost resulted in a 26% YoY drop in the net profits for the year (including extraordinary item). The extraordinary item to the tune of Rs 54 m is relating to the compensation and amortisation of VRS cost and profit on sale of properties. Excluding this, the net profits have declined by 20% YoY. The effective tax rate (calculated as a percentage of PBT) fell from 28% in FY06 to 9% during the year due to tax benefits available to the company on its Uttaranchal plant (100% tax benefit for a 10-year period), thereby saving the bottomline from falling further.

What to expect?
At the current price of Rs 1,565, the stock is trading at a price to earnings multiple of 34.8 times its 12-month trailing earnings. The per capita consumption of biscuits in India is around 1.5 kgs, which is considerably lower than other developing nations. Britannia, being the No.1 player with one of the widest distribution networks is favorably placed to capitalise on such an opportunity. Bread, which is the most widely consumed processed food in the country and is 80% dominated by the unorganized sector, also presents a huge opportunity for the company. We continue to be bullish on the topline performance of the company. We also believe that once the input cost pressures ease, margins might improve, thus enabling the company to translate the buoyant topline growth into equally buoyant bottomline numbers.

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