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Britannia: ITC blues! - Views on News from Equitymaster

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Britannia: ITC blues!
Jun 8, 2006

Performance summary
Biscuits major, Britannia, announced mixed results for the fourth quarter and full year ended March 2006. While the company’s topline for FY06 registered a growth of 8% YoY, net profit declined by 17.1% (excluding extraordinary items). The dismal performance on the bottomline front was largely due to lower other income and higher depreciation cost. The board has recommended a final dividend of Rs 15 per share (dividend yield of 1.2%).

Financial performance: A snapshot…
(Rs m) 4QFY05 4FY06 Change FY05 FY06 Change
Net Sales 3,829 4,540 18.6% 15,875 17,133 7.9%
Expenditure 3,537 4,315 22.0% 14,036 15,154 8.0%
Operating Profit (EBDITA) 292 225 -22.9% 1,839 1,979 7.6%
EBITDA margin (%) 7.6% 5.0%   11.6% 11.6%  
Other income 125 122 -2.4% 792 217 -72.6%
Interest 4 6 50.0% 21 21 0.0%
Depreciation 47 57 21.3% 190 217 14.2%
Profit before tax 366 284 -22.4% 2,420 1,958 -19.1%
Extraordinary expense (115) 49 -142.6% (218) 49 -122.5%
Tax 144 55 -61.8% 714 543 -23.9%
Profit after tax 107 278 159.8% 1,488 1,464 -1.6%
Net profit margin (%) 2.8% 6.1%   9.4% 8.5%  
Effective tax rate (%) 39.3% 19.4%   29.5% 27.7%  
No. of Shares (m) 25.1 23.9   25.1 23.9  
Diluted earnings per share* (Rs)         61  
Price to earnings ratio (x)         20.5  
* Trailing 12 months            

What is the company’s business?
Britannia, promoted by 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 revenues. Britannia's product portfolio includes successful brands like Milk Bikis, Tiger, Little Hearts, Good Day, Mariegold, Premium Bake, Pure Magic, Bourbon and Snax, which enjoy admirable market share. Britannia is the market leader in the Rs 40 bn biscuit segment with over 35% market share, in value terms. It has presence across all segments, from the low-end glucose biscuit to the premium ones.

What has driven performance in FY06?
Revenue momentum continues: Revenue growth during 4QFY06 was the highest in the past five quarters, which has been led by new product launches in the domestic market. The growth at the topline level, considering competition from other players like Parle and ITC, is commendable. Though competition is expected to intensify going further, we believe in the company’s ability to introduce new products and packaging on a consistent basis and thereby, outpacing the industry growth (as it has over the past few years).

Margins under pressure: EBITDA margins for 4QFY06 nose-dived by 260 basis points (2.6%) to 5.0%. However, for the full year, margins remained unchanged at 11.6%. The sharp erosion in operating margins for the quarter could be attributed to spike in raw materials cost, which as a percentage of sales, increased from 53.6% in FY05 to 60.6% in FY06. For the full year too, raw materials cost increased from 55.8% in FY05 to 59.4%. The staff cost for the period under review, however saw a decline, owing to the VRS and other restructuring initiatives undertaken by the company.

(as a % of net sales) 4QFY05 4FY06 FY05 FY06
Advt. & Sales promotion 7.0% 7.6% 6.4% 6.3%
Staff Cost 5.2% 4.3% 4.5% 4.3%
Total cost of goods 53.6% 60.6% 55.8% 59.4%
Other expenditure 26.5% 22.5% 21.7% 18.6%

Other income and depreciation dent bottomline: Despite a decent revenue growth for the fiscal, PBT fell by 19.1% YoY, owing to 72.6% YoY decline in other income. The latter was mainly due to a high base in FY05, as it comprised income from sale of investments to the tune of Rs 579 m. Depreciation for FY06 saw an increase of 14.2% YoY to Rs 217 m, owing to the new manufacturing plant set up by the company in Uttaranchal. However, extraordinary income, which stood at Rs 49 m in FY06 (compared to an expense of Rs 218 m), provided some support to the bottomline. The company has also benefited by shifting its manufacturing facility from Mumbai to Uttaranchal (this will result in 100% 10-year tax and 5-year excise benefit). The benefit of the same has not been completely reflected in FY06, as the new plant became fully operational only by 3QFY06.

Over the past few quarters
  4QFY05 1QFY06 2QFY06 3QFY06
Sales growth (YoY) 5.6% 2.7% 8.4% 17.5%
OPM (%) 7.6% 14.3% 13.9% 12.0%
Net profit growth (YoY) -64.7% -34.8% -9.7% 20.2%

What to expect?
At the current price of Rs 1,250, the stock trades at a price to earnings multiple of 20.5 times FY06 earnings. We had recommended a 'BUY' on the stock in November 2005 at Rs 1,240 with a target price of Rs 1,650. Since then, the stock has breached our targets and has retreated back to earlier levels. We maintain our positive view on the stock. Rising input cost (dependent on monsoon) and intensifying competition are principal risks to our recommendation.

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