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Britannia: Creamy Treat? - Views on News from Equitymaster
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Britannia: Creamy Treat?
Jul 21, 2005

Introduction to results
Bakery products major, Britannia announced mixed results for 1QFY06 late yesterday. While topline has grown marginally, margin expansion has helped the company improve its operating profitability during the quarter. However, the effect of a large extraordinary income in 1QFY05 has been seen in the decline in net profits during the latest quarter. Excluding this effect, net profits have actually improved on a YoY basis during 1QFY06.

(Rs m) 1QFY05 1QFY06 Change FY05
Net Sales 3,947 4,054 2.7% 15,875
Expenditure 3,472 3,474 0.1% 14,036
Operating Profit (EBDIT) 475 580 22.1% 1,839
Operating Profit Margin (%) 12.0% 14.3%   11.6%
Other Income 27 23 -15.6% 792
Interest 5 8 60.0% 21
Depreciation 48 53 10.4% 190
Profit before Tax 449 542 20.7% 2,420
Tax 195 186 -4.6% 714
Extraordinary items 346 35 -89.8% (218)
Profit after Tax 600 391 -34.8% 1,488
Net profit margin (%) 15.2% 9.6%   9.4%
Effective tax rate (%) 43.4% 34.3%   29.5%
No. of Shares (m) 25.1 23.9   23.9
Diluted earnings per share* (x) 95.6 65.4   62.3
P/E ratio (x)   15.4    
(* annualised)        

What is the company’s business?
Britannia, promoted by Danone and Nusli Wadia (joint stake of 51%), 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 93% of the company's revenues.

What has driven performance in 1QFY06?
Revenue show torpid:  Revenue growth during the June quarter at below 3% was culmination of steady sluggishness displayed over the past few quarters. ITC as well as other smaller players are giving Britannia a run for its money. VAT was implemented in several states from April 2005 resulting in stockists and dealers refraining from taking stock due to confusion with respect to the tax implications, which also added to the slow growth momentum witnessed during the quarter.

Lower input costs aid margin expansion:  As can be seen from the table below, raw material prices seem to have softened during the quarter resulting in lower input costs as percent of sale for the company. Also, owing to VRS and restructuring initiatives in past years, staff costs have declined further. All these factors resulted in a margin expansion of 230 basis points during the quarter, which in turn has improving profitability at the operating level.

Cost details…
as a % of net sales 1QFY05 1QFY06 FY05
Total Cost of goods 57.1% 55.2% 56.4%
Staff Cost 4.7% 4.6% 4.5%
Advertisement & promotion N. A. N. A. 6.4%
Other Expenditure 26.1% 25.9% 21.1%
Total expenditure 88.0% 85.7% 88.4%

Tax and extraordinary items saves skin:  The company started commercial production from its new factory in Uttaranchal during April ‘05, which offers it a 10-year excise and 5 year Income tax benefit. This can be reflected in the tax charges that stood at 34.3% during the quarter as against 43.4% in 1QFY05 (excluding the extraordinary income effect). If one were to remove the effect of the extraordinary income in 1QFY05, profits have actually improved on a YoY basis in 1QFY06.

Over the past few quarters
  1QFY05 2QFY05 3QFY05 4QFY05 1QFY06
Sales growth (YoY) 17.2% 12.6% 6.1% 5.6% 2.7%
OPM (%) 12.0% 13.0% 13.5% 7.6% 14.3%
Net profit growth (YoY) 109.8% 47.0% 10.8% -64.7% -34.8%

As can be seen from the table above, the company has been struggling with its topline since the second half of FY05 and the trend continued during 1QFY06 as well. Margins, however, are the highest amongst the past 5 quarters, which is a positive indicating the easing of the input costs pressure.

What to expect?
At the current price of Rs 1,005, the stock is trading at a price to earnings multiple of 12.8 times our estimated FY07 earnings, and price to sales of 1.3 times estimated FY07 sales. We are enthused by the company’s performance in the quarter on the cost cutting and supply chain initiatives, which has paid off and reflects in the margins. Also, with the backing of Danone, the company has access to its latest technology and product range. This will enable Britannia to stay competitive and evolve its product portfolio going forward.

We had recommended a ‘Buy’ on the stock in October 2004 at Rs 655, with a target price of Rs 990 in the medium to long-term. The stock has outperformed our target price. We shall soon update our subscribers with our view on the stock.

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