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Britannia: Growth continues

Jul 25, 2007

Performance summary
  • Topline registers a 19% YoY growth led by price hikes and new product launches. During the quarter, ‘Good Day Jumbo’, a premium cookie in a unique shape was introduced in the market. ‘Chota Tiger’ has been extended nationally.

  • Operating margins rise by 1.3% on back of lower raw material costs.

  • PAT grows by 22% YoY (excluding extraordinary items) inspite of lower other income and higher tax outgo.

(Rs m) 1QFY07 1QFY08 Change
Gross sales 5,100 5,900 15.7%
less: excise duty 268 131 -51.1%
Net sales 4,832 5,769 19.4%
Expenditure 4,523 5,323 17.7%
Operating profit (EBDITA) 309 446 44.3%
EBDITA margin (%) 6.4% 7.7%  
Other income 131 108 -17.6%
Interest 7 5 -28.6%
Depreciation 57 69 21.1%
Profit before tax 376 480 27.7%
Extraordinary item (18) (31)  
Tax 55 88 60.0%
Profit after tax/(loss) 303 361 19.1%
Net profit margin (%) 6.3% 6.3%  
No. of shares (m) 23.9 23.9  
Diluted earnings per share (Rs)*   47  
Price to earnings ratio (x)*   35.5  
* 12 month trailing earnings

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 1QFY08?
Growth continues: Britannia’s sales registered a growth of 19% YoY growth on the back of not just the shift from the unbranded segment to the branded segment but also due to management’s initiatives of introducing innovative products and packages beginning to bear fruit. During the quarter, ‘Good Day Jumbo’, a premium cookie in a unique shape was introduced in the market. ‘Chota Tiger’ has been extended nationally. The company’s foray into snacking has been also steadily growing leading to the strong topline performance. In the Rs 60 bn Indian biscuit market, Britannia holds a leadership position in bakery category with its brands Tiger, Good Day, Marie Gold, Treat, Milk Bikis and 50:50. The company also in the past four months has improved realisations of key brands through a combination of absolute price hikes and weight reduction for the packets. Though pricing is a dynamic variable, the company has kept its options open to review its mix including pricing on an ongoing basis. The company would also take price hikes for other brands in the future, to offset the input costs.

The company has also formed partnership with Khimji Ramdas Group to run two bakery product companies in the fast growing Middle East market. Britannia and its associates have acquired 70% stake in the Dubai-based Strategic Foods International LLC and Oman-based Al Sallan Food Industries Co SAOG. The two companies are significant regional players in biscuit and cookies segment in the GCC markets and export their products to over 40 countries around the world. The companies have a combined annual turnover in excess of Rs 1.6 bn with leading brands such as Nutro, Family Choice and Bakers Pride The company is also planning to grow the international footprint by leveraging on the complementary strengths of its international venture. We expect the topline performance to be strong.

Cost break-up
As a % of net sales 1QFY07 1QFY08
Total Cost of goods 63.1% 61.6%
Staff Cost 3.6% 3.7%
Advertising 6.4% 6.2%
Other Expenditure 20.6% 20.8%

Improving margins: While cost pressures for Britannia have been building over the last few quarters, price hikes and reduction in packet sizes led to marginal improvement in the margins. This coupled with enhanced excise duty exemption on biscuits resulted in an improvement in Britannia’s margins. Though the raw material prices have gone down from 63% (as a percent of sales) in 1QFY07 to 61.6% in this quarter, the unprecedented increase in commodities like wheat, dairy products etc, that started last year, is likely to continue in the current year as well.

Bottomline scenario: The bottomline recorded a 19% YoY (including extraordinary items) growth inspite of higher tax outgo and lower other income. Excluding the extraordinary, the bottomline was up 22% YoY led by lower interest costs.

What to expect?
At the current price of Rs 1,688, the stock is trading at a price to earnings multiple of 16.7 times its FY10 estimates. The company has continued with its strong topline performance. The management is now planning to strengthen its acquisitions. Britannia is keen to scale up the Daily Breads outlet chain to more cities over the next two years. Also, its acquisitions in Middle East have given access to many new markets such as Gulf Cooperation Council (GCC) and Africa. In the first quarter, the company also witnessed improvements in the margins, indicating its ability to pass the price hike to the consumers. Though margins would remain a concern, we believe that the growth on the topline would continue with its snacking segment performing well.

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