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Britannia: High base mutes earnings - Views on News from Equitymaster

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Britannia: High base mutes earnings
Aug 13, 2012

Britannia Industries Limited declared its results for the first quarter of financial year 2012-13 (1QFY13). The company has reported 11% YoY growth in sales and a 3.9% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Britannia saw its topline grow by 11% driven a by a combination of volume, price and sales-mix.
  • On the back of moderation in inflation, the company has managed to improve operating margin by 120 basis points during the quarter.
  • Lower income on account of higher base in the year-ago quarter has led to a poor 3.9% rise in earnings during the quarter.

Standalone financial performance
(Rs m) 1QFY11 1QFY12 % change
Total income 11,076 12,289 11.0%
Expenditure 10,557 11,566 9.6%
Operating profit (EBITDA) 519 723 39.5%
EBITDA margin (%) 4.7% 5.9%  
Other income 258 106 -58.8%
Interest 93 95 1.7%
Depreciation 111 130 17.3%
Profit before tax 573 605 5.6%
Exceptional items - -  
Tax 155 170 10.2%
Profit after tax/(loss) 418 434 3.9%
Net profit margin (%) 3.8% 3.5%  
No. of shares (m)   119  
Diluted earnings per share (Rs)*   15.8  
Price to earnings ratio (x)*   28.8  
(*On a trailing 12-month basis)

What has driven performance in 1QFY13?
  • Britannia clocked a 11% rise in sales. The growth has come from a 3-4% rise in volumes and price-hikes of 2-3%. However a major part of the growth has come from sales-mix consisting of a larger proportion of differentiated product offerings. Britannia has enhanced its premium cream portfolio with launch of several differentiated products such as Bourbon Cappuccino, Pure Magic Praline and a new range of creamy flavours for Treat.

    Cost break-up
    As a % of net sales 1QFY11 1QFY12 Change in basis points
    Total cost of goods 65.5% 61.6% -388.1
    Employee costs 2.7% 3.1% 31.8
    Conversion and other charges 8.3% 9.1% 80.1
    Advertisement costs 7.4% 8.0% 60.1
    Other expenditure 11.3% 12.2% 95.8

  • Operating profitability saw a significant improvement during the quarter arising from waning commodity inflation. The raw material to sales ratio declined by 388 basis points during the quarter. This has more than offset the over 50 basis points rise in conversion costs, adspends and other expenditure (all as a percentage of sales). The operating margin expanded by 120 basis points to 5.9% during the quarter.

  • However, earnings increased by a tepid 3.9% on account of a 59% drop in other income earned during the quarter. The year-ago quarter included profit of Rs153.3 m from the sale proceeds of property.

What to expect?
Britannia has been consistently improving sales-mix through differentiated and innovative product offerings. However with competition heating up, the company has not been able to deliver a robust rise in volumes. As a result most of the topline growth is coming on account of sales mix. This raises concerns about its long-term growth potential.

At the price of Rs. 454, the stock is trading at 15 times our estimated FY15 earnings. At current valuations, the stock does not provide significant upside and therefore we advice a SELL on the stock.

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