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Britannia: FY15 starts on strong note - Views on News from Equitymaster

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Britannia: FY15 starts on strong note

Aug 21, 2014

Britannia Industries Limited declared its results for the first quarter of financial year 2014-15 (1QFY15). The company has reported 15% YoY growth in sales and a 27% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Britannia registered a 15% topline growth.
  • The operating profit margin improved by 0.6% YoY backed by lower ad-spends and employee costs.
  • Net profits grew by 27% YoY on a 23% YoY growth in operating profit and 52% jump in other income earned during the quarter.

Consolidated Financial snapshot
(Rs m) 1QFY14 1QFY15 % change
Total income 15,515 17,870 15.2%
Expenditure 14,138 16,174 14.4%
Operating profit (EBITDA) 1,377 1,696 23.2%
EBITDA margin (%) 8.9% 9.5% 0.6%
Other income 142 216 51.7%
Interest 42 10 -77.0%
Depreciation 196 318 62.4%
Profit before tax 1,282 1,584 23.6%
Exceptional items - -  
Tax 386 447 15.9%
Profit after tax/(loss) 896 1,137 27.0%
Share of profit/(loss) of associates (1) (1)  
Minority interest (0) -  
Net profit/ (loss) 895 1,137 27.0%
Net profit margin (%) 5.8% 6.4% 0.6%
No. of shares (m)   120  
Diluted earnings per share (Rs)*   33.0  
Price to earnings ratio (x)*   37.7  
* On a 12-month trailing basis

What has driven performance in 1QFY15?
  • Britannia registered a 15% YoY increase in revenues led by double-digit growth in volumes.

    Cost break-up
    As a % of net sales 1QFY14 1QFY15 Change in basis points
    Total cost of goods 59.0% 61.2% 217.3
    Employee costs 4.5% 3.7% -77.3
    Conversion and other charges 6.3% 6.2% -6.2
    Advertisement costs 9.5% 7.7% -173.5
    Other expenditure 11.8% 11.6% -21.8

  • Despite a steep rise in input costs, the company has been able to improve margins by 0.6% YoY on the back of lower ad-spends and employee costs. As a proportion of sales, both ad-spends and employee costs have declined by 1.7% YoY and 0.8% YoY. These savings have more than offset the cost of goods to sales ratio that increased by 2.2% YoY during the quarter.

  • Net profits increased by 27% YoY on a 23% growth in operating profits. Interest costs fell by 77% and tax incidence was down to 28% as compared to 30% in the year-ago quarter. Growth in bottomline was further accentuated by a 52% jump in other income earned during the quarter.
What to expect?
Britannia's offtake has improved significantly from single-digits in recent quarters to double-digit growth in June 2014 quarter. The uptick is noteworthy considering that the category volume growth is in low single-digits. The robust topline growth has translated into improved profit margin backed by lower ad-spends. However, growing competition is expected to pull-up ad-spends and exert pressure on margins going ahead. The company is focusing on in-house manufacturing and has plans of capital expenditure to the tune of 1.5-2 bn over the next 2-3 years.

However the stock price has run up quite a bit on improving margin profile due to cost optimization measures. At the price of Rs. 1243, the stock is trading at 25 times our estimated FY17 earnings. At current valuations, the stock remains overvalued and therefore we re-iterate a SELL on the stock.

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