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Britannia: Steady growth - Views on News from Equitymaster
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  • Oct 17, 2003

    Britannia: Steady growth

    Bakery major, Britannia Industries, has reported a 5% topline growth in the September quarter. The company has reported a much better 26% growth in bottomline led by improvement in operating margins, as well as a strong other income growth. The company seems to have restated last year's numbers (especially for the topline). As per the release of the company to the BSE, the topline growth in nearly 10% YoY. However, we have not received the detailed release by the company. As such, we have carried last year's stated numbers. The profit figures are however, absolutely correct.

    (Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
    Net Sales 3,607 3,792 5.1% 6,873 7,161 4.2%
    Other Income 71 115 62.0% 81 201 148.1%
    Expenditure 3,222 3,334 3.5% 6,112 6,268 2.6%
    Operating Profit (EBDIT) 385 458 19.0% 761 893 17.3%
    Operating Profit Margin (%) 10.7% 12.1%   11.1% 12.5%  
    Interest 26 16 -38.5% 54 40 -25.9%
    Depreciation 70 53 -24.3% 133 111 -16.5%
    Profit before Tax 360 504 40.0% 655 943 44.0%
    Tax 126 163 29.4% 217 311 43.3%
    Extraordinary items 28 -11 - 11 -16 -
    Profit after Tax 262 330 26.0% 449 616 37.2%
    Net profit margin (%) 7.3% 8.7%   6.5% 8.6%  
    Effective tax rate (%) 35.0% 32.3%   33.1% 33.0%  
    No. of Shares (eoy) (m) 26.7 25.1   26.7 25.1  
    Diluted earnings per share (Rs) * 41.8 52.6   35.8 49.1  
    P/E ratio (x)   10.6     11.4  
    (* annualised)            

    The company has managed to expand its operating margins consistently to over 12% (up from 10.7% in 2QFY03 and 9.4% in 2QFY02). This has come about due to a dip in staff costs (down over 11%). The company's move to hive off its dairy business in 2002, as well as a VRS scheme seem to be the key reason for this fall in staff cost. Though the company has also reduced the expenditure of purchase of finished goods, but the increase in raw material expenses more or less compensates for the same.

    Cost break-up
    As a % to sales 2QFY03 2QFY04 1HFY03 1HFY04
    Material cost 42.6% 45.1% 37.6% 44.8%
    Staff cost 6.6% 5.6% 9.2% 5.9%
    Purchase of finished goods 11.7% 7.3% 24.4% 17.8%
    Other expenditure 28.4% 29.9% 17.8% 19.0%

    The significant rise in bottomline in the first half of the current year (1HFY04) is largely led by a huge growth in other income (up 148% YoY). This rise in other income has arisen out of profit on sale of investment as well as an excise duty refund during the first quarter of the year. The company has not given out the break-up of this extraordinary income. Higher other income also seems a result of increased investments due to freeing of Britannia's resources post the dairy hive off. This other income growth has largely aided the bottomline growth. Going forward this trend is likely to continue. If we exclude the other income component from the numbers, then too profit before tax during 1HFY04 is up 29% YoY.

    The primary business of the company is now bakery, which consists of biscuits, bread and cakes. At the current price of Rs 560 the stock trades at 11.4x annualised 1HFY04 earnings, market cap to sales of 1x. However, the valuations are skewed owing to the other income fillip. Moreover, the recent controversy on the exit of the company's ex-MD (Mr. Sunil Alagh), has also raised promoter related concerns. In the past, Britannia has only had to contend with Parle as a major competitor in the bakery segment. However, with the recent entry of HLL and ITC into the segment, Britannia is likely to see increased pressure on its turf.



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