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Britannia: Treat time! - Views on News from Equitymaster

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Britannia: Treat time!

Oct 24, 2007

Performance summary
  • New launches and extension of brands lead to the topline growth of 19.8% YoY for 2QFY08.

  • Operating margins expand by 5.2% YoY during the quarter as stronger growth in higher margin products is witnessed.

  • Including extraordinary item, PAT grows by 128% YoY led by higher operating income and other income.

  • For 1HY08, topline and bottomline grows by 19.6% YoY and 64% YoY respectively.

(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 5,497 6,588 19.8% 10,329 12,357 19.6%
Expenditure 5,209 5,903 13.3% 9,732 11,226 15.3%
Operating profit (EBDITA) 288 685 138.0% 597 1,131 89.5%
EBDITA margin (%) 5.2% 10.4%   5.8% 9.2%  
Other income 27 58 114.8% 158 166 5.1%
Interest 16 29 81.3% 23 34 47.8%
Depreciation 64 72 12.5% 121 141 16.5%
Profit before tax 235 642 173.3% 611 1,122 83.7%
Extraordinary item (26) (31)   (44) (62)  
Tax -3 127 -4333.3% 52 215 313.5%
Profit after tax/(loss) 212 484 128.4% 515 845 64.1%
Net profit margin (%) 3.9% 7.4%   5.0% 6.8%  
No. of shares (m) 23.9 23.9   23.9 23.9  
Diluted earnings per share (Rs)*         58.9  
Price to earnings ratio (x)*         25.7  
* 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 2QFY08?
Uptrend continues: Britannia reported a strong double-digit growth of 20% YoY in topline for both, 2QFY08 and 1HFY08. Higher price realisations, better mix, volume growth and cost management led to the strong performance. During the quarter, the company launched ‘Treat Gelo’, an extension of Treat franchise and introduced a range of Pure Magic cookies. While its Tiger brand caters to mass market, the Treat brand operates in the premium end of the market. Pure Magic brand caters to the top-end of the market. The new launches are favouring its performance. The company currently has a 38% of the market in value terms and has unveiled plans to increase its capacity by 20,000 tonnes a year to over 450,000 tonnes. It has also planned investments for product development in the coming quarters. We remain positive on the company’s growth prospects.

Consolidated cost break-up
As a % of net sales 2QFY07 2QFY08 1HFY07 1HFY08
Total Cost of goods 64.0% 59.1% 63.6% 60.2%
Staff Cost 3.5% 3.4% 3.6% 3.5%
Advertisement 5.4% 7.1% 5.8% 6.7%
Other Expenditure 21.8% 20.0% 21.2% 20.4%

Roaring margins: Inspite of input prices of key commodities going up by 15% to 18% YoY, Britannia has managed to report higher margins to the tune of 5.2% YoY for the quarter. Sale of higher margin products led to the strong expansion in margins. The raw material costs as a % of sales fell from 64% in 2QFY07 to 59% in this quarter. However, the advertisement expenses increased from 5.4% of sales in 2QFY07 to 7.1% in the quarter under consideration, mainly due to new launches. For 1HFY08, the margins touched 9.2%. The margins are above our expectations. The company has done well to manage its costs inspite of higher raw material expenses.

Profit picture: The bottomline recorded a 128% YoY (including extraordinary items) growth led by higher operating income and other income. Inspite of the higher interest costs and tax out go, the bottomline performance remained strong. Excluding the extraordinary, the bottomline was up 117% YoY. For the half yearly period, the bottomline is up 64% YoY.

What to expect?
At the current price of Rs 1,516, the stock is trading at a price to earnings multiple of 15.7 times its FY10 estimates. Better mix, higher margin products continue to aid the strong topline performance. The higher margins in the quarter were a surprise. Its expansion plans and investments in product development would further help the company continue with its growth.

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