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Britannia: Perfectly 'baked' recipe - Views on News from Equitymaster
 
 
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  • Oct 26, 2004

    Britannia: Perfectly 'baked' recipe

    Introduction to results
    Bakery products major, Britannia Industries, continues to log double digit topline growth. The company has reported nearly 13% revenue growth in September quarter and nearly 15% growth for the first half of the year. The trend is encouraging considering the fact that most of its FMCG peers have found it tough to grow the topline. Operating margins have also improved during the quarter, though for the first half they have remained stable. Other income buoyancy continues to drive bottomline growth (up 47% YoY).

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net Sales 3,792 4,271 12.6% 7,161 8,218 14.8%
    Expenditure 3,334 3,716 11.5% 6,268 7,188 14.7%
    Operating Profit (EBDITA) 458 555 21.2% 893 1,030 15.3%
    EBDITA margin (%) 12.1% 13.0%   12.5% 12.5%  
    Other income 115 227 97.4% 201 638 217.4%
    Interest 16 6 -62.5% 40 11 -72.5%
    Depreciation 53 48 -9.4% 111 96 -13.5%
    Profit before Tax 504 728 44.4% 943 1,561 65.5%
    Tax 163 210 28.8% 311 405 30.2%
    Extraordinary income/(expense) (11) (33) - (16) (71) -
    Profit after Tax 330 485 47.0% 616 1,085 76.1%
    Net profit margin (%) 8.7% 11.4%   8.6% 13.2%  
    Effective tax rate (%) 32.3% 28.8%   33.0% 25.9%  
    No. of Shares (m) 25.1 23.9   25.1 23.9  
    Diluted Earnings per share (Rs)* 55.2 81.2   51.5 90.8  
    P/E ratio (x)   8.0     7.2  
    (* annualised)            

    What is the company’s business?
    Britannia, promoted by Danone and Nusli Wadia (joint stake - 51%), is the second largest biscuit manufacturer, next only to Parle, in the Indian market. Danone is the world's largest producer of fresh dairy products and the second largest producer of biscuits and mineral water. Britannia recently hived off its dairy business effective March 27, 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 93% of the company's revenues.

    What has driven performance in 2QFY05?
    Sales: The key reason for the strength in topline is believed to be the increasing affordability of branded biscuits that aided volume growth. The company's focus on the bakery products business combined with its marketing strengths seem largely responsible for this drive is sales. The company repackaged and relaunched most of its biscuit brands in FY04. Apart from this, Britannia continued to focus on ways to bring down its costs. VRS and lower cost of debt has helped the company improve profitability.

    Operating margins: The hiving off of properties has led to lower depreciation provisioning. The company also received an order in favour of closure of its Mumbai plant. The matter though is still sub-judice. After the break away from the dairy business, the company's cash flows seemed to have improved significantly. The company reported a strong 97% growth in other income during the quarter, led by sale of the company's investments (to the tune of Rs 195 m). However, sale of investments in a continuous exercise at Britannia. The important thing is that the operating profit has gone up by 21% during the quarter and 15% during the first half.

    Cost break-up
    as a % of net sales 2QFY04 2QFY05 1HFY04 1HFY05
    Total Cost of goods 52.4% 56.5% 51.8% 56.8%
    Staff Cost 5.6% 4.5% 5.9% 4.6%
    Other Expenditure 29.9% 25.9% 29.8% 26.0%
    Total expenditure 87.9% 87.0% 87.5% 87.5%

    Net profit: As part of its buyback programme, Britannia reduced its shares outstanding by about 0.8 m shares during FY04. The company has further bought back 1.22 m shares as part of its June 17 - August 7, 2004 buyback programme. The buyback has further reduced the company's shares outstanding to 23.9 m shares. This of course, has pepped up the company's earning per share. The company has reduced its number of shares outstanding for the fourth year in a row, indicating the management's desire to up its stake in the company (promoter joint stake up, to nearly 51%).

    Over the last five quarters
      2QFY04 3QFY04 4QFY04 1QFY05 2QFY05
    Sales growth (YoY) 5.1% 8.6% 14.5% 17.2% 12.6%
    OPM (%) 12.1% 12.8% 9.5% 12.0% 13.0%
    Net profit growth (YoY) 26.0% 6.8% 4.1% 109.8% 47.0%

    What to expect?
    At Rs 650 the stock trades at a P/E of 7.2 times annualised 1HFY05 earnings, market cap. to sales of 0.9x. The valuations are at the lower end of the FMCG spectrum. The management seems to have put the loss of Mr. Sunil Alagh behind it and is now totally focused on enhancing growth and profitability. However, the company's one product category focus is a concern, as competition is on the rise from the likes of Parle and ITC.

     

     

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