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Britannia: The 'tiger' roars! - Views on News from Equitymaster
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Britannia: The 'tiger' roars!
Oct 28, 2005

Introduction to results
Bakery products major, Britannia, announced mixed results for the September quarter. While topline growth has been enthusing, margin expansion has helped the company improve its operating profitability during the quarter. However, the effect of a large other income (sale of investments of Rs 36 m in this quarter as compared to 195 m in 2QFY05) has adversely affected net profits during the quarter under consideration. Excluding this effect, net profits have actually outpaced topline growth and grew by 39% YoY on a YoY basis during 2QFY06.

(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net Sales 4,271 4,630 8.4% 8,218 8,684 5.7%
Expenditure 3,716 3,985 7.2% 7,190 7,459 3.7%
Operating Profit (EBDIT) 555 645 16.2% 1,028 1,225 19.2%
Operating Profit Margin (%) 13.0% 13.9%   12.5% 14.1%  
Other Income 227 54 -76.2% 638 78 -87.8%
Interest 6 9 50.0% 11 17 54.5%
Depreciation 48 50 4.2% 96 103 7.3%
Profit before Tax 728 640 -12.1% 1,559 1,183 -24.1%
Tax 210 201 -4.3% 405 387 -4.4%
Extraordinary items (33) (1) -97.0% (71) 33  
Profit after Tax 485 438 -9.7% 1,083 829 -23.5%
Net profit margin (%) 11.4% 9.5%   13.2% 9.5%  
Effective tax rate (%) 28.8% 31.4%   26.0% 32.7%  
No. of Shares (m) 25.1 23.9   25.1 23.9  
Diluted earnings per share* (x) 81.2 73.3   90.6 69.4  
P/E ratio (x)         17.3  
(* annualised)            

What is company’s business?
Britannia, promoted by Danone and Nusli Wadia (joint stake of 51%), 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 93% of the company's revenues.

What has driven performance in 2QFY06?
Revenue show enthusing: Revenue growth during the quarter was the highest in the past four quarters, which has been aided by the company’s aggressive stance of launching new products. This quarters topline performance has been encouraging considering the intensifying competition in the industry. It must be noted that new competitors, both domestic and multi-national, are opening shop here. Britannia's main competitor and market leader, Parle, is also becoming aggressive in order to protect its market share. Further, smaller players, as well as ITC, are giving Britannia a run for its money.

Lower input costs aid margin:As can be seen from the table below, raw material prices have softened during the quarter resulting in lower input costs as percent of sales for the company. Also, owing to VRS and restructuring initiatives in past years, staff costs have declined further. All these factors resulted in margin expansion of 90 basis points during the quarter, which in turn has improved profitability at the operating level (up 16% YoY).

as a % of net sales 2QFY05 2QFY06 1HFY05 1HFY06
Total Cost of goods 56.5% 55.5% 56.8% 55.4%
Staff Cost 4.5% 3.7% 4.6% 4.1%
Advertisement & promotion 5.3% N. A. N. A. N. A.
Other Expenditure 20.6% 26.9% 26.0% 26.4%
Total Expenditure 87.0% 86.1% 87.5% 85.9%

Other income creates havoc: Despite the strong revenue growth, bottomline dipped by 10% YoY owing to a 76% YoY fall in other income. The latter was mainly due to a high base in 2QFY05, arising from sale of investments of Rs 195 m as compared to mere Rs 36 m in 2QFY06. Excluding this anomaly, bottomline growth has actually outpaced topline by a huge margin.

Over the past few quarters…
  2QFY05 3QFY05 4QFY05 1QFY06 2QFY06
Sales growth (YoY) 12.6% 6.1% 5.6% 2.7% 8.4%
OPM (%) 13.0% 13.5% 7.6% 14.3% 13.9%
Net profit growth (YoY) 47.0% 10.8% -64.7% -34.8% -9.7%

What to expect?
At the current price of Rs 1,200, the stock trades at a price to earnings multiple of 15.2 times our estimated FY07 earnings, and market cap to sales of 1.5x, which is at the higher side of our valuation spectrum. Although we are enthused by the overall company’s performance on the cost cutting and supply chain initiatives, which has paid off and reflects in the margins, competition is likely to take a toll on the revenue front going forward. In our view, profit growth will continue to be robust as the company shifts a major chunk of its manufacturing to its new facility at Uttaranchal, a tax-free zone, the benefits of which are yet to reflect.

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