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Britannia: Mixed results! - Views on News from Equitymaster
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Britannia: Mixed results!
Oct 30, 2006

Performance summary
Indian biscuit major, announced mixed results for the second quarter of FY07 on Saturday. On a topline growth of 18.7%, the bottomline of the company has shrunk by 52% as compared to same quarter last year. This was largely a result of a significant contraction in operating margins to the tune of 870 basis points. The damage was even higher due to lower other income and higher interest costs.

(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Gross sales 4,708 5,809 23.4% 8,837 10,909 23.4%
less: excise duty 78 312 300.0% 153 584 281.7%
Net sales 4,630 5,497 18.7% 8,684 10,325 18.9%
Expenditure 3,985 5,209 30.7% 7,459 9,711 30.2%
Operating profit (EBDITA) 645 288 -55.3% 1,225 614 -49.9%
EBDITA margin (%) 13.9% 5.2%   14.1% 5.9%  
Other income 54 27 -50.0% 78 146 87.2%
Interest 9 16 77.8% 17 23 35.3%
Depreciation 50 64 28.0% 103 121 17.5%
Profit before tax 640 235 -63.3% 1,183 616 -47.9%
Extraordinary item (1) (26)   33 (49)  
Tax 201 -3 -101.5% 387 52 -86.6%
Profit after tax/(loss) 438 212 -51.6% 829 515 -37.9%
Net profit margin (%) 9.5% 3.9%   9.5% 5.0%  
No. of shares (m) 23.9 23.9   23.9 23.9  
Diluted earnings per share (Rs)*         48.1  
Price to earnings ratio (x)*         26.0  
* 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 2QFY07?
Growth momentum continues: The company’s topline performance is encouraging, considering the intense competition in the industry. Revenue growth of 18.7% during the quarter has been aided by the company’s aggressive stance of launching new products. The topline growth would have been higher but for a one-time adjustment made on the excise duty front (with effect from 4QFY06) in order to equate the reporting of excise duty relating to outsourced products in line with that of in-house manufactured products.

Margins under pressure: EBITDA margins for 2QFY07 shrunk by 870 basis points to 5.2%. The sharp erosion in operating margins for the quarter could be attributed to spike in raw materials cost, which as a percentage of sales, increased from 55.5% in FY05 to 64% in 2QFY07. The other expenses also saw a marginal rise in the quarter.

Consolidated cost break-up
As a % of net sales 2QFY06 2QFY07 1HFY06 1HFY07
Total Cost of goods 55.5% 64.0% 55.4% 63.5%
Staff Cost 3.7% 3.5% 4.1% 3.5%
Other Expenditure 26.9% 27.2% 26.4% 27.1%

Bottomline blues: Lower other income to the tune of 50% and higher financing costs resulted in a 51.6% YoY drop in the net profits for the quarter (including extraordinary item). The extraordinary item to the tune of Rs 26 m is relating to the compensation and amortisation of VRS cost. Excluding this, the net profits have declined by 45.8% YoY. The effective tax rate (calculated as a percentage of PBT) fell from 31% in 2QFY06 to -1% during the quarter, due to tax benefits available for the company on its Uttaranchal plant (100% tax benefit for a 10-year period).

What to expect?
At the current price of Rs 1,253, the stock is trading at a price to earnings multiple of 26 times its trailing 12 month earnings. The company continues to face problems on the margin front due to higher input costs. However on the volumes front, Britannia is performing well due to strong topline growth reported by the company in the last few quarters. Britannia also recently acquired 50% in daily Breads (manufacturer and retailer of high-end bakery products) which will act as a vehicle to supplement its core business with a fast growing high margin line of products. The company is also planning to expand its capacity to meet the growing demand, which is positive in our view. Thus, given the strong brand equity and strong demand potential for its products, we remain positive on the company from a long-term perspective.

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