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Britannia: Sales growth at expense of profits - Views on News from Equitymaster

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Britannia: Sales growth at expense of profits
Nov 11, 2010

Britannia Industries Limited declared its 2QFY11 results. The company has reported 27% YoY growth in sales and a fall of 46% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Top line for Britannia during 2QFY11 grew by 27% YoY.
  • Operating (EBITDA) margins for the company fell by 3.9% YoY to 5.1% during the quarter. This lacklustre performance is due to higher raw material costs as a percentage of sales.
  • Net profit fell by 46% YoY during the quarter.
  • For 1HFY11, the bottom line of the company fell by 39% YoY while net profit margins declined by 3.5% YoY to stand at 3.2%. This performance comes on the back of fall in operating income, higher interest costs and rise in effective tax rates but was partly offset by a lower exceptional loss. When adjusting for exceptional loss, the company’s bottom line has fallen by 45% YoY.


Standalone Financial snapshot
(Rs m) 2QFY10 2QFY11 % change 1HFY10 1HFY11 % change
Net Sales 8,627 10,975 27.2% 15,966 20,116 26.0%
Expenditure 7,847 10,419 32.8% 14,563 19,104 31.2%
Operating profit (EBDITA) 780 557 -28.7% 1,403 1,013 -27.8%
EBDITA margin (%) 9.0% 5.1%   8.8% 5.0%  
Other income 84 97 15.9% 213 278 30.6%
Interest 9 97 1002.3% 17 191 1023.5%
Depreciation 94 103 10.6% 185 203 10.0%
Profit before tax 762 453 -40.5% 1,414 896 -36.6%
Exceptional items (70) (13)   (140) (14)  
Tax 101 122 20.2% 210 235 11.9%
Profit after tax/(loss) 591 319 -46.0% 1,064 647 -39.2%
Net profit margin (%) 6.8% 2.9%   6.7% 3.2%  
No. of shares (m) 24 119   24 119  
Diluted earnings per share (Rs)*         6.3  
Price to earnings ratio (x)*         69.9  
* On a 12-month trailing basis

What has driven growth in 2QFY11?
  • As noted, the sales of the company grew by 27% YoY. This comes on the back of a strong volume growth.

    Cost break-up
    As a % of net sales 2QFY10 2QFY11 1HFY10 1HFY11
    Total cost of goods 60.1% 65.7% 60.3% 65.5%
    Employee costs 3.5% 2.7% 3.1% 2.7%
    Conversion and other charges 8.5% 8.3% 8.5% 8.2%
    Advertisement costs 8.3% 7.0% 7.7% 7.2%
    Other expenditure 11.2% 11.2% 11.6% 11.3%

  • Operating income for the company fell by 29% YoY. This was on the back of rise in key commodity prices. Raw material costs increased by 39% YoY as a result of high food inflation. However, fall in employee and advertisement costs (both as a percentage of sales) helped support operating income. Employee costs fell by 2% YoY while advertisement costs increased by 9% YoY.

  • Net margins for Britannia fell by 3.9% YoY to stand at 2.9%. This performance comes on the back of fall in operating income, rise in interest costs and higher effective tax rate and was partly offset by higher other income and lower exceptional loss during the quarter. When adjusted for exceptional loss, net profit is seen to fall by 50% YoY.

What to expect?
At the price of Rs 438, the stock is trading at 19.9 times our estimated FY13 earnings (RPro subscribers click here. The company is suffering from rising food inflation and increase in competition. While the prices of raw material are expected to soften, the competitive intensity is a cause for concern. Moreover, the price of the stock has run up recently. For this reason we are cautious on the company.

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