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Britannia: Maintains margins - Views on News from Equitymaster

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Britannia: Maintains margins
Nov 15, 2011

Britannia Industries Limited declared its results for the second quarter of financial year 2011-12 (2QFY12). The company has reported 18% YoY growth in sales and a 18.8% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Standalone top line for Britannia during 2QFY12 grew by 18% YoY. The growth was driven by 10% growth in offtake and 7% rise due to a combination of mix and price hikes. During 1HFY12, turnover was up by 19.5% YoY.
  • Operating (EBITDA) margins were maintained at around 5% for 2QFY12 and 1HFY12 aided by tight control on raw material and other expenditure.
  • Backed by lower interest cost along with controlled depreciation expense and tax outgo, earnings in 1QFY12 grew by a faster 18.8% YoY. Net profit in 1HFY12 saw a brisk 23% YoY rise backed by 27% jump in other income.

Standalone Financial snapshot
(Rs m) 2QFY11 2QFY12 % change 1HFY11 1HFY12 % change
Total income 10,975 12,957 18.1% 20116 24032 19.5%
Expenditure 10,432 12,320 18.1% 19118 22877 19.7%
Operating profit (EBITDA) 544 637 17.2% 999 1155 15.7%
EBITDA margin (%) 5.0% 4.9%   5.0% 4.8%  
Other income 97 95 -2.2% 278 353 27.1%
Interest 97 97 -0.2% 191 190 -0.6%
Depreciation 103 116 11.7% 203 226 11.5%
Profit before tax 440 519 18.0% 882 1,092 23.8%
Exceptional items - -   - -  
Tax 122 141 16.0% 235.3 295.8 25.7%
Profit after tax/(loss) 319 378 18.8% 647 796 23.1%
Net profit margin (%) 2.9% 2.9%   3.2% 3.3%  
No. of shares (m)         119  
Diluted earnings per share (Rs)*         13.4  
Price to earnings ratio (x)*         35.7  
* On a trailing 12 months basis

What has driven growth in 2QFY11?
  • Britannia continued to reap benefits from robust demand for its bakery products as well price-hikes taken to counter inflation. The company posted an 18% YoY growth in turnover on a 10% rise in volumes. Around 7% of the topline growth was contributed by favourable product mix and higher price realisations.

    Cost break-up
    As a % of net sales 2QFY11 2QFY12 Change in basis points
    Total cost of goods 65.7% 64.9% -81.0
    Employee costs 2.8% 3.7% 93.0
    Conversion and other charges 8.3% 8.3% -5.5
    Advertisement costs 7.0% 7.8% 72.9
    Other expenditure 11.2% 10.4% -75.7

  • The company's margins remained in-tact during the quarter, thanks to strict control on raw material costs. As a result, the cost of goods to sales ratio dropped by 81 basis points during the quarter. Even the proportion of other expenditure in sales was down by 76 basis points. However, employee costs and adspends surged by 57% and 30%, respectively on a YoY basis offsetting cost savings. Resultantly, the operating margin was maintained at around 5%.

  • At 18.8%, the growth in earnings at the net level bettered the 17.2% rise in operating income. Marginal cut in interest cost coupled with controlled depreciation and tax outgo led to robust rise in PAT during the quarter.

What to expect?

At the price of Rs. 479, the stock is trading at 16 times our estimated FY14 earnings.

Intense competition, high commodity inflation and low margins are causes of concern for Britannia. But the company's substantial presence in the non-staple biscuit market comprising of biscuits other than Marie & Glucose, strong focus on the premium health segment, presence across price-points and diversification into value-added dairy segment bode well for its future growth.

However current valuations still remain stretched and we would advise investors to remain cautious.

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