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Britannia: Margin improvement continues - Views on News from Equitymaster
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Britannia: Margin improvement continues
Nov 21, 2013

Britannia Industries Limited declared its results for the second quarter of financial year 2013-14 (2QFY14). The company has reported 13% YoY growth in sales and a 66% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Britannia posted a 13% YoY revenue growth in 2QFY14. For 1HFY14, topline grew by 13.5%.
  • The operating margin expanded by 3.3% YoY backed by lower raw material-to-sales ratio. During 1HFY14, operating margin appreciated by 3.1% YoY.
  • However, net margin increased by a mere 1.8% YoY due to higher tax outgo and decline in other income earned. For 1HFY14, the net margin grew by 2.1% YoY.

Consolidated Financial snapshot
(Rs m) 2QFY13 2QFY14 % change 1HFY13 1HFY14 % change
Total income 15,593 17,558 12.6% 29133 33072.6 13.5%
Expenditure 14,671 15,949 8.7% 27416 30084 9.7%
Operating profit (EBITDA) 922 1,609 74.5% 1718 2989 74.0%
EBITDA margin (%) 5.9% 9.2%   5.9% 9.0%  
Other income 124 41 -66.9% 232 180 -22.4%
Interest 87 10 -88.1% 191 53 -72.6%
Depreciation 182 211 16.0% 348 406 16.9%
Profit before tax 776 1,429 84.0% 1,411 2,710 92.1%
Exceptional items - -   - -  
Tax 186 451 142.5% 356.3 837.2 135.0%
Profit after tax/(loss) 590 977 65.6% 1,055 1,873 77.6%
Share of profit/(loss) of associates 0 1   0 2  
Minority interest 1 -   1 0  
Net profit/ (loss) 589 976 65.7% 1,054 1,871 77.6%
Net profit margin (%) 3.8% 5.6%   3.6% 5.7%  
No. of shares (m)         120  
Diluted earnings per share (Rs)*         28.5  
Price to earnings ratio (x)*         31.1  
* On a 12-month trailing basis

What has driven growth in 2QFY14?
  • Britannia registered a 13% YoY increase in revenues.

    Cost break-up
    As a % of net sales 2QFY13 2QFY14 Change in basis points
    Total cost of goods 63.5% 59.9% -363.1
    Employee costs 3.7% 3.8% 8.5
    Conversion and other charges 6.8% 6.9% 13.3
    Advertisement costs 8.5% 8.8% 32.4
    Other expenditure 11.7% 11.5% -16.3
  • The company continued to benefit from benign commodity prices and better realizations from premium offerings. Resultantly, the raw material to sales ratio fell by 3.6% YoY during the quarter. This has more than offset incremental ad spends and conversion charges (all as a proportion of sales). The operating margin expanded by 3.3% YoY during the quarter.

  • Net profits grew by a relatively slower 66% YoY on a 74.5% YoY increase in operating profit due to a steep rise in tax outgo. The tax incidence increased to 31.6% in 2QFY14 from 24% in 2QFY13. Even the other income earned during the quarter was down by 67% YoY during the quarter.
What to expect?
Britannia's profitability is on a sharp upswing backed by improved product-mix and waning commodity inflation. But rising competition and high ad-spends are headwinds that can impact margins in future.

At the price of Rs. 887, the stock is trading at 22 times our estimated FY16 earnings. At current valuations, the stock remains overvalued and therefore we re-iterate a SELL on the stock.

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