Britannia: At the crossroads - Views on News from Equitymaster

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Britannia: At the crossroads

Dec 7, 2001

The Britannia stock price has risen by 13% over the past one month. However, the stock has been range bound in the last three months. Infact, it is more or less at the same levels as witnessed six months ago. Where are the valuations headed?

(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Net Sales 3,519 3,796 7.9% 6,839 7,290 6.6%
Other Income 36 41 13.9% 49 53 8.2%
Expenditure 3,238 3,441 6.3% 6,295 6,604 4.9%
Operating Profit (EBDIT) 281 355 26.3% 544 686 26.1%
Operating Profit Margin (%) 8.0% 9.4%   8.0% 9.4%  
Interest 22 30 36.4% 41 66 61.0%
Depreciation 46 61 32.6% 92 114 23.9%
Profit before Tax 249 305 22.5% 460 559 21.5%
Extraordinary items 68 73 7.4% 61 62 1.6%
Tax 104 125 20.2% 173 206 19.1%
Profit after Tax/(Loss) 213 253 18.8% 348 415 19.3%
Net profit margin (%) 6.1% 6.7%   5.1% 5.7%  
No. of Shares 27.9 27.3   27.9 27.3  
Diluted Earnings per share* 31.2 37.1   25.5 30.4  
P/E Ratio   16.8     20.5  
*(annualised)            

Britannia has grown by nearly 7% in topline (YoY) during the first half of the current year. The net profit has grown by 19% during the same period. In light of the difficult market conditions, which the FMCG sector has been facing, the performance has been pretty reasonable. The company has managed to improve its operating margins by 140 basis points in 1HFY02. Going by all this, one would have expected the valuations to strengthen, but they have not. There may be a few reasons for this. The stock is already trading at a reasonable P/E of 21x annualised 1HFY02 earnings. The company is set to spend a sizeable amount of money on advertising in the coming months. The signing of Sachin Tendulkar as a brand ambassador is a pointer to this. Also, the company's interest burden has increased sizeably. With HLL also eyeing the bakery segment, concerns continue to mount.

Cost break-up
(Rs m) 2QFY01 2QFY02 Change
Raw material 1,857 2,049 10.3%
Staff 266 242 -9.0%
Others 1,115 1,150 3.1%
Total expenditure 3,238 3,441 6.3%

Another important reason for staid valuations is that the company has lost the dairy initiative to Amul and Nestle. From the first mover advantage it was supposed to gain, it has become an also ran. Nestle is continously adding new products to its dairy folio and Amul is not sitting idle either.

However, to counter this Britannia has recently entered into a joint venture with a a New Zealand based dairy company to market new dairy products. Also, though signing up Sachin is expensive, it may add the zing necessary to propel topline growth. Britannia's association with cricket sponsorship has always helped it. The Lagaan tie-up and schemes are aimed at adding to the volumes of its key brand 'Tiger', which was facing pressure earlier.

Another encouraging fact is that the company's second quarter was much better than the first quarter performance. If this continues, then the valuations are likely to get stronger. Over the longer term, Britannia is likely to continue as one of the key players in the FMCG sector.


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