• JUNE 6, 2002

Britannia: Can it maintain the strength?

Britannia has declared a strong 12% growth in fourth quarter sales fueled by higher sales in both bakery and dairy products. The company's pre tax profits growth of 16% was however, curtailed by a 1% drop in operating margins. Net profits crossed over Rs 2 bn for the full year due to non recurring profits of Rs 1.4 bn. Earnings for the full year before adjustments were higher by 13%.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Net Sales3,3353,74012.1%13,32514,5108.9%
Other Income10518576.2%16124451.6%
Operating Profit (EBDIT)297295-0.7%1,1511,36318.4%
Operating Profit Margin (%)8.9%7.9% 8.6%9.4%0.8%
Interest 374316.2%10114442.6%
Profit before Tax31736816.1%1,0221,22319.7%
Extraordinary items67 1,2371746.3%117 1,3681069.2%
Profit after Tax/(Loss)2001,390595.0%7052,032188.2%
Net profit margin (%)6.0%37.2% 5.3%14.0% 
No. of Shares 27.926.9 27.926.9 
Diluted Earnings per share*29.7206.7 26.275.5 
P/E Ratio 2.6  7.1 

Britannia added Rs 167 m to its bottomline by reversal of previous year's liabilities representing a write back of processing charges no longer required. During the year, the company transferred its dairy business to its joint venture company, Britannia New Zealand Foods. Britannia accumulated surplus of Rs 1.3 bn consequent to this transfer. Britannia's stake in this JV, as per its initial plans would be 49%. As a result its numbers are unlikely to get reflected in the consolidated accounts in the coming years.

The dairy market is becoming competitive after the aggressiveness of Nestle and Amul. However, the margins in the business are comparatively higher with good growth potential compared to bakery business. Dairy business contributes around 13% to its total revenues. Although, the division recorded loss of Rs 34 m in FY02, it is likely to turnaround in the current year. Stiff competition and increasing ad budgets could have triggered the company's move to hive off the business into separate company. However, since the company has already established a brand, the business could have generated good revenues in coming years notwithstanding competition. But as said earlier, revenues from dairy business will not be reflected in Britannia's numbers going forward if the company holds 49% stake.

Also, with HLL eyeing the bakery products markets and sluggish growth in biscuits segment, revenues from bakery division could come under pressure in the coming years. Britannia has however, managed to lock in good growth on the back of inovative schemes and tie-ups. Going forward, increasing advertisement expenses to boost volume growth could pressurize its operating margins.

Cost break-up
(Rs m)4QFY014QFY02ChangeFY01FY02Change
Raw material 1,681 2,232 32.8% 6,774 7,761 14.6%
Staff 252 271 7.5% 953 942 -1.2%
Others 1,105 942 -14.8% 4,447 4,444 -0.1%
Total expenditure 3,038 3,445 13.4% 12,174 13,147 8.0%

During the year, the company provided Rs 56 m on accounts of VRS, which helped it to reduce its staff cost. Raw material cost however, increased sharply by 33% in the fourth quarter. For the full year, the company managed to increase its operating margins by 80 basis points due to lower raw material cost for the first nine months of FY02.

At the current market price of Rs 538, Britannia is trading at a P/E of 22x (excluding extraordinary income) and market cap to sales ratio of less than 1x . The company concluded its buyback programme successfully. It bought the targeted 1 m shares at an average price of Rs 530. Britannia's staid buyback programme may have been one of the primary reasons for the stock's lacklustre performance. The company has decided to go for another buback at Rs 650 per share not exceeding Rs 920 m for acquiring 2.5 m shares. The new buback programme is over 20% premium to its current market price, which could generate some buying interest in the stock. However, in the long term concerns of depending on only bakery division, which has slow market growth rate could depress valuations.

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