Britannia: Investors lick gains

Focus on premium categories and price rises pushed up margins leading to better-than-expected numbers

Lower input costs, strong margin expansion and a fall in interest costs boosted Britannia's net profit for the June quarter. With sales of Rs 1,403 crore (up 14.9 per cent year-on-year) and net profit of Rs 86 crore (up 98.6 per cent) on a standalone basis, Britannia beat the Street estimates on all fronts. Though sales growth was marginally ahead of expectations, the net profit figure was 54 per cent ahead of Street estimates.

The Britannia scrip, which has outperformed the Sensex in two-three months, touched a new 52-week high of Rs 774.80 on Monday. Strong results sent the stock spiralling, which surged 10 per cent in Monday's session before ending the day at Rs 732, up 5.43 per cent. Most analysts remain positive on the company and expect higher contribution from premium products.

Of the eight analysts polled by Bloomberg since July, six have a 'buy' recommendation on the scrip; one has 'sell' and the other 'neutral'. The average target price is Rs 695. However, most analysts are likely to raise their earnings estimates for FY14 and FY15 and, thereby, target prices as well. A few have raised it closer to Rs 850-860. However, at 29 times FY14 estimated earnings, the valuations are at a 34 per cent premium to the stock's historical average one-year forward price/earnings ratio of 22 times. Also, given Monday's rise, investors could look at buying on dips.

Britannia derives 85 per cent of its consolidated revenues from biscuits, and has strong brands in most categories. The rest comes from cakes, bread, rusks and dairy. In the June quarter, consolidated sales were up 14 per cent at Rs 1,540 crore and net profit was up 93 per cent and Rs 89.5 crore.

The company has many strong brands, including Tiger (glucose biscuits), Treat (cream biscuits), 50-50 (crackers), Good Day (premium cookies and the company's highest selling brand) and NutriChoice (premium high-fibre biscuits). Higher focus on premium categories helped. Analysts say this strategy would drive topline and profits. Other high-margin products such as cake, bread and rusk have grown 28 per cent over FY08-FY13 and now form 15 per cent of revenues.

"Britannia has recently forayed into breakfast cereals, milk and premium biscuits. We believe this rejig in the product portfolio offers significant up-trading benefits. Also, with increased per capita consumption and penetration, the company would continue to grow at a pace faster than its historical growth", says V Srinivasan, fast-moving consumer goods (FMCG) analyst at Angel Broking. Analysts expect it to clock five-six per cent volume growth this financial year, aided by brand investments and portfolio expansion.

For the June quarter, the company's volume growth is estimated at five per cent, which, with price rises (taken in second half of FY13) and better product mix boosted revenue growth. On the other hand, prices of some raw materials have also been benign to stable compared with the year-ago period. Thus, raw material cost as a per cent of sales fell 509 basis points to 47.4 per cent. Along with lower other expenses (down 110 basis points to 11.2 per cent), these fuelled margin expansion (up 332 basis points) and net profit.

Vinita Bali, managing director, Britannia, said, "The expansion in margin is due to an improvement in the product mix and higher price realisation, with an emphasis on cost management. The growth momentum we saw in the second half of last year, continued".

Lower interest costs (down 65 per cent to Rs 3 crore) and 31 per cent rise in other income (to Rs 14 crore) provided further impetus to the bottom line. Guarang Kakkad, vice-president, institutional research, Religare Capital Markets, says, "They (Britannia) have repaid non-convertible debentures of Rs 400 crore, which has led to lower interest costs. Interest costs are likely to remain at lower levels."

Notably, these positives have more than offset the pressure arising from higher advertisement and promotional spends (up 94 basis points to nine per cent of sales) and higher tax rate (up 275 basis points to 30.9 per cent).

Kakkad says, "Britannia has seen strong gross margin expansion and it has invested part of these gains in brand-building through increased ad spends. We believe the ad spends will continue to be between eight per cent and nine per cent as it chases better volume growth."