Britannia's strong show set to continue

Strong margin expansion, surge in net profit (up twofold) and decent volume growth outlined Britannia's results for the September quarter. The company raced ahead of Street expectations on all fronts, leading to an upward revision of earnings and the target price by analysts.

"We raised our FY14 and FY15 earnings estimates by seven per cent each, given the margin beat, and our target price to Rs 1,025 (from Rs 870 earlier). Britannia remains one of our top mid-cap picks, with an improving product mix driving topline/margin growth and reasonable valuations (27.8 times FY14 estimated earnings) offering a sizable upside,” says Gaurang Kakkad, FMCG analyst at Religare Capital Markets.

Analysts at Prabhudhas Lilladher have also, since the results, raised their EPS (earnings per share) estimates (by six to 12 per cent) and the target price (to Rs 1,050) for the stock.

The stock surged to a high of Rs 949 in Tuesday's trade before closing 3.7 per cent higher at Rs 908, as against a one per cent fall in the Sensex.

Of 16 analysts polled by Bloomberg since October, 13 have a ‘Buy’ rating on Britannia, two have a ‘Neutral’ view and one a ‘Sell’ While their average target price of Rs 943 indicates little upside, if one factors in the earnings upgrades after the results and the average target price of six analysts post results (of Rs 999), there is an upside potential of about 10 per cent. However, investors should wait for a better entry point, given the run-up in the stock since September.

For the quarter gone by, Britannia's standalone sales stood at Rs 1,595 crore, up 13.7 per cent over a year, driven by price increases and product mix improvements. The volume growth is estimated at four to six per cent and was in line with the trend witnessed over the past two to three quarters. The Ebitda (earnings before interest, taxes, depreciation and amorisation) margin expanded sharply by 430 basis points (bps) year-on-year to 8.6 per cent. In the past three quarters, Britannia has seen strong traction in the Ebitda margin, which was 7.8 per cent and 8.3 per cent in the March and June quarters, respectively.

This was due to a 380 bps surge in gross margins to 39.4 per cent and significant cost savings. Total expenses (as a percentage of net sales) fell 435 bps to 92.35 per cent in the September quarter, fuelled by a 218 bps fall in raw material costs to 53.1 per cent (as a proportion of sales). Advertisement/sales promotion expenses fell 16 bps to 8.2 per cent, while other expenses fell 37 bps to 10.9 per cent of sales. The company’s focus on high-margin premium products and cost rationalisation efforts seem to be paying well. The net profit was Rs 96 crore; it grew 109.8 per cent over a year, despite a higher tax rate (up 308 bps) of 32 per cent.

The margin expansion is significant, given the slowing in the biscuits segment. In the June quarter, the biscuits’ category growth was a third of that witnessed in the June 2012 quarter. Thus, a focus on profitability, rising share of the non-biscuits segment and product innovations will enable Britannia to minimise the slowdown’s impact, believe analysts.

“As the industry focuses less on price and more on quality, in line with the shift in consumer preferences, we forecast 15 per cent revenue CAGR (compounded annual growth rate) and 21 per cent net profit CAGR over FY14-16. Britannia's strong balance sheet and impressive cash conversion cycle are additional positives,” writes Sunita Sachdev, consumer analyst at UBS Securities, in a recent report. She has a ‘Buy’ rating on the stock, with a target price of Rs 1,050.

Britannia is stepping up its rural presence and expanding the food and snacks portfolio to drive long-term growth.

Notably, rural markets have remained fairly stable as compared to urban ones during this slowdown and, hence, the strategy of increasing the rural penetration should help. Improved financial health of its dairy and international businesses will aid growth. Also, monetisation of its land assets at Chennai and Bangalore should enhance the cash balance. Sharp volatility in key input prices and further slowing in domestic demand remain key downside risks.