Britannia surprises with volumes

Even as it is expected to post healthy sales growth, profit could come under pressure due to higher competition

Lower ad spends, higher other income and fall in tax rate boosted Britannia Industries (Britannia)' profitability in the June 2014 quarter, helping profits come ahead of Street expectations. While the company posted a 25 per cent increase in net profit at Rs 108 crore, consensus estimates according to Bloomberg had pegged it at Rs 101 crore for the quarter. On the top line front, although stand-alone net sales at Rs 1,618 crore was large in line with estimates of Rs 1,621 crore, the growth, 15.3 per cent year-on-year, is the highest since the December 2012 quarter. More importantly, it was driven by double-digit growth in volumes, which is a big positive surprise given that the category volume growth is in low single-digits.

This also reverses Britannia's recent trends. Its biscuits volume growth had come off from high teens to about 3-4 per cent in recent quarters.  A small part of the top line increase thus was price led. However, Britannia's underperformance to ITC in the cream biscuit segment has been a key concern though, say analysts. Krishnan Sambamoorthy, analyst at Nirmal Bang Institutional Equities, says: "Over the medium term, Britannia has lost market share to ITC, especially in the premium cream biscuits category. Britannia has not spent more than 0.1 per cent on R&D on a consolidated basis in any of the past 10 years. That needs to change going forward."

Britannia's Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin expanded 61 basis points to 9.5 per cent in the quarter. Although the Street was expecting margins to increase by about 50 basis points, the margin gains have come at the cost of lower ad spends and might not be sustainable, according to analysts. The management, too, expects the ad spends to go up from now. Raw material costs as a per cent of sales has risen by 334 basis points to 50.7 per cent. The company has managed to offset this pressure by increasing prices and by lower advertising and sales promotion (ASP) spends (down 175 basis points to 7.3 per cent of sales) and employee costs (down 74 basis points to 2.7 per cent). Other expenses, too, declined 25 basis points to 11 per cent in the quarter.

"Britannia's consolidated ad spends as a percentage of sales are lowest in the past nine quarters. We believe the company will have to increase ad spends going forward to maintain volumes," adds Sambamoorthy. Increasing competition in the industry is the key reason for such expectations.

What also boosted the net profit is other income. Britannia's other income jumped 51.7 per cent to Rs 20 crore, which was due to sale of shares. Such a trend is not sustainable. Tax rate, too, came in lower at 28.2 per cent (down 189 basis points) and boosted the bottom line.

The company's outlook remains healthy. Analysts believe the pickup in economic growth will push discretionary spends higher, while the company's specific measures will drive sales growth further.

"We see Britannia as a proxy for India's snack consumption market with healthy medium-term growth catalysts. We expect innovation and premiumisation to drive near-term growth, which underpins our 16 per cent revenue CAGR (compounded annual growth rate) forecast over FY14-16," says Balaji Prasad, analyst, Barclays.

Out of the 12 analysts polled by Bloomberg since July 2014, eleven have a 'buy' and one a 'sell' rating on the stock. However, their average target price of Rs 1,137 indicates the stock is fairly valued for now. It trades at 29.4 times FY15 estimated earnings versus the historical average one-year forward price-to-earnings ratio of about 25 times.

Higher competition from ITC and other players is a key downside risk though. Britannia's subsidiary business has been under pressure due to high milk prices and the trend is likely to continue in the near future.