More good days ahead for Britannia

Focus on premiumisation, new launches to aid future growth

Aided by benign input costs and lower other expenses, Britannia Industries posted strong operational performance in the June quarter. Operating profit margins got a 484 basis points (bps) boost year-on-year (y-o-y) to 14.4 per cent. In addition to input costs, which, as a percentage of sales, were down 334 bps to 50.2 per cent, flattish advertising spends and better product mix helped improve profitability. Further, other expenses were down 111 bps to 10.6 per cent, aided by lower freight and fuel costs.

Margin gains could have been higher but for the fact that the company passed on part of input cost benefits to end-consumers. Positively, the margin expansion story is far from over, believe analysts.

The efforts to improve its share of premium products will continue to drive margin gains over the next few quarters. Not surprisingly, the scrip rallied up to 1.3 per cent to Rs 3,177.4 on Tuesday when the S&P BSE Sensex fell 0.4 per cent. The stock has rallied by 186 per cent in the past year and outpaced both the Sensex and peers. The stock now trades at handsome valuations of 48 times FY16 estimated earnings. Given the strong show in the June quarter and healthy growth prospects, analysts could raise their full-year earnings and target price estimates for the company. This will act as a key support to Britannia's valuations going forward.

For the quarter, Britannia's consolidated net profit grew 66.9 per cent y-o-y to Rs 190 crore and was 20 per cent ahead of Bloomberg consensus estimate of Rs 158 crore. Strong operational performance offset the impact of lower other income and higher tax rate in the quarter. Consolidated net sales grew 13 per cent y-o-y to Rs 2,003 crore and was broadly in line with Bloomberg consensus estimate of Rs 2,019 crore.

Britannia will benefit from revival in urban demand. The company's focus on expanding distribution and launching new products in the premium category will drive future revenues as well as profitability. Britannia's dairy products are witnessing good growth, although intensifying competition in this category will be a key monitorable.

The company plans to enter new geographies to boost the growth of its international business. Apart from biscuits, Britannia is focusing on growing its cakes and rusk segments. Any fall in volume growth or a sudden rise in input costs could be the key downside risks for the stock.