 "Britannia: Growing at a healthy pace in a weak market")
Britannia reported largely in-line operational results for the December 2014 quarter. The company’s standalone Ebitda margin came in line with expectations at 10.6 per cent aided by lower input costs (down 182 basis points to 50.7 per cent of sales) as well as advertising and promotional costs (down 55 basis points to 7.6 per cent).
Even as standalone net sales, which grew 13.6 per cent to Rs 1,834 crore, were slightly lower than Bloomberg consensus estimates of Rs 1,854 crore, net profit at Rs 121 crore (up 25.1 per cent) was also below estimates of Rs 134 crore but mainly due to a one-time payment towards Voluntary Retirement Scheme (VRS) of Rs 12 crore.
The Ebitda margin expansion of 138 basis points along with a 3.6 times jump in other income to Rs 21 crore aided net profit and more than offset the impact of a higher tax rate (up 180 basis points to 31.8 per cent) and depreciation (up 59.3 per cent to Rs 26 crore) in the quarter. Profitable growth in Britannia's subsidiaries, exports and dairy businesses fuelled a strong show in the consolidated bottom line (see table), which was up 36.5 per cent.
Revenue growth was fuelled by a robust 9 per cent increase in volumes in the quarter, which is commendable given the slowdown in the industry. Britannia is amongst the few FMCG companies which have been able to keep domestic volume growth in a narrow band of 7-9 per cent. This is due to the company’s renewed focus on innovation and higher exposure to the premium biscuits segment.
Varun Berry, Managing Director, Britannia, said, “We have delivered consistent results over the past eight quarters due to our focused approach. Our subsidiaries, dairy and export businesses have also been accretive to the bottom line in this quarter. The overall environment is not very positive and the biscuits industry volumes have grown just 1.5 in the quarter.”
On the margin front, premiumisation coupled with overall cost savings and lower raw material costs led to the Ebitda margin expansion in the quarter. Some of the gains, however, were passed on to customers.
“We have ploughed back some of the margin gains and are giving more value to consumers, especially in the Good Day and Marie brands,” adds Berry. As the company looks to pass on part of the gains from benign input costs to the end consumers, it should help sustain a higher off-take in sluggish market.
The other area that helped margins was ad spends. Notably, even though ad spends (as per cent of sales) came off slightly in the quarter, the management clarified that they have cut spends in unproductive areas and invested the same in brand-building exercises.
Going forward, analysts expect margin and volume gains to continue. Analysts at Emkay Global believe Britannia's operating margins are set to expand 150-200 basis points over FY17 on the back of premiumisation, gains from lower input costs and focus on overheads control. They have a Buy rating on the stock with a target price of Rs 2,020.
And this margin gain will come despite the company having to invest in advertising, promotion and new launches to compete effectively with aggressive peers such as ITC and Mondelez, amongst others.
Britannia launched two new cookies namely Britannia Nutri Choice Heavens in the super premium cookies and Britannia Good Day Choco Chunkies in the premium cookies segment in the quarter gone by. While it is too early to call these launches a success, management seems to be satisfied with the response to these products in the market. Another product is expected to be launched in the coming months.
The flip side is that even as most brokerages polled by Bloomberg in 2015 so far have a Buy rating on Britannia, their average target price stands at Rs 1,846, indicating a downside of 4 per cent from current levels. At current valuations of 40.8 times FY16 estimated earnings, the scope for significant upsides appears capped.
Even as standalone net sales, which grew 13.6 per cent to Rs 1,834 crore, were slightly lower than Bloomberg consensus estimates of Rs 1,854 crore, net profit at Rs 121 crore (up 25.1 per cent) was also below estimates of Rs 134 crore but mainly due to a one-time payment towards Voluntary Retirement Scheme (VRS) of Rs 12 crore.
The Ebitda margin expansion of 138 basis points along with a 3.6 times jump in other income to Rs 21 crore aided net profit and more than offset the impact of a higher tax rate (up 180 basis points to 31.8 per cent) and depreciation (up 59.3 per cent to Rs 26 crore) in the quarter. Profitable growth in Britannia's subsidiaries, exports and dairy businesses fuelled a strong show in the consolidated bottom line (see table), which was up 36.5 per cent.
Revenue growth was fuelled by a robust 9 per cent increase in volumes in the quarter, which is commendable given the slowdown in the industry. Britannia is amongst the few FMCG companies which have been able to keep domestic volume growth in a narrow band of 7-9 per cent. This is due to the company’s renewed focus on innovation and higher exposure to the premium biscuits segment.
Varun Berry, Managing Director, Britannia, said, “We have delivered consistent results over the past eight quarters due to our focused approach. Our subsidiaries, dairy and export businesses have also been accretive to the bottom line in this quarter. The overall environment is not very positive and the biscuits industry volumes have grown just 1.5 in the quarter.”
On the margin front, premiumisation coupled with overall cost savings and lower raw material costs led to the Ebitda margin expansion in the quarter. Some of the gains, however, were passed on to customers.
“We have ploughed back some of the margin gains and are giving more value to consumers, especially in the Good Day and Marie brands,” adds Berry. As the company looks to pass on part of the gains from benign input costs to the end consumers, it should help sustain a higher off-take in sluggish market.
The other area that helped margins was ad spends. Notably, even though ad spends (as per cent of sales) came off slightly in the quarter, the management clarified that they have cut spends in unproductive areas and invested the same in brand-building exercises.
Going forward, analysts expect margin and volume gains to continue. Analysts at Emkay Global believe Britannia's operating margins are set to expand 150-200 basis points over FY17 on the back of premiumisation, gains from lower input costs and focus on overheads control. They have a Buy rating on the stock with a target price of Rs 2,020.
And this margin gain will come despite the company having to invest in advertising, promotion and new launches to compete effectively with aggressive peers such as ITC and Mondelez, amongst others.
Britannia launched two new cookies namely Britannia Nutri Choice Heavens in the super premium cookies and Britannia Good Day Choco Chunkies in the premium cookies segment in the quarter gone by. While it is too early to call these launches a success, management seems to be satisfied with the response to these products in the market. Another product is expected to be launched in the coming months.
The flip side is that even as most brokerages polled by Bloomberg in 2015 so far have a Buy rating on Britannia, their average target price stands at Rs 1,846, indicating a downside of 4 per cent from current levels. At current valuations of 40.8 times FY16 estimated earnings, the scope for significant upsides appears capped.