)
Britannia Industries' scrip surged 18.4 per cent to make a new 52-week high of Rs 680 on Monday before closing 15.9 per cent higher at Rs 666. These gains came on the back of robust performance in the March 2013 quarter, which the company announced after market hours on Friday. Britannia's net profit came in about 50 per cent ahead of analysts' expectations, leading to earnings upgrades by most brokerages. Analysts have raised their earnings expectations for FY14 by 10-11 per cent.
"We upgrade earnings by 10 per cent each for FY14 and FY15, leading to a revised March 2014 target price of Rs 700 (from Rs 560 for the stock). Britannia remains one of our top mid-cap picks as an improving product mix drives topline and margin growth," says Varun Lohchab, FMCG analyst at Religare Capital markets.
While most analysts are bullish on the company, post Monday's run up the scrip appears fairly priced. At 26 times FY14 estimated earnings, the stock is quoting well over its historical average one-year forward price/earnings ratio of about 22 times. Most brokerages have a target price of Rs 700 on the stock, which suggests that upsides are limited at just five per cent from current levels.
Operationally, the company is likely to gain from higher cost efficiencies and premiumisation of its biscuits portfolio (Good Day, NutriChoice, Tiger, Treat and 50-50). Entry into new categories like cereals will also help drive growth. Analysts expect Britannia's volume growth in FY14 to improve to about five per cent from an estimated three to four per cent in the recently concluded quarter. Management also believes that volume growth will recover gradually over the next two quarters, driven by higher brand spends and portfolio expansion. The company's margins are also likely to expand due to higher proportion of premium products and easing input costs. Consequently, the company's earnings are expected to grow 20 per cent over the next two years. However, given that the company operates in a low-margin business, its Ebitda margins are exposed to any unprecedented sharp rise in key input (wheat, sugar, palm oil) prices. Also, so far, Britannia has done well despite rising competition from the likes of ITC, Parle, etc. Any aggression by incumbents could hurt its performance in the interim.
What is worrying some analysts is Monday's announcement of the change in top management wherein Vinita Bali, its managing director (MD), is now going to focus on international markets and new business development. During her tenure as chief executive officer and then MD, Britannia's sales rose 2.5 times and net profit increased 60 per cent.
Abneesh Roy, FMCG analyst at Edelweiss Securities, says "It is a very surprising move. International is very small, around 10-15 per cent of their overall revenues. Food is a very tough segment in international markets and it is very tough for anyone to scale it up. Thus, it is surprising that instead of the high-growth Indian market, Bali will focus on international markets."
Cost savings, higher other income boost Q4 profits
For the March 2013 quarter, Britannia outperformed Street expectations on the net profit front. While sales growth of 13.5 per cent to Rs 1,487 crore was in line with expectations, net profit jumped 66 per cent to Rs 88 crore and was miles ahead of analysts' estimates of about Rs 59 crore. While a 64 per cent growth in other income to Rs 37 crore aided growth in net profit, gains at the operating level were larger. Operating profit surged 70.6 per cent to Rs 116 crore.
Significant savings in employee costs (due to higher one-offs in the March 2012 quarter), other expenses and conversion costs drove Ebitda margin expansion of 260 basis points to 7.8 per cent. Sequentially too, margins jumped 245 basis points, a clear indication of operational gains.
Volume growth came in at three per cent, which was a function of strong brand investments and lower base of the March 2012 quarter. At a time when India Inc is facing tight liquidity, for the full year FY13, the company's net debt fell 58 per cent to Rs 80 crore and working capital cycle reduced from 15.5 days to 2.4 days due to better inventory management.
