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Premium biscuits serve up strong Britannia results

Its presence in the high growth potential dairy segment will be another engine of growth in the future

Sheetal Agarwal & Avishek Rakshit  |  Mumbai/Kolkata 

On a day when the broader markets inched up, Britannia Industries’ stock clocked 9.4 per cent gains to close at Rs 3,152 on Monday. Better-than-expected Ebitda margin and net profit, along with continued double-digit volume growth in the domestic market in the June quarter, were the key reasons for this surge. Ebitda is earnings before interest, taxes, depreciation, and amortisation. Given the performance and outlook, shareholders of Britannia can hope for good days to continue. Britannia, which sells its products under brands like Good Day, NutriChoice, Bourbon, Marie, reported an estimated 10 per cent growth in volumes, which were on expected lines. However, the margin was the surprising element. Britannia reported a 13.2 per cent jump in its consolidated net profit at Rs 219.1 crore for the quarter ended June. During April-June 2015-16, the company had posted a net profit of Rs 193.7 crore. Its net sales grew 8.2 per cent to Rs 2,162 crore during the quarter under review as against Rs 1,997.8 crore a year ago. According to Abneesh Roy, an analyst with Edelweiss, Britannia volume growth was slightly ahead of estimates and margin came ahead. "The second half of 2016-17 is expected to be better in growth, led by a revival of demand in rural areas driven by rural initiatives and good monsoon. Urban growth will be boosted on the back of wage increase of government employees," he said. Britannia's consolidated Ebitda margin stood at 14.8 per cent (up four basis points year-on-year) versus Bloomberg consensus estimate of 14.3 per cent. The Street was expecting some pressure on Ebitda margin, given the increase in input prices. Ebitda margin gains for the quarter were fuelled by savings on employee costs as well as other expenses (which includes advertising spends) even as input costs headed north in the quarter. However, the road ahead for Ebitda margin may not be as smooth as in the recent past. Competition would require continuous investments in advertising spends, branding, and innovation. Britannia's continued focus on premiumisation, along with expectations of recovery in rural demand, should provide some cushion to Ebitda margin going forward. Company raising prices Britannia has been raising prices two to seven per cent. "In four-five months, flour and sugar have seen severe inflation," managing director Varun Berry said. Interestingly, players focused on premium cookies and biscuits have done well in the June quarter. ITC's Sunfeast Mom's magic cookies, along with new launches such as Delishus Expressions, also aided this segment's performance in the quarter.

This assumes significance given the subdued performance of biscuits category in the quarter. Against this backdrop, Britannia, which is seeing increasing share of premium products in its revenue, appears well-placed. The company's plan to boost its distribution network to further raise its rural presence can be another catalyst for growth. Macro factors such as good monsoon and pay hike for government employees should support growth in the short to medium term. Though Britannia witnessed continued momentum in domestic markets, its international growth was hit by weak geopolitical situation in West Asia (or Middle East) and Africa, as well as volatile currencies. However, given the smaller size of its international business (seven per cent of consolidated revenues) the impact is not meaningful. The management remains confident of maintaining growth momentum and is re-staging its brands. The recent re-launch of Tiger brand of biscuits will aid growth in rural markets. Varun Berry, managing director, Britannia, says, "We continue to outpace the market with our go-to market strategy of creating a robust distribution network, with unrelenting focus on rural and our weak states. We intend to drive consumer offtake and strengthen our momentum through re-stage of our brands and plugging our product portfolio gaps going forward. Commodity prices have firmed up significantly over the last two quarters and we have initiated a combination of price increase and cost-efficiency measures to address this." The company's presence in the high-potential dairy segment will be another engine of growth in the future. The implementation of GST (goods and services tax) will be a minor negative initially for Britannia (and other organised companies) given that most of its products (biscuits, rusk, butter, cheese, ghee, cakes, etc) will attract higher tax rate. Currently, most of its products attract concessional excise rate. However, some of this pressure will be offset by supply chain efficiencies under GST, believe analysts. In the long run, there are bigger gains. The unorganised sector, which accounts for a third of the biscuits sector, and flies below the tax radar, will fall under the tax net once GST is implemented. This will provide a level-playing field to companies like Britannia. Last but not the least, stock valuations too are supporting. The Britannia stock, despite Monday's surge, trades at 38 times FY17 estimated earnings. Though not cheap, valuations are lower than that of other consumer stocks that are trading at 40 times plus price-to-earnings multiple.

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First Published: Mon, August 08 2016. 22:50 IST
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