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Britannia surprises with double-digit volume growth

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% increase in net profit to Rs 108 crore, consensus estimates as per Bloomberg had pegged it at Rs 101 crore for the quarter. On the topline front, though standalone net sales at Rs 1,618 crore was large in-line with estimates of Rs 1,621 crore, the growth — 15.3% year-on-year is the highest since 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% in recent quarters. A small part of the topline 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, FMCG analyst, 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% on R&D on a consolidated basis in any of the past 10 years. That needs to change going forward.”

Meanwhile, Britannia’s EBITDA margin expanded 61 basis points to 9.5% in the quarter. Though 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 may not be sustainable, believe analysts. The management, too, expects the ad spends to go up from now on. Raw material costs as a% of sales has risen by 334 basis points to 50.7%. 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% of sales) and employee costs (down 74 basis points to 2.7%). Other expenses, too, reduced 25 basis points to 11% 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% 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% (down 189 basis points) and boosted bottomline.

Going ahead, 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 driving 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% revenue CAGR forecast over FY14-16”, says Balaji Prasad, M.D., analyst at Barclays.

Out of the 12 analysts polled by Bloomberg since July 2014, 11 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 historical average one-year forward PE of about 25 times.

Higher competition from ITC and other players is a key downside risk though. Britannia’s subsidiary business (dairy business, Middle East, bread) has been under pressure due to high milk prices and the trend is likely to continue in the near future.

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