Britannia (Q3 FY12)

CMP Rs527, Target price Rs544, Upside 3.2%

• Britannia registered 15.4% yoy revenue growth at Rs12.5bn during Q3 FY12 – marginally below our expectations of Rs12.8bn. The revenue growth has been lower compared to 18-21% witnessed in past two quarters. The volume growth is likely to have been below 10%. We believe this was mainly due to an unfavorable sales mix (lower proportion of high-end products, increase in sales of low price point products) and lower consumer offtake.
  
• Britannia surprised us positively on the operating margins front. Operating margins expanded by 140bps to 6.5% fuelled by ~410bps drop in raw material cost. Decline in key input prices - wheat and sugar helped reduce input cost burden. The margin expansion could have been even better but for the 160bps increase in overhead cost. Net profit for the quarter surpassed our expectations by recording strong 44.8% yoy growth at Rs541mn driven by improved operating efficiency.

• Britannia is the largest player in the fast growing biscuits category with a market share of over 30% with a strong portfolio of brands like – Tiger, 50:50, MarieGold, Good Day, Milk Bikis, Treat and NutriChoice. However, due to rising competition, the company is facing pressure in both discount and premium segments. Firm input prices and requirement of higher adspend due to increased competitive activity are keeping operating margins under check. We don’t expect operating margins to revert to FY09 levels of 8.4% over the next 2-3 years. At the current market price of Rs527, the stock is trading at 24.2x FY13E EPS of Rs21.8. We maintain Market Performer rating on the stock with a 9-month price target of Rs544.