Britannia (Q4 FY12)

CMP Rs528, Target Rs544, Upside 3.0% 

• Britannia’s Q4 FY12 revenues matched our expectations by recording 16.8% yoy growth at Rs13.1bn. The revenue growth has been lower compared to 18-21% witnessed in the past. The volume growth is likely to have been below 8%. 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. 
   
• Operating margins for the quarter declined by 40bps to 5.2% due to 240bps /95bps increase in overhead and advertising cost respectively. A 240bps drop in raw material cost restricted further margin erosion. Lower key input prices - wheat and sugar (flat) helped reduce input cost burden. Net profit for the quarter surpassed our expectations of Rs498mn by recording strong 22.6% yoy growth at Rs530mn partly led by higher other income and lower depreciation and tax outgo.

• 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 Rs528, the stock is trading at 21.9x FY14E EPS of Rs24.1. We maintain Market Performer rating on the stock with a 9-month price target of Rs544.