CMP Rs716, Target Rs831, Upside 16.1%
Britannia Industries Ltd organized an analyst meet to discuss its Q1 FY14 results and future plans. Following are the key takeaways from the meet:
- Britannia’s standalone Q1 FY14 revenues recorded 14.9% yoy growth at Rs14bn driven by healthy volume growth, price hikes and premiumisation. Operating margins for the quarter expanded sharply by 300bps to 8.3% aided by sharp 440bps and 200bps drop in raw material and overhead cost respectively. Net profit almost doubled to Rs863mn – above our expectations of Rs756mn led by healthy revenue growth, improved operating efficiency and higher other income.
- Going forward the management plans to focus on the bakery and dairy businesses to propel growth in the near and long term and for that purpose, the company would continue to invest in back-end operations and make substantial spends in advertising. The dairy business is currently very small compared to the bakery business as it contributed only 10% of the total revenue in Q1 FY14. The business has quadrupled in the last five years and the management believes it has a huge potential for growth.
- Britannia is setting up plants in different geographic locations (two new units at Patna and Odisha, new bakery plant in Gujarat at a cost of Rs500mn) to reduce freight cost. This will help reduce lead distance by 100-150kms. Britannia is undertaking various initiatives like patented technology for energy efficient ovens, use of biofuels, reverse auction platform for procurement of inputs and efficiency initiatives like six sigma, TPM, TQM and Kaizen for reducing costs.
- Britannia has improved its operating margins substantially for the last two quarters at ~8% compared to ~6-7% earlier. We believe Britannia will be able to maintain margins at this level unless there is sharp increase in input prices or resurgence of price led competition.
- Britannia is in the process of simplifying and rationalizing its operations. The company is phasing out its non-contributing SKUs and brands (has many SKUs contributing less to revenues and profits but are complicating operations and using resources). We believe due to this process, even if there will be some impact on sales in the short term, it will help in improving margins and better growth in long term.
- In the international business too Britannia has cut out fringe geographies and countries and has focused more on its main geography of GCC, which has resulted in increased margins.
- Britannia is taking initiatives to increase its rural distribution reach for catering to the opportunity of increasing consumption of food products in rural markets. The company plans to increase overall distribution coverage by ~7% every year and rural coverage by ~10% every year.
- Britannia is focused on maintaining market share at least 1/3rd of biscuits industry. Britannia’s current rural market share is 0.7x of its overall market share. The company gradually plans to increase the same to 1.5x of overall market share. Modern trade market share is currently at 1.25x its overall market share.
- 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. Britannia is focusing on premiumisation of its product portfolio. We believe it will help the company achieve better margins in the long term. We maintain Buy given healthy domestic volume growth, improved performance of subsidiaries and attractive valuations. Increase in competitive intensity, input cost inflation and slowdown in domestic volume growth are the key risks to our call. At the current market price of Rs716, the stock is trading at 22x FY15E EPS of Rs32.6. We maintain Buy with a 9-month price target of Rs831.
| (Rs m)
|| Q1 FY14
|| Q1 FY13
|| % yoy
|| Q4 FY13
|| % qoq|
| Net sales
| Material cost
| Purchase of FG
| Personnel cost
| Advertising cost
| Other overheads
| Operating profit
| OPM (%)
|| 300 bps
|| 51 bps|
| Other income
| Effective tax rate (%)
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