Britannia (Q3 FY14)

Britannia reported modest 10.2% yoy growth in consolidated revenues at Rs17.7bn driven by healthy volume growth, price hikes and premiumisation. Operating margins for the quarter expanded sharply by 210bps to 14.8% aided by 170bps drop in raw material cost. Lower staff, adspend and overhead cost further fuelled margins.

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. The company has also implemented initiatives like alternative fuels to keep costs as low as possible.

Net profit for the quarter registered 61.5% yoy increase at Rs1bn led by improved operating efficiency and lower interest outgo (as the company repaid a major portion of debt). Other income for the quarter remained flat at Rs256mn there by restricting further earnings growth. Effective tax rate for the quarter was higher at 29.2% against 26.9% in Q3 FY13 due to increase in tax surcharge from 5% to 10%.

Britannia's standalone Q3 FY14 revenues matched our expectations by recording 11.1% yoy growth at Rs16.1bn. Operating margins witnessed sharp 300bps expansion at 8.4% aided by sharp 210bps decline in raw material cost. Net profit registered 69.1% yoy growth at Rs963mn - marginally below our expectations of Rs973mn led by healthy revenue growth and improved operating efficiency. The growth could have been even better but for lower other income and higher 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. 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 Rs903, the stock is trading at 23.8x FY15E EPS of Rs37.9. We maintain Buy rating on the stock with a 9-month price target of Rs1,018.