Stock Review: Britannia Industries

The Britannia Industries stock, which has been an out-performer over the last one year, has been inching down in the last fortnight and a half due to a 50 per cent year-on-year drop in net profits in the June quarter. With food inflation ruling high, an increase in marketing costs and uptick in interest costs affected profitability. Despite this, higher volumes aided steady revenue growth at 24 per cent yearon-year. Going ahead, profitability should improve on lower input costs, steady volumes and price hikes.

Improving margins, steady sales pitch

The earnings before interest, taxes, depreciation and amortisation (Ebitda) margins witnessed a decline over the last four quarters in 2009-2010. In fact, the company posted a loss at the Ebitda level in the March quarter. However, a moderation in input prices recently boosted margins, which improved from a negative four per cent to around five per cent in the June quarter. With sugar prices declining 38 per cent from their peaks and wheat prices being relatively benign, margins are improving.

The company is also looking at product price hikes of 5-10 per cent in the future to protect its profitability. Britannia sales grew at a faster pace at around 2225 per cent in the last two quarters on the back of higher volumes (greater than 15 per cent in this period) and price increases on various key product categories in the past two quarters. The success of its low-priced packs and improved consumer sentiment will drive volume growth in the coming quarters. Expect sales to grow at 19-20 per cent on an average in two years.

Outlook

The softening of input costs could lead to new local competition that could impact the company's low-priced products, like Tiger. However, it has been able to hold its own in the premium segment with products like GoodDay, Treat and Nutrichoice. Better pricing in the premium segment offers better margins.

Price increases and lower input costs could result in higher profit margins in the coming quarters. Overall, expect margins to improve and average at 7.7-8.2 per cent in the next two fiscals. Post the issue of bonus debentures, interest costs went up from around `1crore on an average in 2010 to `9crore in the June quarter. On an average, net profits are expected to grow at 25 per cent in the next two years.

The stock is trading at 21 times its estimated 2011-12 earnings and can be considered with a two-year perspective.