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Recommendations India

Britannia Industries Q4FY14 results update

June 18, 2014, Wednesday, 05:50 GMT | 01:50 EST | 10:20 IST | 12:50 SGT
Contributed by Nirmal Bang

Despite weak demand, Britannia continues to surprise on the operating margin expansion front. The volume growth of 2-3% is disappointing and despite increase in input prices (average of Jan-Mar) mainly wheat (+7.4% YoY) and palmoil (+11.9% YoY) and despite higher base of Q4FY13, Britannia continued to improve operating margin by 130bps YoY to 10.2% in Q4FY14 with tight cost control, efforts to plug portfolio gaps and sales mix improvement. The consolidated operating margin improved by 60bps YoY to 9.5% in Q4FY14.

We have introduced FY16E numbers. We expect company to report consolidated net sales growth by 12.4%/12% in FY15E/FY16E respectively. We believe that, Britannia appears to have hit a sweet spot in its strategy of using price hikes and a richer product mix (new and premium products) to combat rising costs. Britannia’s focused effort to drive efficiencies in back-end through cost management program is yielding benefits. We feel that the company will be able to sustain the operating margin going forward on the back of change in sales mix though substantial margin improvement is expected to be moderated (due to high ad spends as competition intensifies from ITC, Parle, Unibic, etc); in our view. We feel that, a sustainable shift in margins for the past couple of quarters (led by operational turnaround) even makes a case for multiple expansion and would at least prevent the stock from de-rating even as preference for defensive may decline. At CMP of Rs 869, stock is trading at 22.9x/19.9x PE for FY15E/FY16E respectively. We roll-over our target multiple to FY16E PE 24x and retain our BUY rating with a TP of Rs. 1061.

Revenue growth slightly lower: Britannia has reported a net revenue growth of 9% YoY to Rs. 1619.8cr and by 0.3% QoQ, led by estimated single digit volume growth, price hike and product mix improvement. In consolidated level, net revenue grew by 8.6% YoY to Rs. 1777.3cr and by 0.3% QoQ.

Sustained EBITDA margin expansion for the past five quarters: Despite weak sales growth, Britannia has reported yet another strong quarter with consistent improvement in operating margin backed by underlying portfolio premiumization. Standalone EBITDA growth inclined by 24.9% YoY to Rs 164.6cr and by 10.8% QoQ. EBITDA margin improved by 130bps YoY to 10.2% in Q4FY14 and by 100bps QoQ. Despite decline in advertisement cost as a % of sales by 140bps YoY, the upside in operating margin was curtailed by jump in Other expenses by 60bps and employee cost by 50bps YoY. Gross margin improved by 20bps YoY to 37.2% in Q4FY14 driven by premiumization and price hikes. In addition, consolidated EBITDA margin improved by 60bps YoY to 9.5% in Q4FY14 and by 50bps QoQ.

PAT growth in-line: Despite higher tax outgo by 310bps YoY to 34.3% in Q4FY14, depreciation cost by 10.1% YoY, standalone PAT grew meagre by 4.2% YoY to Rs 91.5cr in Q4FY14 as the decline in interest cost by 96.3% YoY was off-set by decline in Other income by 45.9% YoY. PAT margin de-grew by 20bps YoY to 5.7% in Q4FY14 and by 30bps QoQ. Consolidated APAT grew by 16.9% YoY to Rs 107.8cr and by 7.1% QoQ.