Britannia Ind: Hold

Recommendation: Hold

Aarati Krishnan

AT FIRST glance, the 67.7 per cent increase in net profits of Britannia Industries for July-September 2000 quarter appears impressive.

However, the profit growth has been magnified by exceptional items, which are not sustainable. During the quarter, Britannia wrote-back processing charges of Rs 7.90 crore (no longer considered necessary) and assumed higher employee separation costs.

Excluding the effect of these two exceptional items, Britannia managed a 30 per cent improvement in profits before taxes and a 13 per cent growth in post-tax profits. Net sales registered a 15.2 per cent growth this quarter.

This performance more or less matches that of the April-June 2000 quarter when Britannia reported a 28 per cent growth in profits before taxes and a 16 per cent growth in net sales.

Growth in the sales value has come partly from higher realisations. Britannia has raised the maximum retail prices on its major brands between 7 per cent and 11 per cent over the past year. This was intended to compensate for the doubling of excise duties on biscuits from 8 per cent to 16 per cent in the 2000-01 Budget.

Biscuits in low unit packs (costing less than Rs 5 and weighing 100 gm or less) were subsequently exempted from the hike. This has probably worked to the advantage of Britannia, which has been focussing on this segment with its mass market brand -- Tiger. Tiger has been among the fastest growing brands in the Britannia group over the last one year.

Apart from biscuits, the foray into dairy products such as cheese, flavoured milk and butter, has helped pep up topline growth. Though Britannia's foray into flavoured milk and butter is yet to make a significant contribution to revenues, it has managed to capture a substantial share of the cheese market.

Improvements in the operating profit margins have helped boost profit growth rate. Britannia's OPM in 1999-2000 first half improved to 8.9 per cent from 8 per cent. This has come mainly from savings in raw material costs. In 2000-01 first half, the proportion of raw/packaging materials to sales was 38 per cent, substantially lower than 42 per cent in the corresponding previous period.

Britannia's strategy of outsourcing manufacture could account for part of the gains. However, the softening of wheat flour prices in the latest quarter, due to comfortable supplies, are also likely to have helped. Similarly, staff costs, as a proportion of sales, fell from 6.9 per cent in 1999-2000 first half to 6.5 per cent in the same period of 2000-01. The company appears to have streamlined its workforce over the past year. Employee separation costs rose to Rs 1.10 crore in the first half of 2000-01 from Rs 0.3 crore in 1999-2000.

From a long-term standpoint, biscuits, which remain the key revenue-drivers for Britannia, offer potential for improvement in growth rates through higher category penetration. While the premium end of the market has seen a flood of new entrants, including several multinational brands, Britannia, with its established distribution network, appears to be in a better position to capitalise on the growth in the mass market. The success of Britannia's mass market brand -- Tiger -- is evidence of this.

Dairy products is similarly a high potential area. Procurement systems for milk usually play a key role in this line of business. However, Britannia has minimised the risks associated with the dairy business by outsourcing manufacture of dairy products from established players.

Therefore, while modest sales growth is of concern, a higher contribution from new product lines could boost growth rates for Britannia over a two-three-year period. This could be one of the reasons for the sustained market fancy for the Britannia Industries stock in the recent times.

The stock has surged from Rs 660 in the beginning of October to the current Rs 800, and now trades at 28 times the annualised per share earnings for 2000-01, which is on a par with that accorded to top-rung FMCG companies. The recent surge in stock price limits the scope for a substantial appreciation in price from this level. However, existing investors can hold the stock in the light of the company's satisfactory growth prospects.