Britannia: More good days ahead

Aided by benign input costs and lower other expenses, Britannia posted strong operational performance in the June quarter. Operating profit margins got a 484 points boost year-on-year to 14.4 per cent. In addition to input costs which as a percentage of sales were down 334 basis points to 50.2 per cent, flattish advertising spends as well as better product mix helped improve profitability. Further, other expenses were also down 111 basis points to 10.6 per cent, aided by lower freight and fuel costs.

Margin gains could have been higher but for the fact that the company passed on part of input cost benefits to end consumers. Positively, the margin expansion story is far from over for Britannia, believe analysts. Company's efforts to improve share of premium products such as NutriChoice, Good Day, Nut and Raisin Cake, Good Day Choco Chunkies, Maska Rusk, amongst others and benign input prices will continue to drive margin gains over the next few quarters. Not surprisingly, the Britannia scrip rallied up to 1.3 per cent to Rs 3,177.4 on Tuesday when the S&P BSE Sensex fell by about 0.4 per cent. The stock has rallied by a huge 186 per cent in the past one year and has outpaced both the Sensex as well as peers. The stock now trades at handsome valuations of about 48 times FY16 estimated earnings. Post the strong show in June quarter and healthy growth prospects, analysts could raise their full year earnings and target price estimates for the company. This will act as a key support to Britannia's valuations going forward.

For the quarter, Britannia's consolidated net profit grew 66.9 per cent year-on-year to Rs 190 crore and was 20 per cent ahead of Bloomberg consensus estimate of Rs 158 crore. Strong operational performance more than offset the impact of lower other income and higher tax rate in the quarter. Consolidated net sales grew 13 per cent year-on-year to Rs 2,003 crore and was broadly in-line with Bloomberg consensus estimate of Rs 2,019 crore. Volume growth remained healthy at an estimated 9-10 per cent in-line with trend witnessed in recent quarters.

Going forward, Britannia will benefit from revival in urban demand. The company's focus on expanding distribution and launching new products in the premium category will drive future revenues as well as profitability. Britannia's dairy products (Cheese Slices, amongst others) is witnessing good growth though intensifying competition in this category will be a key monitor able. Company plans to enter new geographies to boost growth of its International business. Apart from biscuits, Britannia is also focusing on growing its cakes and rusk segments. Any fall in volume growth, sudden rise in input costs are key downside risks for the stock.