Britannia Industries - Volumes take a backseat - Reliance Securities

Key highlights of the result

- Revenue in-line with our estimates: Britannia Industries (BIL) reported a revenue growth of 10.8% yoy to Rs1,222cr (Rs1,103cr), primarily aided by value growth (~7% growth in realizations as per our estimates, as the company has taken ~12% yoy price hike across its portfolio in the past one year and has launched premium niche products in the health and wellness space).

- Margins negatively surprise, as conversion charges come in higher than estimates: Britannia reported an OPM expansion of 104bp yoy to 5.3%, as benefit of lower raw material prices (wheat and sugar) and lower volumes aided gross margin, which expanded 379bp yoy. Saving conversion and other charges (up 82bp yoy), all other operational expenses were in-line with expectations. Staff cost (up 32bpyoy), advertising spends (up 62bp yoy) and other expenses (up 98bp yoy) increased during the quarter.

- Earnings register paltry increase despite higher operational efficiency: Recurring earnings reported a growth of 3.9% yoy, primarily supported by higher EBITDA, as depreciation expense (up 17.3% yoy) and tax rate (up 116bp yoy) registered an increase, while, other income declined 41.1% yoy. 1QFY2012 included profit of Rs10.4cr (net of tax) from the sale of property in other income, adjusting for this extraordinary gain, the earnings for 1QFY2013 has registered a strong increase of 38.4% yoy.

- Consolidated business continues to remain black: BIL's consolidated business continued to remain profitable, with its subsidiaries contributing ~Rs127cr to the top-line and ~Rs3cr to the PAT with EBIT margins of 3.3%. While, we do not value BIL on consolidated basis, we believe that the profitable subsidiaries may be a tailwind to the stock performance going ahead. For FY2012, BIL's subsidiaries and associate companies recorded a revenue growth of ~33% yoy, aided by enhanced dairy portfolio (curd and Ultra High Temperature Milk were the major revenue drivers for BIL's dairy business) and an adjusted profit of ~Rs13cr (as against loss of ~Rs11cr in FY2011)

Outlook and Valuation

While, the revenues for 1QFY2013 were in-line as per our expectations, we have factored in our numbers higher conversion and other expenses, in-line with the trend shown in this quarter. Further, we factor in the near term headwinds plaguing the stock in terms of failed monsoons, which will impact - (1) raw material prices going ahead (wheat, sugar and vegetable oil, all contribute significantly to raw material cost for BIL), (2) food inflation, denting the consumer wallet and (3) volume recognition. Nonetheless, at the CMP, we recommend a Buy on the stock with a revised target price of Rs547 (Rs596 earlier).

Risks to the view

- Lower than anticipated volume growth will impact our estimates
- Higher than anticipated distribution expense may impact our estimates.

Source : Equity Bulls

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