Britannia Industries - Q2FY14 Update, CMP Rs.903, Rating Change to NEUTRAL, Target Rs.910, Book Partial Profits - Sushil Finance

Britannia Industries Ltd (BIL) has reported yet another excellent set of numbers for Q2FY14 which was above our expectations. Its subsidiaries have not performed well in Q2FY14.

Key Highlights of Q2FY14 Results

BIL's Standalone Performance: Revenues grew 13.7% YoY to Rs.16100.0 mn with more than half of the growth led by price realization and balance from product mix & volume growth. EBITDA grew 105.8% YoY to Rs.1532.1 mn with margins of 9.5% which expanded 426 bps YoY & 36 bps QoQ mainly on account of 379 bps YoY & 37 bps YoY lower raw materials cost & other expenses as % of sales respectively. The expansion in margin was due to improvement in product mix and higher price realization alongwith cost management benefits. PAT grew 109.8% YoY to Rs.956.8 mn with margins of 5.9% which expanded 272 bps YoY but contracted 15 bps QoQ. PAT margin expansion was lower than EBITDA margin due to lower other income & higher tax rate. Reported EPS of Rs.8.0 in Q2FY14 vs. Rs. 3.8 last year in Q2FY13.

BIL's Consolidated Performance: Revenues grew 12.6% YoY to Rs.17557.5 mn. EBITDA grew 74.5% YoY to Rs.1608.5 mn with margins of 9.2% which expanded 325 bps YoY & 29 bps QoQ mainly on account of 363 bps YoY lower raw materials cost as % of sales respectively. Small part of the margin expansion gains has been invested in brand-building through increased ads & sales promotion spends which increased as % sales by 32 bps YoY. PAT grew 65.7% YoY to Rs.976.4 mn with margins of 5.6% which expanded 178 bps YoY but contracted 21 bps QoQ. PAT margin expansion was lower than EBITDA margin due to lower other income & higher tax rate. Reported EPS of Rs.8.1 in Q2FY14 vs. Rs. 4.9 last year in Q2FY13.

BIL's Subsidiaries Performance: Revenues grew 2.2% YoY to Rs.1457.5 mn. EBITDA de-grew 56.9% YoY to Rs.76.4 mn with margins of 5.2% which contracted 718 bps YoY & 72 bps QoQ mainly on account of 252 bps YoY & 72 bps QoQ increase in staff cost and 585 bps YoY & 105 bps QoQ increase in ads spends as % of sales which was offset partly by 221 bps YoY decrease in raw materials costs as % of sales. PAT de-grew 85.3% YoY to Rs.19.6 mn with margins of 1.4% which contracted 800 bps YoY & 102 bps QoQ. Reported EPS of Rs.0.2 in Q2FY14 vs. Rs. 1.1 last year in Q2FY13.

OUTLOOK & VALUATION

Considering BIL's excellent FY13 and H1FY14 performance with margins expansion, strong brand portfolio with leading position in premium segment, ~1/3rd market share in the branded biscuits category, sales mix improvement, cost cutting initiatives, negative working capital and cash generation from its subsidiaries, we are upward revising our FY14E & FY15E earnings estimate by 18.0% & 17.5% to Rs.32.1 (Rs.27.2) & Rs.36.3 (Rs.30.9) respectively. At the CMP of Rs.903, the stock trades at a valuation of 25x its FY15E EPS of Rs.36.3. We believe that it will be a big challenge for BIL to maintain current margins in the forthcoming quarters considering slowing economic environment & volatile nature of its two key raw materials (Sugar & Flour). We thereby change our rating to NEUTRAL with revised Target Price of Rs.910 at 25x its FY15E EPS (less than its 5 Yrs Avg 1-Year Fwd PE-26) & recommend to book partial profits since the stock has seen a strong run up in the last 6 months. With the risk-reward at balance currently, we will review our rating post higher volume growth visibility or margin expansion or correction in the stock, if any. Key Risks: Further scope for higher profitability than our estimates as we have not incorporated gains from the BIL's plans to sell its Chennai's 16-acre industrial plot & plans to monetize its prime land bank in Bangalore by moving its corporate office in Bangalore to a new one within the city by early next year. We believe that the funds from sale may be used by BIL for debt reduction.

Source : Equity Bulls

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