Britannia Industries Limited - Robust operating performance in a challenging environment - Phillip Capital

We attended the analyst meet of Britannia Industries Limited and came out positive. The management indicated that FY14 has been a year of consolidation and the pace of innovations has been a little slower but it can pick up in the year ahead. We believe the significant improvement in EBIDTA margin seen in FY14 (YTD margins up 340bps) is sustainable and further improvements in the forthcoming quarters can surprise the market positively. We maintain our Buy recommendation on the stock valuing the company at 25x FY15E earnings at Rs 1050. The key takeaways of the analyst meet are as follows:

Revenue growth driven by price, mix improvement and volume; Dairy business under pressure in FY14: Q3FY14 revenue growth of 11% (standalone business was driven by price growth, product mix improvement and volume growth. We infer that product price hikes and mix improvement contributed equally in the pricing growth which we estimated for the quarter at ~6.5% YoY while our volume growth estimate for the quarter was ~4.5% YoY. The consolidated revenue growth for the quarter was slower than standalone revenue at 10% on account of slowdown in dairy business. The management indicated that Dairy business has faced challenges on account sharp rise in milk prices which impacted both revenues and costs for the segment. The management also indicated that in FY14 premiumisation trends have continued and in biscuits category cookies have registered faster growth than cream biscuits. FY14 has largely been a year of consolidation for the company and innovations are likely to pick up in FY15. In the dairy business the company will focus on its strengths in products like cheese and new products like yogurt will be the key growth drivers while the snacking category will not be a key area of focus for the company in the near to medium term.

Ample scope for distribution expansion: Britannia's rural distribution network is just 3/4th of its urban distribution network and it has ample room for expansion in the rural areas. In the urban network the management indicated that there is significant scope for improving the depth of its distribution (i.e increasing the number of products sold to existing outlets). Distribution will continue to remain key focus areas for the company which provides visibility on distribution led revenue growth.

Focus on cost continues; Margins sustainable: The Company's cost initiatives are now seeing results with significant margin improvement in 9 months FY14 by 350bps YoY. The management indicated that there is ample scope for cost savings by reducing time to market, energy cost savings in manufacturing and extending the best practices to its co-packers. We believe that further improvements in EBIDTA margins cannot be ruled but margin improvements from the current levels are likely to be protracted as the company is likely to again step-up innovations which will translate to higher advertising and promotional expenses.

Maintain estimates and target price, Maintain BUY recommendation: We have largely maintained our earnings estimates for FY14E and FY15E unchanged. We maintain our Buy recommendation of the stock.

Source : Equity Bulls

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