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Aarati Krishnan

BRITANNIA Industries has delivered robust profit growth for 2003-04, with its growth rates well ahead of the majority of its FMCG peers. A cost-reduction exercise and an ongoing buyback programme may also help earnings growth on a per share basis. But, at a price-earnings multiple of about 15 times its trailing earnings, the stock appears to already capture Britannia's near-term growth prospects.

Category in good health

The 11 per cent growth in Britannia's net sales for 2003-04 compares favourably with that of most other FMCG companies. Affordable pricing has helped the biscuit category register double-digit volume growth past couple of years.

Superior profit growth

Britannia's profit growth has been substantially superior to sales growth on account of three factors. One, the halving of excise duty on biscuits in the preceding Budget appears to have generated savings. Second, the company's strategy of improving its product mix through a conscious focus on premium products appears to have pegged up its overall margin profile. Third, Britannia'a cost-cutting efforts also appear to be yielding results. Though prices of key inputs such as flour, sugar and oils were in the grip of an inflationary spiral through 2003-04, the company's material costs have been flat in relation to sales. Staff costs have declined marginally, probably the result of the ongoing VRS. These factors have generated a robust 24 per cent growth in the company's operating profitsA slew of exceptional items have dented the company's net profits by Rs 11.9 crore this year, after making a positive contribution of Rs 4.4 crore last year. As a result, the company's net profits have risen by 19 per cent for 2003-04, at a rate lower than its operating profits.

Threat from competition

The key threats for the company are the growing competition in the biscuit segment and the possibility of pricing pressures in the mass market. Competitors such as Parle-G and Surya Foods have already carved out a significant share in the mass market through aggressive pricing, where Britannia's brand, Tiger, is trying to enlarge its share. At the higher end of the market too, competition is hotting up, with players such as ITC rolling out new extensions.

Britannia's profits in 2003-04 received a one-time boost from the cut in excise duty on biscuits. This may not be repeated this fiscal.

However, the company's new cost-reduction measures may help alleviate these pressures to some extent. The company has recently initiated proceedings to close down its Mumbai unit and set up new manufacturing facilities at Uttaranchal, which will significantly lower its excise and tax burden.

The cost savings from the Mumbai unit closure, if it proceeds as planned, could help lower the company's cost structure and put it in a better position to compete in the mass market.

Over the past couple of years, Britannia has been steadily reducing its equity base through a buyback programme. Having shrunk its equity base from Rs 25.9 crore to Rs 25.1 crore in 2003-04, the company has recently proposed a fresh buyback, which will target 9.9 per cent of its present share capital.

Given the dwindling returns from treasury operations, deployment of cash surpluses in a buyback programme, may help investors by pegging up Britannia's per share earnings albeit by a small margin.

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