Cookie maker Britannia today announced its earnings for the quarter ended March, largely meeting analyst estimates for revenues and earnings before interest, tax, depreciation and amortisation (EBITDA). Quarterly net profit beat analyst estimates, helped by lower tax expenses.

Key takeaways:

Revenues: Largely in line with expectations. Three factors were expected to play out during the quarter. First, recovery was expected in January and February after months of subdued demand. Secondly, lockdown announced in March would’ve led to disruption in supplies and a negative impact on revenues and profits. Finally, biscuit being a staple food across consumer segments, was expected to witness extra demand on account of pantry stocking.

Analysts were expecting some of these opposing factors to come together and lead to flattish volume growth and 1 percent growth in the topline. The company delivered flattish domestic volume growth with a 2 percent increase in consolidated revenues.

EBITDA: At Rs 454 crore, the operating profit was in line with analyst expectations of Rs 447 crore.

EBITDA margins: Improved by 20 basis points year-on-year, led largely by the company’s tight control on costs. Britannia’s raw materials costs increased by 5 percent during the quarter, pulling down gross margins by 150 basis points from 41.2 percent to 39.7 percent. Gross margin decline was limited despite moderate inflation in commodity prices due to the company’s commodity hedging policy in September. Britannia also controlled other expenses to mitigate the impact of lower gross margins. Other expenses declined by 7.5 percent, resulting in savings of 210 basis points in EBITDA margins.

Net profit: Was boosted by a lower effective tax rate. Britannia’s tax expense as a percentage of profit before tax reduced from 34.6 percent to 18.6 percent.

Management commentary:

The company said that revenues and profits were impacted by 7-10 percent by the lockdown during the March quarter. The current quarter, however, is expected to be strong.

The third factor of extra demand on account of pantry stocking by consumers is still playing out. Britannia's revenues grew 20 percent in April and 28 percent in May. The company has been able to improve its market share during the lockdown. The management said they were studying the impact of COVID-19 on short term and longterm changes in consumer preferences, and tweak their strategy accordingly.

Balance sheet:

Britannia’s, otherwise strong balance sheet has been in focus ever since the company’s investments in other Wadia group companies like Go Air and Bombay Dyeing started increasing in the past few quarters. The street was worried about the recoverability of these inter-corporate deposits as businesses like real estate and aviation witness massive liquidity issues. As of March 31, 2020, there was an increase in Britannia’s financial assets and receivables as compared to September 2019 and March 2019. However, company sources said that exposure to group companies hasn’t increased. In fact, they’re also expecting recovery from the investments made in GoAir shortly. Fresh long term investments, as per the company, have been made in NCDs of various companies. Eg. Tata, Kotak, HDFC, Bajaj, etc.

Valuation:

Quality, they say, doesn’t come cheap, more so given the lack of well-performing companies in these times. After a sharp dip to Rs 2100 due to market correction in March, the stock has rise 65 rise in the last two months. At Rs 3500, Britannia is hovering around an all-time high. It trades at 56 times FY21e P/E and 49 times FY22e P/E. While there is limited room for PE re-rating, the structural story of packaged foods gaining market share, increasing penetration, reaching more stores, and the long term theme of Britannia becoming a total foods company is intact

First Published:Jun 2, 2020 7:33 PM IST