Sunday, July 13, 2008

What two i's have done to Britannia

I will talk about the impact of two i's, ITC and Inflation, on the profitability and price of share of Britannia. Following table shows the Operating Profit Margin and Net Profit Margine of Britannia over the last 8 years ( Operating Profit Margin = (Net Sales - Expenditure)/Net Sales, Net Profit Margin = Net Profit After Tax / Total Income) :

YearOperating Profit MarginNet Profit Margin

Figures for 2007 and 2008 are consolidated. If you see the more details at BSE you will find that the profits for 2003, 2004 and 2005 were helped by large other income mainly arising out of sale of securities. ITC started its operations from FY 2004. Inflation in wheat and edible oil prices started from FY07 onwards where government had to import wheat, edible oil prices shot up by 80% (my own experience when groundnut oil prices of Gemini shot up from INR 65 to INR 118). Sugar also had a short run but its prices came under control due to windfall harvest of cane. It seems than that profit margins of Britannia were unaffected by the entry of ITC (This is in contrast with HUL whose profits fell from 1800 Cr to 1200 Cr in 2004 due to entry of P&G in Indian Detergent market. P&G slashed prices of Tide by 40% and HUL had to follow suit. That kind of harakiri hasn't happened yet in Biscuits).

Till 2005, the Tax to PBT was around 30% which fell to 9% in 2007 and rose to 20% in 2008. I assume it will rise to 25% in future. The depreciation had remained constant at around 20-25 Cr which increased to 39 Cr in 2008. Interest burden is almost nil.

If we consider 2003-2006 to be exceptional years of high profits for Britannia, and 2007-2008 to be exceptional years of low profit margins, than still 9% OPM can be assumed for calculating long term profits, 1% for depreciation+interest and 25% of 8% = 2% for tax giving 9%-1%-2%=6% for Net Profit Margin only from operations, other income extra.

The sales growth of Britannia historically has been 14% (Sales increased from 100 Cr in 1983 to 2800 Cr in 2008).

Thus for the next 10 years, if we assume that the long term condition prevails, in 2018, the company should make INR 10000 Cr worth of sales and 600 Cr worth of net profits. Considering a conservative P/E of 15, the company should trade at a market cap of around 9000 Cr.

During these 10 years, company will generate profits of around INR 3300 Cr. Thus if we buy britannia today, we will get 3300 Cr in 10 years + 9000 Cr at the end. So in 2018 we would have got 12300 Cr. (I have not counted the profits of each year invested because 3300 Cr we will get in tranches from 2009-2018 170 Cr every year increasing by 14% a year).

Considering a risk free return of 8% on PPF, we are willing to pay INR 100 to government to get INR 216 in 2018. Thus we should give a market cap of at least INR 5695 Cr to Britannia at this point of time. But it is languishing at around 3200-3500 Cr in the current market, a margin of safety of 40%. For a big FMCG company like Britannia, this should be enough.

I would recommend STRONG BUY on Britannia today at INR 1350.
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