Bri­tan­nia’s June quar­ter mar­gins level off, bonus deben­tures to drive re­turn ra­tios up

Mint Asia ST - - Mark To Market -


In­dus­tries Ltd’s June quar­ter re­sults raises a ques­tion of whether prof­itabil­ity is lev­el­ling off or if this is a tem­po­rary phase. Sales grew by 13.6% in the June quar­ter over a year ago. If we as­sume vol­ume growth was 10%—the com­pany only said it grew in dou­ble dig­its—then price played a rel­a­tively small part. While rev­enue growth was de­cent, in­put costs pro­vided a good boost to mar­gins. Mod­er­a­tion in prices of key in­puts such as flour, milk and sugar helped.

While that meant Bri­tan­nia had a fat mar­gin of sales left over, it saw a sharp in­crease in em­ployee costs and other ex­penses. Still, its net profit rose by 19.4% over a year ago. The press state­ment in­di­cated that sales growth in the dairy seg­ment was sub­dued as the com­pany shifted fo­cus to value-added prod­ucts, but the shift helped mar­gins.

Also, the in­ter­na­tional busi­ness growth was flat. It plans to en­ter new cat­e­gories to drive growth. For now, its plans are to sell crois­sants, cream wafers and sim­i­lar snacks.

The past few years have seen Bri­tan­nia in­crease its dis­tri­bu­tion reach and lower


costs. While these have yielded sig­nif­i­cant gains, they are likely to reach a thresh­old. Af­ter that, the firm needs to drive more sales through its net­work. That’s where sell­ing more pre­mium prod­ucts and new cat­e­gories will help.

While Bri­tan­nia’s per­for­mance has im­proved, its bal­ance sheet has a prob­lem of plenty and it is us­ing the bonus deben­ture is­sue to fix that. As of 31 March, its bank bal­ance and cur­rent in­vest­ments to­gether rose to ₹ 1,044 crore, up 3.5 times from a year ago. Free cash flow gen­er­ated was ₹ 826 crore.

Its re­turn on net worth will jump af­ter the is­sue, even if profits re­main flat (though they are not ex­pected to be flat). In the short run, this is in­deed an ar­ti­fi­cial way of boost­ing re­turn ra­tios, but not in the longer run. Af­ter three years, the deben­tures will be re­deemed and money paid to share­hold­ers.

At that point, Bri­tan­nia’s cap­i­tal em­ployed will also de­cline since debt is paid off (cap­i­tal em­ployed is net worth plus debt). At that point, its re­turn on cap­i­tal em­ployed will also im­prove.

Why not sim­ply pay the en­tire amount as div­i­dend? The firm will then have very lit­tle cash left, ei­ther for a busi­ness ex­i­gency or to fund an ac­qui­si­tion. This way, it man­ages to make its ra­tios look bet­ter, even while the cash re­mains with it.

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