Analysis. Big bonus for Britannia shareholders

Shareholders of Britannia Industries had reasons to smile last week. Apart from posting a double-digit growth in revenues and profits in the quarter-ended June 2018, the company announced ‘bonus debentures’ for its shareholders in a gesture to mark its centenary year in business. The company will issue one bonus debenture of ₹60 each for one equity share of ₹2 each, totalling ₹721 crore. The bonus debentures will carry a charge on certain immovable assets of the company, will have a maturity period of three years and will be traded both in the National as well as the Bombay Stock Exchanges. While the exact coupon rate on these instruments will be determined by the Board, it will not exceed 8 per cent. Interest will be paid annually.

On a strong footing

After the dent due to demonetisation and GST, Britannia has been clocking double-digit top and bottom-line growth in the last few quarters. In the latest June quarter, its consolidated revenues grew by 13.6 per cent year-on-year to ₹2,527 crore, while net profits moved up by 19.4 per cent Y-o-Y to touch ₹258 crore. The company’s prospects appear bright.

It is reinvigorating its dairy business by setting up a fully integrated dairy operation at Ranjangaon in Maharashtra. Focus on value-added products such as whey and skimmed milk powder in this facility will improve margins.

Britannia is also sprucing up its product portfolio and entering the croissants and snacks segments shortly. It has planned a host of premium biscuit launches this year as well. The company is working on improving its rural footprint and its presence in States such as Uttar Pradesh, Madhya Pradesh, Gujarat and Rajasthan, in which it has traditionally been weak.

The bonus debenture issue will push up its debt. But this is not a cause for concern. The company has been able to reduce debt in the last five years. Its debt-to-equity ratio has come down from 0.39 in the year ended March 31, 2014 to 0.05 in fiscal 2018.

Considering that only about one-fifth of the total of ₹1,000 crore envisaged for the dairy facility has been spent in fiscal 2018, the development of this facility would require more capital spending in the next two to three years. Unlike dividends, bonus debentures do not entail immediate outflow of cash, as the principal amount will be paid to the shareholders only on maturity.

Thus, along with internal accruals, this amount will come in handy to fund the expansion. Besides, it also allows room for acquisitions or further capital spends.

Britannia’s retained earnings (P&L account balance and general reserves) have moved up from ₹750.5 crore five years ago to ₹3,318.6 crore as on March 31, 2018. The company’s cash and cash equivalents (including current investments), as of March 31, 2018 stood at ₹1,044 crore, more than three times higher than the previous fiscal.

The bonus debenture issue entails transfer of funds from reserves to debt. So, the company’s return on equity, which stood at 32.9 per cent in fiscal 2018 (against 36.9 per cent in fiscal 2017), could rise this year.

Rich valuation

The Britannia Industries stock, however, did not react much to the bonus debentures announcement last Monday, and closed the day with a 1 per cent fall. However, the stock has been the darling of the market in the last few years.

Since the market rally that began in mid-2013, it has moved up eight-fold to about ₹6,336 now. It now trades at a rich valuation of over 70 times its trailing 12-month consolidated earnings. Considering the huge rise in the stock price, the company is considering a stock-split in its board meeting on August 23.

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