Britannia building capacity to enhance in-house production

Britannia Industries, India's second-largest biscuit maker, is looking to increase the share of in-house production in order to reduce cost overheads.

The Wadia Group-controlled company, will enhance in-house production share to 60% of the total production in the next three to four years from the current 46%. The company is also setting up new manufacturing facilities in Tamil Nadu.

The move, industry experts said, will help increase operating efficiencies and boost gross margins.

While top company officials had indicated overall capital investment of between Rs 150 crore and Rs 200 crore over the next two years, it is not clear how much would go into the new manufacturing facilities.

"Investments would mostly be into expansion of capacities, product innovation and the setting up an innovation centre," Varun Berry, managing director, Britannia Industries, had said at the company's annual general meeting earlier this week.

Amnish Aggarwal and Gaurav Jogani, research analysts, Prabhudas Lilladhar, said in a recent company note that Britannia has in the last few years set up four new manufacturing units that helped it increase the ratio of in?house production from 30% to 46% of sales.

"The company is in the process of setting up two new units in Tamil Nadu, which will enhance in-house production capabilities. It will also enable Britannia to further cut costs by further reducing the distance to markets and improve profitability," the analysts said.

Featuring dedicated production lines for plain biscuits, creams and cookies, the four new units – located in Bihar, Odisha, Gujarat, and Andhra Pradesh – have ensured improved production planning and economies of scale. "The new units have already improved the geographical spread. Accordingly, freight costs as a percentage of sales have declined by 40 basis points (bps) despite 50% increase in diesel prices in past two years," they said.

For the quarter ended June 2014, the company posted 350 bps (or 3.5%) expansion in gross margins over fiscals 2012?14 backed by 30?40 bps gains from VAT subsidy on new units and lower input costs of sugar and edible oil. However, gross margins showed a decline of 230 bps yoy in the first quarter of fiscal 2015 due to higher base and a sharp 30% increase in costs of milk and milk derivatives (10% of raw material cost).

"While operating profit (Ebitda) grew 21.5% yoy to Rs 142 crore with margins increasing 45 bps yoy to 8.8%. Gross margins declined by 230 bps yoy but improved 80 bps quarter on quarter (qoq) to 38%," Gaurang Kakkad, VP – institutional research, Religare Capital Markets, said in his report.

However, analysts are of the opinion that with skimmed milk powder (SMP) prices beginning to soften, margins are expected to recover in the coming quarters.

"We estimate 20 bps gross margin decline in fiscal 2015 and 60 bps expansion in fiscal 2016. We estimate Ebitda margins to expand from 9.5% in fiscal 2014 to 10.8% in fiscal 2016 which will enable 23.7% Ebitda CAGR," Prabhudas Lilladhar analysts said in their report.

To cut costs further, the company has set up energy efficient ovens in new units using patented technology and is also using biomass as an alternate fuel thereby reducing energy costs. The recent past has also seen reduction in the overall headcount whereby bigger roles have been offered to existing managers to contain costs and improve employee productivity and involvement.

"The company now has leaner and accountable team, and is undertaking various projects to undertake production efficiencies by reducing waste and using automation and TQM. We note that employee costs (adjusted) have declined by 30 bps in the past two years. We expect another 20 bps reduction over fiscals 2014?16," Prabhudas Lilladhar analysts said in their report.