growing with every bite - Nirmal Bang Initiating Coverage.pdf · Britannia Industries enjoys the...

growing withevery bite

1 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee

Britannia Industries Ltd.

II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

4

Recommendation BUY Growing with every Bite…

Britannia Industries enjoys the key position in the branded biscuit category where the company enjoys 1/3

rd or around 33% market share in the biscuits

market size of $2.2 bn branded biscuits category in India. Britannia’s profitability was continuously under pressure with lower EBITDA margin. Britannia operating margin were in the range of 5%-7% in last five year though the sales growth were reasonable over 16% CAGR. In last two quarter we have witnessed substantial margin expansion with 8.9% and 9.2% in Q4FY13 and Q1FY14 respectively. According to management, the margin expansion is driven by companies focused efforts to drive efficiencies in back-end through cost management program, premiumization trend in market, improvement in the product mix towards high value-added products and price increase taken by company.

At the consolidated level, the company’s large subsidiaries are in Dubai (SFIC), Oman (Al Sallan) and in India (Britannia Dairy). Both Al Sallan and Dairy business turned profitable in FY12. We expect profitability of the dairy business to improve even further.

With a new CEO at the helm we expect the company to continue to improve its performance. Further, the management has guided that the company is likely to benefit from stable food prices on account of good rainfall this year and will help it to maintain or improve the expanded margin.

Further, Britannia has defined its manufacturing strategy where it’s increasing its reach to the consumption markets through in-house manufacturing especially for its premium products. The management aims to push up the proportion of in-housed manufacturing from the current 45% to 65% in the next few years. We are of the view that this strategy will improve sales, and margins going forward.

Company will drive the growth by further penetrating in rural market which will counter the slowdown in urban market. We believe that, Britannia appears to have hit a sweet spot in its strategy of using price hikes and a richer product mix (new and premium products) to combat rising costs. Britannia’s focused effort to drive efficiencies in back-end through cost management programme is yielding benefits. We feel that the company will be able to sustain the operating margin going forward on the back of benign commodity price, change in sales mix will drive margin profile in our view. Thus, we feel that the company still has a potential to re-rate further owing to the strong brand portfolio, sales mix improvement, cost cutting initiatives, cash generation from its subsidiaries and change in management.

At CMP of Rs. 824, stock is trading at 23.3x and 18.6x PE for FY14E and FY15E respectively. Britannia trades at 15-25% discount to listed peers ITC, Nestle, Marico & GSK Consumer, largely due to low operating margin. However, due to ongoing structural changes in company’s revenue and product mix, the operating margin will improve and this discount could narrow down gradually. Britannia enjoys strong operating cash flows, consistent dividend payouts and healthy return ratios. We recommend BUY with TP of Rs. 1061 (FY15E PE 24x).

CMP Rs. 824

Target Price Sector

Rs. 1061 FMCG

Stock Details

BSE Code 500825

NSE Code BRITANNIA

Bloomberg Code BRIT IN

Market Cap (Rs cr) 9868

Free Float (%) 49.1%

52- wk HI/Lo (Rs) 840/400

Avg. volume BSE (Quarterly) 28429

Face Value (Rs) 2.0

Dividend (FY 13) Rs. 8.5 per share

Shares o/s (Crs) 12.0

Relative Performance 1Mth 3Mth 1Yr

Britannia 17.2% 22.6% 72.5%

Sensex 4.1% -0.1% 3.0%

Shareholding Pattern 30

th June 13

Foreign Promoters Holding 50.9%

Institutional (Incl. FII) 29.4%

Corporate Bodies 2.2%

Public & others 17.6%

Ruchita Maheshwari Research Analyst +91 22 3926 8023 [email protected]

Sunil Jain, HOR +91 22 3926 8196 [email protected]

Year Cons Net

Sales Growth % EBITDA EBITDAM (%) PAT PATM (%) EPS (Rs.) P/E (x)

EV/Sale(x) ROE

FY12 5460.8 19.0% 310.9 5.7% 199.6 3.7% 16.7 49.3 1.8 54.3%

FY13 6135.9 12.4% 420.6 6.9% 259.5 4.2% 21.7 37.9 1.6 53.7%

FY14E 7177.6 17.0% 640.1 8.9% 421.6 5.9% 35.3 23.3 1.4 59.6%

FY15E 8397.8 17.0% 769.8 9.2% 528.0 6.3% 44.2 18.6 1.1 49.9%

mailto:[email protected]

2 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

Investment Rationale

Britannia EBITDA margin in new range

Despite the large market size and higher penetration levels, Britannia faced fierce competition from ITC. In addition, high input costs and increase in ad spend has resulted in a low EBITDA margin. The sharp rise in prices of agricultural inputs like sugar and wheat along with higher ad spend-to-sales resulted in subdued EBITDA margin from FY10 onwards. In the last couple of quarters, the management has increased focus in improvement in product mix (higher contribution of value added products compared to the plain biscuit), and higher price realization coupled with effective cost management resulted into the improvement in EBITDA margin post Q4FY13. The new found aggression is evident in its performance – it reported a significant improvement in EBITDA margin by 280bps YoY to 8.9% Q4FY13 and has been able to sustain the high margin where the company reported 9.2% in Q1FY14. However, given the efforts taken to plug the gaps in its portfolio, we expect Britannia to sustain the margin going forward. However, sharp improvement in margins to ~9%, as witnessed in post Q4FY13, will not only aid in strong earnings growth but can also result in stock re-rating.

Source: Company & Nirmal Bang Research Source: Company & Nirmal Bang Research

Britannia reported 330bps YoY EBITDA margin expansion in Q1FY14 which resulted in 79.3% increase in EBITDA and 98.6% increase in YoY PAT. Gross margin expanded 230bp YoY to 40.3% in Q1FY14. The company’s focus is on premium brands, as indeed the pricing actions are driving this in our view. Further, low gross margins of 38% in base quarter (Q1FY13) and gains from operating leverage contributed to sharp increase in EBITDA margins, even as Britannia maintained elevated levels of ad-spends (9% of sales) during Q1FY14. This is the second consecutive quarter of top notch EBITDA performance belying concerns of one-off strong Q4FY13. Clearly, the investments behind supply chain undertaken since FY12 are started giving favorable return.

3 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

Source: Company & Nirmal Bang Research


One of the largest players in the branded biscuit category

Britannia Industries enjoys the key position in the branded biscuit category where the company enjoys 1/3

rd or around 33% market share in the biscuits market size of $2.2 bn branded biscuits

category in India. Britannia currently has seven strong brands in its portfolio including Good Day, Marie, Tiger, Treat, 50-50, Milk Bikis & Nutri Choice. Britannia has almost similar to the market share held by Parle. Britannia has been trying to reduce its dependence on the plain vanilla glucose biscuits and innovating aggressively on the value-added products. Biscuits category contributed ~87% to Britannia’s standalone revenue in FY13.

4 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

Source: Industry & Nirmal Bang Research

Increase in contribution of higher margins segment to drive growth Britannia is the pioneer in launch of cookies and creams biscuits in the Indian markets. With the increase in the premium biscuits sales mix (shift in consumer preference from the plain biscuit to value added premium biscuit), Britannia had a head start in the premium segment is set to benefit most. Over the years, Britannia has focused on power brands namely Tiger, Marie, 50-50, Good Day, Treat and Nutrichoice. Most of the brands have seen launch of value-added products. Britannia continues to have leadership in the cookies segment accounting for 44% of the total pie, while ITC has emerged stronger in the creams segment amounting to 27% market share of the total pie as against 25% market share of Britannia. To continue its leadership position in the cookies segment, Britannia has launched Rs. 5 price point cookies to upgrade consumers in the out-of-home consumption. All the leading players are focusing on the premium segment in the cookies, creams and value-added segment. Parle, which has lion’s share in the Glucose segment and had launched 20-20 cookies at the mass end, has now entered premium segment with Gold Star cookies. ITC has launched Sunfeast Kaju Badam cookies at the mass end of the segment (the company is already present in the premium segment). With the aggressive management strategy for the past five years, the share of the glucose biscuits has dropped to 19% in FY13 from 40% in FY07. With large share of non-glucose biscuits and higher end biscuits, Britannia will be the beneficiary of customer up gradation in to premium segment of biscuits.

5 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

Source: Industry & Nirmal Bang Research Source: Industry & Nirmal Bang Research

Rational competition in the biscuit segment

Despite the entry of new players like Kraft (Oreo), McVitie’s and Unibic and entry of Horlicks in premium segments of the biscuit, the competition has become more rational in the past 12-18 months. The players like Kraft, Unibic has increased the advertisement and sales promotion activity, but the players are very rational in pricing game. None of the players have indulged in pricing war to corner share and disturb the market equilibrium. Despite, the aggressive promotional activates, these players have not been able to leave a considerable mark and has been able to carve small niches for themselves. We feel that the leadership position of Britannia in premium segment is difficult to shake as we feel that inspite of aggressive promotions; the players have not been able to disturb the Britannia market positioning.

Non-biscuit sales growing at 28% CAGR; to lead the future growth

Non-biscuit bakery products comprises of Bread, Rusk & cake. We believe this segment provides huge opportunity for the company as non-biscuit bakery products market is currently large and unorganized in India. Sales of these segments have grown at 28% CAGR in the past five years as against sales CAGR of 15% in the biscuits segment during the same period. Revenue contribution from non-biscuit category to Britannia’s standalone revenue has increased from 11% in FY08 to 17.2% in FY13. We expect the contribution from the segment to improve going forward as the company has integrated its domestic bakery and dairy distribution and sales teams in FY12 which in our view, will increase the customer reach of Britannia’s dairy & bakery products. Bread: Britannia claims to have 50% market share in India’s ~Rs. 13 bn bread market in 2012. Britannia competes with national players like Modern and regional players like Harvest Gold in Delhi, Wibbs and Kwality in Mumbai. Britannia has extended its product line from plain maida bread to value added products like Multigrain, oats, etc. The idea behind launch of value added products is to increase the margin of this segment as the value added product commands higher realization of 50-100% compared to the plain maida bread. This has lead Britannia ahead of the players in terms of innovation.

6 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

Cake and Rusk: Britannia is the only national players selling rusk and fruit cake in India. Though, there are lot of local players like Monginis, Celejor, Toasty (rusk) in Mumbai and several other brands available in the other cities. Britannia has developed the rusk segment by launching Rs. 4 price point pack as an out-of-home consumption and a great snacking option. Britannia has been able to develop rusk as a branded product in the already unorganized segment market. We further believe that these segments offer huge growth potential which can be en-cashed by value-added variants, product availability and awareness.


Continuous focus on product innovation to drive growth India is witnessing a major shift towards 'premiumization' as consumer preferences change, fuelled by soaring disposable incomes in smaller towns and health awareness. To cater to the current trends, Britannia has launched various value added products to increase its mix towards premiumization with its products like Pure Magic, Treat, Good Day, Burbone etc. The Company has been driving its sales by introducing several new and renovated offerings across the entire portfolio that includes NutriChoice Multigrain Thins and Roasty, Pure Magic, Treat Fruit Creams, Marie with Honey, Tiger-Zor chocolate and almond milk. The company has launched cream variants like Krunch, Elaichi and Banana flavours of Tiger at the middle end of the market. Marie has been extended to Vita Marigold. 50-50 has seen extension into Maska Chaska and now Snackuits. Further, Treat and Good Day have seen extensions into value-added premium products which are priced 2-3x more than the original variants. This has resulted into the decline in the sales of Glucose in total sales from 40% in FY07 to 19% in FY13. We believe all this investments by Britannia in the brands and new products development and with steady premiumization of portfolio going ahead, will make Britannia’s brands more relevant and distinctive and thereby lead to Britannia’s profitable growth going forward.

7 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

Improvising manufacturing and sales effectiveness

Britannia has defined its manufacturing strategy where it’s increasing its reach to the consumption markets through in-house manufacturing especially for its premium products. Under this strategy, the company plans to set up Greenfield manufacturing plants as well as buy equity stakes in companies promoted by its contract manufacturers. In FY12, Britannia has commissioned two new Greenfield units in Hajipur, Bihar and Khurda, Orissa. Further, the company has also aligned its manufacturing and depot footprints to reduce distance to market. The management aims to push up the proportion of in-housed manufacturing from the current 45% to 65% in the next few years. We are of the view that this strategy will improve sales, and margins going forward.

Subsidiaries turned profitable in FY12; steady growth likely led by dairy business

In March 2007, Britannia Industries Limited formed a Joint Venture with the Khimji Ramdas Group, one of the largest and the most respected business conglomerates in the Middle East. Britannia and its Associates have acquired a significant stake in Dubai based Strategic Food International Co. LLC and Oman based Al Sallan Food Industries Co SAOG. The two companies are key regional players in the biscuits, wafers and cookies segment in the GCC markets and export their products across the world. The subsidiaries had reported a loss of Rs. 62.1 cr in FY09; however, they have reported a sharp turnaround with PAT of Rs 8.1 cr in FY12 and Rs. 26 cr in FY13. Subsidiaries have improved profitability further and are accretive to EPS. We note that Dairy subsidiary has more than doubled profits in FY13 to Rs. 35 cr from Rs. 15.5 cr in FY12. Britannia Dairy is the most profitable of these subsidiaries. The company has cut out fringe geographies and countries and has focused more on its main geography of GCC, which has resulted in increased margins

Improvement in performance of subsidiaries


StakeRs. Cr Sales Net Profit Sales Net Profit Sales Net Profit Sales Net Profit Sales Net ProfitBritannia Dairy Products 100% 161.9 -3.5 188.8 10.1 218.8 4.2 293.5 15.5 309.5 35Daily Bread 100% 16.3 -24.8 14.5 -4.6 19.5 -1.2 24.1 -1.5 23.3 -2.7Strategic Food Int 100% 157.8 -26.9 128 -18.5 136.1 -13.1 188.4 -4.3 232.3 -4.9Al Sallan 66% 73 -6.9 92.4 -8.3 87.3 1.8 107.3 -1.6 125.4 0.1Total 409 -62.1 423.7 -21.3 461.7 -8.3 613.3 8.1 690.5 27.5

FY09 FY10 FY11 FY12 FY13

8 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

Dairy business also offers good growth opportunity Branded dairy products also provide good growth opportunity as this category is growing fast and provides scope for differentiation. In India, dairy market size is ~Rs. 2346 bn in 2012 as per industry source, which is growing at 5% per annum. Britannia dairy operates at the premium end of the dairy segment with presence in UHT Milk, Butter, Cheese slices, Cheese, Curd, Ghee and Tiger Zor and Actimind Milk. The business is operating at the premium end, with products like Slimz Milk, Gourmet cheese and value-added cheese slices. We note that Britannia Dairy products enjoy a price premium of 8%-15% across product segments. Further, the market of value-added products of milk like dahi, yoghurt, cheese & dairy based beverages is also growing rapidly, albeit from a small base of ~Rs. 110 bn in 2012 as per industry sources. With higher disposable income, a greater array of choices and an increasing health and nutrition consciousness, the dairy industry will continue to benefit from the migration to branded and value-added milk and milk based products. This has also increased industry competitiveness with local and regional players going national and international players extending their presence and business portfolio.

Increase in rural penetration to drive growth

The company is continuously increasing its rural consumption by widening the rural reach. The company’s product portfolio has a rural to urban share of 70% (in terms of consumption). The company intends to take the rural share to 150% of total urban consumption over the long term. As

on FY13, the rural contribution to the total Britannia’s revenue stands to 40%. The company is focusing on rural markets by increasing reach and widening its portfolio to drive higher revenue growth. The contribution of the rural will increase owing to good monsoon, pre-poll spend and food security bill which in turn will drive higher rural disposable income. Further Britannia is scaling up its rural presence by augmenting its distribution network, with 6%-7% growth in outlet coverage per annum. We feel increasing rural penetration will insulate it from economy slowdown and will help it to maintain growth.

Financial Analysis

For the past couple of years, Britannia has been focusing on three key areas to drive operational excellence: (a) newness and innovations, (b) revenue management and (c) cost rationalization. Currently, Britannia controls 1/3rd of the organized biscuit segment, expects to maintain this market share with a focus on profitable growth. We believe that the strong brand equity, rising aspirations and pricing power can increase rural growth significantly; however, efficient and cost effective distribution remains a challenge. We expect Britannia to report net sales CAGR 17% over FY13-FY15E led by a combination of price hikes, mix improvements and volume growth.

9 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33


Improvement in EBITDA margins likely to sustain

The unpredictability of commodity prices has been the biggest drag on margins earlier. However, with the easing of commodity costs off lately and passing of the raw-material inflationary pressures to customers will improve the EBITDA margin going forward. Although, concerns regarding vulnerability of operating margins to commodity costs and lack of pricing power in the industry are valid. To negate the impact, the increase in efforts to drive efficiencies in the supply chain and back-end are bearing fruits. Focus on cost rationalization enabled Britannia to report strong EBITDA margins of over 8% for Q4FY13 and Q1FY14. Further, stable commodity costs, an enhanced mix and price hikes also buoyed the EBITDA margins. We believe some of the benefits pertaining to cost control are sustainable and should help drive medium-term margins. In addition, the dairy/international business are worth Rs 3.5bn each in terms of revenues, and have seen a marked improvement in profitability over the past year with margins now comparable to that of the standalone business will also drive the operating margins for the company going forward. Thus, premiumization coupled with improved traction in Dairy and International businesses should support medium-term profitability; in our view.

We expect the EBITDA margin to be 8.9% in FY14E and 9.2% in FY15E.


10 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

Valuation and Recommendations

Peer Comparison

Source: Bloomberg estimates & Nirmal Bang Research

*Nirmal Bang estimates

CMP as on 30th

September 2013

Peer Comparison Charts:


Mkt Cap CMP

(Rs Bn) FY13 FY14E FY15E FY13 FY14E FY15E Sales EBITDA PAT FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E

Britannia* 98.7 824 61.4 71.8 84.0 6.9 8.9 9.2 17.0 35.3 42.7 37.8 23.3 18.6 23.2 15.2 12.4 17.7 11.5 7.8 53.7 59.6 49.9

Nestle 503.2 5220 83.0 93.7 108.8 23.1 22.4 22.4 14.5 12.7 15.9 47.1 41.7 35.3 25.3 24.0 20.8 26.8 21.9 17.9 69.5 57.8 54.8

Dabur 295.6 170 61.8 71.1 82.0 16.4 17.1 17.4 15.2 18.5 20.1 38.7 31.8 26.8 29.6 24.7 21.1 11.2 11.1 9.0 39.7 37.9 36.3

ITC 2696.0 340 313.2 362.6 404.0 35.6 34.8 36.9 13.6 15.5 17.4 35.1 30.5 25.7 23.4 20.7 17.5 10.6 10.6 9.3 35.7 36.1 37.5

GSK Cons 182.4 4337 31.9 35.9 41.8 18.0 16.8 17.1 14.5 11.1 17.3 41.8 35.8 30.5 27.6 28.1 23.7 11.8 11.4 9.6 34.9 34.3 34.2

HUL 1356.9 627 270.0 297.8 338.3 15.6 15.3 15.2 11.9 10.5 1.5 35.4 37.8 34.6 31.3 29.0 25.6 35.2 38.0 31.4 117.0 111.7 100.0

GCPL 285.0 837 64.1 77.6 92.1 15.9 15.9 16.4 19.9 21.2 13.1 35.8 34.3 27.8 29.7 24.8 20.2 8.0 7.4 6.2 26.0 22.6 23.8

Marico 141.8 220 46.0 51.0 58.9 13.9 14.4 14.6 13.2 16.0 18.8 35.6 30.0 25.3 23.1 20.1 17.2 6.9 6.0 5.1 25.3 21.4 21.3

RoE %CAGR (FY13-FY15E) % PENet Sales EBITDA % EV/EBITDA P/B

11 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

One year forward P/E band One year forward EV/EBITDA band


One year forward P/BV band


Britannia Industries enjoys a key position in the branded biscuit category where the company enjoys 1/3

rd or around 33% market share in the biscuits market size of $2.2 bn branded biscuits category in

India. Britannia’s profitability was continuously under pressure with lower EBITDA margin. Britannia operating margin were in the range of 5%-7% in last five year though the sales growth were reasonable over 16% CAGR. In last two quarter we have witnessed substantial margin expansion with 8.9% and 9.2% in Q4FY13 and Q1FY14 respectively. According to management, the margin expansion is driven by companies focused efforts to drive efficiencies in back-end through cost management program, premiumization trend in market, improvement in the product mix towards high value-added products and price increase taken by company. The company’s large subsidiaries are in Dubai (SFIC), Oman (Al Sallan) and in India (Britannia Dairy). Both Al Sallan and Dairy business turned profitable in FY12. We expect profitability of the dairy business to improve even further.

12 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

Britannia stock trades at 23.3x/18.6x FY14/FY15E P/E, below its five-year median of 23.9x, and at 15.1x/12.4x EV/EBITDA, respectively below its five-year median of 16.5x. As the company has posted strong performance in the last two quarters which we believe the company will be able to continue the momentum going forward hence, improving the return ratios and cash flow over FY13-FY15E. The stock is currently trading below its P/E and EV/EBITDA median as the stock market is yet to factor in the strong improvement posted by the stock, which we believe may happen in the next nine to twelve months. RoCE increased from 36.5%/23.7% in FY10/FY11, respectively, to 41.0% in FY13. Following improvement in operating margin, return ratios and cash flow, the stock got re-rated. Still, Britannia trades at a discount when compared with other consumer goods companies after adjusting for growth rate and better return ratios. We expect Britannia to post EPS CAGR of 42.7% over FY13-FY15E as against, 15.5%/20%/16.9%/17.1%/1.2%/13.5%/18.7% in case of Nestle/Dabur/ITC/GSK Cons/HUL/GCPL/Marico, respectively, and its stock trades at 18.6x FY15E P/E compared to 35.3x/26.8x/25.7x/30.5x/34.6x/27.8x/25.3x for these companies, respectively. Britannia is expected to post a healthy RoE of 49.9% in FY15E against 36.3%/37.5%/34.2%/23.8%/21.3% in case of Dabur/ITC/GSK Cons./GCPL/Marico, respectively. However, at 17.5x FY15E P/E, the stock trades at a discount to these players. Healthy revenue CAGR of 17%, better product mix and reduction in manufacturing costs would drive margins, while low debt on the back of improving working capital cycle and strong cash flow generation would drive net profit CAGR by 42.6% over FY13-FY15E. With 1/3

rd market share,

improvement in EBITDA margin, improvement in RoCE, consistent free cash flow generation and low debt balance sheet coupled with 17%/42.6% revenue/PAT CAGRs over FY13-FY15E will command better valuation. We believe that, Britannia appears to have hit a sweet spot in its strategy of using price hikes and a richer product mix (new and premium products) to combat rising costs. Britannia’s focused effort to drive efficiencies in back-end through cost management programme is yielding benefits. We feel that the company will be able to sustain the operating margin going forward on the back of benign commodity price, change in sales mix.

At CMP of Rs. 824, the stock is trading at 23.3x and 18.6x PE for FY14E and FY15E respectively. Britannia trades at 15-25% discount to listed peers ITC, Nestle, Marico & GSK Consumer, largely due to low operating margin. However, due to the ongoing structural changes in company’s revenue and product mix, the operating margin will improve and this discount could narrow down gradually. Britannia enjoys strong operating cash flows, gives consistent dividend payouts and healthy return ratios. We recommend to BUY the stock with a target price of Rs. 1061 per share (FY15E 24x PE).

Risk and Concern Increase in raw-material cost continue to remain a cause of concern for Britannia where in

company depend on agro-based product like Wheat, Sugar, Palm Oil etc and prices of these products continue to scale up in long run. In near term, the prices of these products have shown some moderation/stability on account of good rainfall.

Heightened competitive pricing by ITC and Parle.

Risk associated with management changes.

13 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

Q1FY14 Standalone Result Analysis

Particulars Q1FY14 Q1FY13 YoY% Q4FY13 QoQ%

Net Sales 1403.4 1221.6 14.9% 1486.6 -5.6%

Other Operating Income 12.9 7.3 77.0% 15.8 -18.5%

Total Income 1416.3 1228.9 15.3% 1502.4 -5.7%

Raw Material Consumed 664.8 640.9 3.7% 648.4 2.5%

Stock Adjustment 8.1 -1.9

82.5 Employee Expenses 48.6 37.7 29.0% 28.4 71.0%

Conversion & related charges 116.8 112.3 4.0% 122.2 -4.5%

Purchase of Traded Goods 164.5 118.5 38.9% 206.0 -20.1%

Advertisement 126.5 98.7 28.2% 124.4 1.7%

Other Expenses 157.3 150.4 4.6% 158.6 -0.8%

Total Expenditure 1286.7 1156.6 11.2% 1370.6 -6.1%

EBITDA 129.7 72.3 79.3% 131.9 -1.7%

% of net sales 9.2% 5.9%

8.9% Depreciation 15.3 13.0 17.6% 14.9 2.8%

EBIT 114.4 59.3 92.8% 117.0 -2.2%

Interest 3.4 9.5 -64.6% 10.4 -67.6%

PBT & OI 111.0 49.9 122.7% 106.6 4.1%

Other Income 13.9 10.6 30.6% 21.1 -34.3%

PBT 124.9 60.5 106.5% 127.7 -2.2%

Tax 38.6 17.0 39.9

Tax / PBT 30.9% 28.1% 31.2%

Net Profit 86.3 43.5 98.6% 87.9 -1.8%

% of net sales 6.1% 3.6% 5.9%

EPS (Unit Curr.) 7.2 3.6 7.3


Q1FY14 Standalone Financial Performance:

Stand-alone net sales grew 14.9% to Rs. 1403.4 cr; volume growth estimated at 6%-7%,

helped by lower base as well as sustained strong brand investments. Consolidated net sales grew 14.2% YoY growth to Rs. 1539.6 cr.

Gross margin expanded by 230bps YoY to 40.3% in Q1FY14. Other expenses and conversion costs declined 110bps and 90bps YoY. Thus, despite 90bps

increase in ad-spends, EBITDA margins expanded 330bps YoY to 9.2% resulting in robust 80% YoY growth in EBITDA.

Other income grew 30.6% YoY and interest costs decline by 64.6% YoY driving PBT growth of 106.5% YoY. However, 280bps YoY tax rate to 30.9%. Therefore, Adj PAT grew 98.6% YoY to Rs. 86.3 cr.

14 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

Company Overview Britannia Industries is a part of Wadia Group. The Company operates in two business segments: bakery products, including biscuits, bread, cakes and rusk, and dairy products, including milk, butter, cheese, ghee, dahi, milk-based ready to drink beverages and dairy whitener. Biscuits contribute to more than 80% of Britannia`s total turnover. Other products include bread and cakes. Britannia forayed into dairy business in 2002 through its subsidiary Britannia New Zealand foods Pvt. Ltd. (BNZF), which was run as a JV with Fonterra, world’s second largest dairy company. In 2009, Britannia acquired Fonterra’s 49% stake and BNZF was renamed as Britannia Dairy Pvt. Ltd. (BDPL), which became a wholly owned subsidiary of Britannia. BDPL offers dairy products, including cheese, dairy whitener, yoghurt, butter and ghee. The company marked its presence in retail bakery business with 51% acquisition of Bangalore based food retailer, Daily- Bread.

15 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

Consolidated Financials

Profitability (Rs. In Cr) FY12 FY13 FY14E FY15E Balance Sheet (Rs. In Cr) FY12 FY13 FY14E FY15E

Revenues - Net 5460.8 6135.9 7177.6 8397.8 Issued Share Capital 23.9 23.9 23.9 23.9% change 19.0% 12.4% 17.0% 17.0% Reserves & Surplus 385.3 526.9 826.0 1228.1EBITDA 310.9 420.6 640.1 769.8 Net Worth 409.2 550.8 849.9 1252.0

% change 12.6% 35.3% 52.2% 20.3%

Share application money

pending allotment 0.0 2.3 2.3 2.3Interest 41.6 41.3 31.5 18.5 Capital subsidy 0.0 4.8 4.8 4.8Other Income 59.1 52.2 56.2 68.2 Total Loans 604.0 379.9 249.9 119.9EBDT 328.4 431.6 664.9 819.6 Minority Interest 2.2 2.3 2.3 2.3Depreciation 61.8 73.2 82.9 90.8 Net Deferred Tax Assets 7.6 12.8 12.8 12.8Exceptional (Gain)/ Loss 0.0 0.0 0.0 0.0 Total Liabilities 1022.9 952.8 1122.0 1394.1PBT 266.6 358.4 581.9 728.8 Net Fixed Assets 530.0 637.6 852.0 911.2Tax 66.9 98.6 160.0 200.4 CWIP 111.3 147.3 0.0 0.0PAT 199.7 259.9 421.9 528.4 Goodwill on consolidation 94.4 99.2 99.2 99.2Share of profit & loss associates -0.1 -0.3 -0.3 -0.3 Investments 248.5 108.2 107.9 107.6Minority interest -0.1 -0.1 0.0 0.0 Inventories 431.8 374.7 413.0 483.2Adj PAT 199.6 259.5 421.6 528.0 Sundry Debtors 113.0 122.8 137.7 149.6Shares o/s ( No. in Cr.)* 11.9 12.0 12.0 12.0 Cash & Bank 61.3 102.9 141.1 290.6EPS 16.7 21.7 35.3 44.2 Loans & Advances 239.7 278.6 304.8 356.6Adj EPS* 16.7 21.7 35.3 44.2 Other non current assets 12.1 12.1 14.2 16.6Cash EPS 21.9 27.9 42.2 51.8 C A L&A 857.9 891.2 1010.7 1296.5Stanadlone Quarterly (Rs. In Cr) Sep.12 Dec.12 Mar.13 Jun.13 CL & P 819.1 930.7 947.8 1020.4

Revenue including OI 1416.6 1467.6 1502.4 1416.3 Working Capital 38.8 -39.6 62.9 276.1EBITDA 74.4 92.4 131.9 129.7 Total Assets 1022.9 952.8 1122.0 1394.1

Interest 8.8 9.1 10.4 3.4 Cash Flow (Rs. In Cr) FY12 FY13 FY14E FY15E

EBDT 65.6 83.3 121.5 126.3 Operating

Dep 14.3 14.9 14.9 15.3 EBITDA 310.9 420.6 640.1 769.8Other Inc. 12.8 11.4 21.1 13.9 Change in WC -49.2 119.9 -67.7 -67.3PBT 64.2 79.8 127.7 124.9 Tax -51.5 -89.2 -160.0 -200.4Tax 18.6 22.8 39.9 38.6 CF from Operations 210.2 451.3 412.4 502.1 PAT 45.6 57.0 87.9 86.3 Investing Activities EPS (Rs.) 3.8 4.8 2.5 2.0 Capex -279.8 -221.6 -150.0 -150.0

Operational Ratio FY12 FY13 FY14E FY15E Investment 140.0 140.3 0.0 0.0

EBITDA margin (%) 5.7% 6.9% 8.9% 9.2% Other Income 59.1 52.2 56.2 68.2Adj.PAT margin (%) 3.7% 4.2% 5.9% 6.3% Cash from Investment -80.63 -29.05 -93.76 -81.76Adj.PAT Growth (%) 48.5% 30.0% 62.4% 25.3% Financing

Price Earnings (x) 49.3 37.9 23.3 18.6 Dividend paid -90.1 -117.8 -118.9 -122.4Book Value (Rs.) 34.3 46.7 71.7 105.3 Share Capital and Premium 0.0 7.1 0.0 0.0ROCE (%) 31.6% 41.0% 60.0% 60.1% Interest Paid -41.2 -42.3 -31.5 -18.5RONW (%) 54.3% 53.7% 59.6% 49.9% Loan -0.3 -224.1 -130.0 -130.0Debt Equity Ratio 1.5 0.7 0.3 0.1 Others -13.5 -3.6 0.0 0.0Price / Book Value (x) 24.1 17.7 11.5 7.8 Cash from Financing -145.1 -380.7 -280.4 -270.9EV / Sales 1.8 1.6 1.4 1.1 Net change in Cash -15.6 41.6 38.2 149.5EV / EBIDTA 31.5 23.2 15.2 12.4 Opening cash 76.9 61.3 102.9 141.1

Closing Cash 61.3 102.9 141.1 290.6


16 | P a g e

II nnii tt

ii aatt ii

nngg

CCoo

vvee

rr aagg

ee

tt iiaa

tt iinn

gg CC

oovv

eerr aa

ggee

tt iinn

gg CC

oovv

eerr aa

ggee

gg CC

oovv

eerr aa

ggee

CCoo

vvee

rr aagg

ee

vvee

rr aagg

ee

rr aagg

ee

ggee


II nn

ii ttii aa

ttii nn

gg CC

oovv

eerraa

ggee

–– 00

11 OO

ccttoo

bbee

rr 22

0011

33

NOTES

Disclaimer:

This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities PVT LTD). The information, analysis and

estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This

document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for

general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the contents stated

herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This

document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affil iates and their employees

may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or

perform investment banking or other services for any company mentioned in this document.

Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.)

B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park

Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai-400013 Board No. : 91 22 3926 8000/8001

Fax. : 022 3926 8010

growing with every bite - Nirmal Bang Initiating Coverage.pdf · Britannia Industries enjoys the...

Documents

Transcript of growing with every bite - Nirmal Bang Initiating Coverage.pdf · Britannia Industries enjoys the...