INSTITUTIONAL EQUITY RESEARCH Britannia Industries ... Cookies, and Veg-muffins. It also re-launched...

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Transcript of INSTITUTIONAL EQUITY RESEARCH Britannia Industries ... Cookies, and Veg-muffins. It also re-launched...

  • INSTITUTIONAL EQUITY RESEARCH

    Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

    Britannia Industries (BRIT IN) Priced to perfection

    INDIA | FMCG | Quarterly Update

    14 November 2018

    Top takeaways from Q2FY19  Significantly better than our estimates due to strong momentum in domestic business,

    foray into new categories (wafer biscuits), and increasing salience of premium products. Domestic business saw its fourth consecutive quarter of double-digit volume growth on: (1) solid performance in domestic business via higher A&P and re-launches, (2) new product launches/ foray into new categories, and (3) focus on increasing distribution network in traditionally weaker areas (Hindi Belt + Gujarat grew at 1.5x Britannia’s overall run-rate). On a two-year CAGR, adjusted volume growth of 9% is quite commendable.

     Management said that rural growth continued to outpace urban growth, which has been the trend across most FMCG companies; it expects momentum to sustain in coming quarters as general elections will boost consumer spending.

     International business grew in double-digits, despite slowdown in key geographies of Middle East and Africa, as Britannia forayed into newer countries within Africa. It plans to start the Nepal plant in 4QFY19.

     Management justified gross margins expansion of c.220bps yoy to 39.7%, despite RM headwinds, based on: (1) it is largely covered for any RM inflation till mid 4QFY19, (2) high salience of premium products, (3) increasing share of in-house manufacturing, and (4) for its bread business, it has shifted to contract manufacturing from direct procurement. Britannia plans hike prices by 3-4% in 2HFY19 to mitigate RM inflation.

     EBITDA grew only c.20% yoy (in line with strong gross profit growth) due to ad- campaigns (up 20%) carried out to celebrate its centenary. Management expects ad sends to normalise from 2HFY19. PAT growth was lower than EBITDA growth due to lower other income (declined 13.5% yoy).

    We like the narrative, but not valuation: We remain overweight on the foods space over HPC, based on the following factors: (1) formalisation will be more visible in foods space, given higher share of unorganized sector, (2) setting up more large/integrated manufacturing facilities will in turn help to derive benefits of economies of scale and reduce wastage, (3) distribution infrastructure will improve (availability of refrigerators / other ancillary infra), and 4) focus on LUP will drive penetration.

    Nestle/GSK Consumer remain our top picks within the large-cap/mid-Cap FMCG space. We like the Britannia management’s narrative of driving topline and bottomline growth by strengthening power brands via innovation/re-launches and premiumization, enhancing direct distribution reach, increasing the share of in-housing manufacturing, and focussing on cost-efficiencies programme (planning savings of Rs 2.25bn in FY19, and foraying into newer categories (croissants/wafer biscuits), but valuations remain very expensive (54x FY20 EPS), particularly in the context of 14% earnings CAGR over FY18-21.

    We maintain NEUTRAL with a target of Rs 4,900 (40x Dec-20 EPS) as elevated valuation do not leave room for even minor disappointments. Key risk: higher than expected RM inflation and increase in competitive intensity

    Neutral (Maintain) CMP RS 5825 TARGET RS 4900 (-16%)

    COMPANY DATA

    O/S SHARES (MN) : 120

    MARKET CAP (RSBN) : 694

    MARKET CAP (USDBN) : 10

    52 - WK HI/LO (RS) : 6944 / 4400

    LIQUIDITY 3M (USDMN) : 2.1

    PAR VALUE (RS) : 2

    SHARE HOLDING PATTERN, %

    Sep 18 Jun 18 Mar 18

    PROMOTERS : 50.7 50.7 50.7

    FII / NRI : 16.7 17.5 17.3

    FI / MF : 12.6 12.0 12.4

    NON PRO : 3.8 3.7 3.8

    PUBLIC & OTHERS : 16.3 16.1 15.9

    KEY FINANCIALS

    Rs mn FY19E FY20E FY21E

    Net Sales 1,10,585 1,24,596 1,40,440 EBIDTA 17,925 21,014 24,178 Net Profit 11,532 12,983 14,849 EPS, Rs 96.0 108.1 123.6 PER, x 60.7 53.9 47.1 EV/EBIDTA, x 38.3 32.4 27.8 P/BV, x 16.7 13.8 11.6 ROE, % 27.5 25.6 24.6 Debt/Equity (%) 4.2 3.5 2.9 Vishal Gutka and Preeyam Tolia

    (Rs mn) Q2FY19 Q2FY18 yoy Q1FY19 qoq vs. our

    estimates % Comments

    Volume growth (% yoy) 13.0 6.0 12.5 Volume growth largely led by the premium segment

    Net Sales 28,548 25,365 12.5 25,272 13.0 8.7

    Gross Profits 11,343 9,525 19.1 10,009 13.3 10.7

    Gross Margin (%) 39.7 37.6 218bps 39.6 13bps 70bps Gross margins grew on low-cost inventory and product mix

    Staff costs 1080.4 1069.8 1.0 1086.1 -0.5 15.0

    Other operating expenses 5,867 4,766 23.1 5,195 12.9 12.0

    EBITDA 4,544 3,777 20.3 3,894 16.7 8.7

    EBITDA margin (%) 15.9 14.9 103bps 15.4 51bps 0bps

    PBT 4,590 3,934 16.7 3,933 16.7 8.5

    Adj. PAT 3,030 2,611 16.1 2,582 17.3 8.0

  • Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

    BRITANNIA INDUSTRIES QUARTERLY UPDATE

    Volume growth driven by premium products and enhanced Low-cost inventory and better product mix led

    distribution reach to gross-margin expansion

    Source: PhillipCapital India Research

    New launches and renovation

    9.0

    7.0

    1.5 2.0

    -

    6.0

    13.0

    11.0

    12.5 13.0

    -

    2.0

    4.0

    6.0

    8.0

    10.0

    12.0

    14.0

    Volume growth (%)

    7

    (17)

    22

    (22) (25)

    (20)

    (15)

    (10)

    (5)

    -

    5

    10

    15

    20

    25

    Flour Sugar RPO Milk

    2Q - commodity inflation (%)

  • Page | 3 | PHILLIPCAPITAL INDIA RESEARCH

    BRITANNIA INDUSTRIES QUARTERLY UPDATE

    Two-year forward P/E band EV/EBITDA band

    Source: PhillipCapital India Research Estimates

    15x

    30x

    45x

    60x

    0

    1000

    2000

    3000

    4000

    5000

    6000

    7000

    8000

    9000 Rs

    10x

    20x

    30x

    40x

    0

    200000

    400000

    600000

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    1000000

    1200000 Rs mn

  • Page | 4 | PHILLIPCAPITAL INDIA RESEARCH

    BRITANNIA INDUSTRIES QUARTERLY UPDATE

    Con-call takeaways

     Rural continues to grow faster than urban.

     Despite a slowdown in the Middle East and Africa, its international business grew in double digits.

     Its Mudra factory, which was commercialised in Q2FY9, will provide a cost advantage and improve efficiency in serving international markets, especially the Middle East and Africa.

     The biscuits facility has been commercialised in the Ranjangaon factory; cake and croissant production will start soon. The Ranjangaon facility will contribute 8-10% of the national capacity.

     It expects to add 200,000-250,000 outlets every year and targets to reach 2.5mn in the near term, which the company believes is achievable.

     It plans to add another two plants in the east and north each and one plant in the south in the next 2-3 years. Capex for FY19 stands at Rs 5bn.

     Currently, 55% of the production in volume terms is in house; it targets bringing this up to 65%.

     Its overall cost savings target in FY19 is Rs 2.25bn (same as FY18) led by cost efficiency in the factory (labour, power & fuel, material usage, etc.) and a change in logistics arrangements that has reduced the transported distance for biscuits.

     Capex for FY19 stands at Rs 5bn. Biscuits

     Launched Pure Magic Chocolush, Goodday Cashew Almond, Tiger Choco Cookies, and Veg-muffins. It also re-launched Britannia 50-50 and Bour-Bon with new packaging.

     Forayed into wafers by launching Crème Wafers, which has seen strong response from consumers; however, it is available only in southern states. Currently, the market size for wafers biscuits stands at Rs 4-5bn, with 20% CAGR. This market is widely fragmented, which offers huge opportunity as it is highly under penetrated compared to western countries.

     The premium portfolio is growing faster than the value portfolio (the value portfolio is defined as less than about Rs 100/kg) for the entire industry. Value portfolio contribution has come down to 40% from 50% for the industry in last 4-5 years.

    Dairy

     It launched Britannia Winkin Thick Shakes (Rs 25) and Dairy Whitener Jar (Rs 159) in Q3. Currently, the dairy whitener market is divided into retail (Rs 30bn) and institutional (Rs 15bn); Britannia plans to focus only on the retail market.

  • Page | 5 | PHILLIPCAPITAL INDIA RESEARCH

    BRITANNIA INDUSTRIES QUARTERLY UPDATE

    Financials

    Income Statement Y/E Mar, Rs mn FY18 FY19E FY20E FY21E

    Net sales 99,056 1,10,585 1,24,596 1,40,440 Growth, % 7 12 13 13 Other operating income 845 866 970 1,086 Total income 99,901 1,11,451 1,25,566 1,41,526 Raw material expenses -61,832 -67,088 -75,138 -84,531 Employee expenses -4,016 -4,478 -5,015 -5,617 Other Operating expenses -19,036 -21,960 -24,399 -27,200 EBITDA (Core) 15,017 17,925 21,014 24,178 Growth, % 17.5 19.4 17.2 15.1 Margin, % 15.2 16.2 16.9 17.2 Depreciation -1,421 -1,682 -2,175 -2,650 EBIT 13,596 16,243 18,838 21,528 Growth, % 17.3 19.5 16.0 14.3 Margin, % 13.7 14.7 15.1 15.3 Interest paid -76 -383 -677 -683 Other Income 1,664 1,747 1,660 1,826 Pre-tax profit