India Research Sector: FMCG 5th April 2013

Britannia Industries Ltd.

Shivani Mehra Tel: +9122-66638956 [email protected]

Accumulate

Nilesh Doshi Tel: +9122-66638950 [email protected]

Britannia Industries Ltd. (BIL) Date

5th April 2013

Britannia Industries Limited is a major player in the ready to eat

CMP

`515.25/-

food segment with leadership position in Bakery category. Its brand

52 week High / Low

`599.90/400.00

Equity Cap (current)

`23.9crs.

and Treat. The Company's plants are situated in Kolkata, Delhi,

Face Value

`2/-

Chennai, Mumbai, Uttarakhand, Orissa & Bihar with a capacity of

Mkt. Capitalization

`6157.23 crs.

~160,000 MT. The company currently has ~33% market share in the

portfolio includes Tiger, Marie Gold, Good Day, 50:50, Nutrichoice

biscuit segment with leadership position in various cream & cookies 18450.23

categories. The company has transformed itself from being a

NSE - NIFTY

5553.25

primarily a biscuit company in FY08 with diversification efforts into

NSE Code

BRITANNIA

other bakery products & dairy. In two years there is a structural

Bloomberg Code

BRIT IN

BSE Code

500825

BSE SENSEX

change in company’s revenue and product mix from 90%+ biscuit contribution to revenue to currently 77%. Britannia made its strong

Shareholding Pattern @ 31-12-12 Promoters

50.93%

Institutions

28.74%

Others

22.07%

presence felt in dairy this year and recently forayed into ready to eat Indian breakfast market & savory market. We expect this new initiative to start yielding results from FY14. Company’s product categories are all growing at 15%+ while the overall industry is

3-MTS

6-MTS

1-YR

6.0%

10.2%

-7.1%

Sensex

-3.1%

0.4%

10.0%

Nifty

-3.8%

-0.4%

9.4%

BIL

growing at 10%+.

Investment Rationale:
New product launches; expansion of categories & premiumisation: Over the last 4 to 5 years we have seen Britannia evolve its

Net Sales

FY11

FY12

FY13E

FY14E

product portfolio from a primarily salted biscuit (50-50) &

4,609.4

5,485.4

6,148.0

6,969.4

glucose player (Tiger) to a more value added product mix. The

19.0%

12.1%

13.4%

Growth %

industry witnessed a visible change in demand pattern over this

PBIDT

236.7

310.9

366.6

436.6

PBIDT Margins

5.1%

5.7%

6.0%

6.3%

134.2

199.7

230.4

294.8

PAT Margins

2.9%

3.6%

3.7%

4.2%

EPS

11.3

16.7

19.3

24.7

During the same time period Britannia also increased its product

PE

45.6

30.9

26.7

20.9

offerings while simultaneously increasing its presence in diary &

PAT

period from glucose biscuits to higher valued added biscuits such as creams, cookies &health digestive biscuits which saw a rise in demand.

bakery segment. Over the years the company has increased its offerings in both these segments with product differentiators to beat competition. The company’s recent launches have been focused on the health and nutrition platform. Examples of its health and nutrition launches are Nutri choice biscuits, Slimz Milk, Britannia cheese slices with 30% more calcium, Nutrichoice Roasty (savory), and Multigrain, multifibre, honey & oats, and wheat breads. We believe that over a period of time launches in this health & wellness segments likely to provide the company

Britannia Industries Ltd. (BIL)

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5th April 2013

with improving pricing power as consumers of such products are relatively less price sensitive.
Expect a slow and steady improvement in margins: Premiumisation of product portfolio, higher contribution of value added offerings, coupled with near term softening of raw material prices will lead to improvement in margins going in Q3, Q4 of FY14. We expect margins to hereon improve on the back of strong brand expansions & consolidation of value added offerings. We expect margin to be ~6.2% for FY14 from 5.9% in FY13E and steadily improve further in the future.
Backend investments in capacity: - With plans located in Kolkatta, Delhi, Chennai, Mumbai & Pantnagar the company began investing in capacity addition with geographical diversification 2 years ago. The company’s average capex was ~`60 crs. p.a which is now trending at `200 crs. the company is backward integrating to maintain quality and quick turnaround in all regional markets. The company recently invested in Orissa & Bihar to further strengthen its position in Eastern India.

The company

announced a plan to setup a Greenfield plant in Gujarat also. This will help increase presence in the Western markets and decentalised

distribution

Decentralized

activities

manufacturing

for

Western

facilities

to

India. help

consolidate regional distribution costs and hence control overall logistics cost.

Britannia Industries Ltd. (BIL)

3

5th April 2013

Risks: o Increasing competition: There have been a slew of MNC bakery giants entering the Indian biscuit market over the last 2 years. This coupled with a very large and unorganized local biscuit manufactures add to the competition. Britannia is fighting competition through its new launches positioned with a health and wellness tag and also with entry into other new growing snack and dairy categories. o Volatility in raw material costs: Wheat, sugar and milk are the main raw material for the company. The prices have been volatile and continue to remain volatile. The company is open to taking calibrated price hikes to protect margins. o Increase in diesel cost to impact distribution costs: The staggered increase in diesel prices during this fiscal will have a negative impact on cost of distribution. To overcome these challenges, company has undertaken capex and has planned manufacturing capacities across regions, which will result in controlling distribution costs.

Valuations: At the CMP of `515.25 the stock trades at 26.7x & 20.9x its FY13E & FY14E EPS of `19.3 & `24.7 respectively. The company is trading at hardly 1x its market cap to sales. Margins hereon will stabilize and improve going into FY14 on the back of stable raw material prices especially sugar, milk, wheat and packing material. The new products launches will further lower dependence on the biscuits category & help in volume growth in the business.

We recommend investors to

ACCUMULATE the stock on a long term basis.

Britannia Industries Ltd. (BIL)

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5th April 2013

Product mix & premiumisation of product portfolio

75% FY12

77%

76% FY11

FY10

83%

79% FY09

FY08

92%

90% FY07

FY06

92%

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

FY05

% of total revenue

Biscuit revenue

Over the last 4-5 years Britannia's dependence on biscuits segment is coming down. It has diversified into various other product categories such as breads, cakes and milk & milk products. The contribution of other than biscuit segment has increased from 8% in FY05 to 25% in FY12. During the same period we have seen Britannia evolve its product portfolio from a primarily salted biscuit (50-50) & glucose player (Tiger) to a more value added product mix. Biscuits which is the largest contributor to topline at 75% has witnessed an industry wide trend shift towards the value added cream & cookies segment. The industry witnessed a visible change in demand pattern over this period from glucose biscuits to higher valued added biscuits such as creams, cookies &health digestive biscuits which saw a rise in demand. Britannia’s product portfolio across these categories is priced at a premium to next best peer. The non biscuit business, which includes international business & dairy apart from breads, cakes rusks, has been growing at ~20-22% over the last 3-4 years. The dairy business is breaking even at various locations and the launch of specialty breads to enable company to command better markups.

Revenue Mix 120% 100% 80% 60% 40% 20% 0%

8% 92%

FY05

11%

13%

25%

83%

77%

75%

FY08

FY10

Other Bakery Products

Britannia Industries Ltd. (BIL)

FY12 Biscuits

Cakes, rusks & breads segments have registered a CAGR of 18% over the last 3 years. We expect this segment to grow at 20%+ yoy with an upward bias if the company introduces new brand extensions or new products lines. The company recently launched savories, sour milk & health breads markets. We expect this segment to start yielding results from FY14. We expect with the launch of specialty breads his margin to further improve. We expect the wheat and sugar prices to now remain stable ad demand and supply are in balance (risk being elections). These international operations have also started contributing to the bottom line. We expect operating margins to improve from current 5.9% to 6.5% by Q4FY14.

5

5th April 2013

Slow and steady improvement in margins Food inflation has peaked in India. Apart from Wheat the MSP for which has again recently been revised upward (ensuing elections) Sugar & milk have started to ease off and stabilize. In the Q3FY13, the company took an average price increase of 5.5%. Mix & price also contributed 5.5-6% on an average to topline growth. Apart from the effort to premiumise the product portfolio with new launches the wheat, sugar and milk prices appear to now remain stable as demand and supply are in balance (risk being elections). These are the two main raw materials for the company. The international operations have also started contributing to the bottom line. We expect operating margins to improve from current 5.9% to 6.5% by Q4FY14.

Skimmed Milk WPI

Milk WPI

190 185 180 175 170 165 160 155 150 145 140

220 210 200 190 180 170 160

Nov-12

Jan-13 Jan-13

Sep-12

Jul-12

May-12

Mar-12

Jan-12

Nov-11

Sep-12

Jul-12

May-12

Mar-12

Jan-12

Nov-11

Sep-11

Jul-11

Jan-13

May-11

150

Jan-11

150 Nov-12

160

Sep-12

160 Jul-12

170

May-12

170

Mar-12

180

Jan-12

180

Nov-11

190

Sep-11

190

Jul-11

200

May-11

200

Mar-11

210

Mar-11

Sugar WPI

210

Jan-11

Nov-12

Wheat WPI

Sep-11

Jul-11

May-11

Mar-11

Jan-11

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

150

We believe company effort to premiumise its product portfolio to make it easier for the company to take price hike (semi- price elasticity) especially in the nutritive portfolio.

Britannia Industries Ltd. (BIL)

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5th April 2013

Consolidation of innovation The company has over last 3-4 years done the innovations in its product portfolio in all facets such as Pricing, Packaging and entry into new segments. Innovation has been focused on growing its segments with the base of health and nutrition. The company has over the years innovated its product portfolio so as to command pricing premium in the market. Brand leverage has helped Britannia gain foot hold in new segment such as Chaas and healthy bread offerings. Innovation backed by advertisment exposure to help improve growth. Britannia accelerated the nutritional drive in the last 3-4 years and has been growing in double digits in this segment. The adults Health and Wellness segment is growing at 20%+ levels and Britannia is witnessing similar to higher growth. Approximately 50% of its revenues flow in from this health & wellness segment.

Over the last 2-3 years the company has entered into various segments of snacks & beverages like milked based drinks and namkeens. These launches are supported by its main differentiator health & wellness. The market potential for a few of the launches is as follows: Currently, India’s health snack market accounts for only about five per cent of the estimated `10,000-crore snack food market. The organized market for yogurt is estimated at Rs 250 crore and growing at a healthy rate of more than 20% annually. Yoghurt and sour milk drinks are expected to account for a 10% share of total dairy sales by 2016, thus almost doubling the 2011 contribution of 6%. The potential for growth in the Indian flavored milk is very good with an estimated annual growth rate of 15-20%.

With a market share of 10-12% of the industry Britannia is now targeting the health conscious with the launch of multi fiber & multi grain breads.

Britannia Industries Ltd. (BIL)

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5th April 2013

Backend investments in capacity and front end investments in brands to aid growth Britannia has over the years increased the investment behind creating backend capacity to further increase the scope of internal sourcing. The company’s average capex was ~`60 crs. p.a which is now trending at `200 crs. The company is backward integrating to maintain quality and quick turnaround in all regional markets. The company recently invested in Orissa & Patna & plan to setup a Greenfield plant in Gujarat also. Decentralized manufacturing facilities to help consolidate regional distribution costs and hence control overall logistics cost.

Capex (` ` cr)

FY 07

FY 08

FY 09

FY 10

FY 11

FY 12

Standalone

88.86

66.566

68

48

82

191

%growth

118.5%

-25.1%

1.9%

-29.9%

73.1%

132.2%

Consolidated

253.25

77.313

108

79

90

266

-69.5%

40.0%

-26.5%

12.9%

196.4%

%growth

The company has increased its advertisement expenditure as well to strengthen its brands and leverage on the same to launch new products. Ad expenses which used to average at ~7 % of sales is now trending at 8%+.

A & SP (% of NSV) 8.4

8.1

8.4

8.4

Q4 11-12

Q1 12-13

Q2 12-13

Q3 12-13

7

Q3 11-12

Britannia Industries Ltd. (BIL)

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5th April 2013

Risks

o

Increasing competition: There have been a slew of MNC bakery giants entering the Indian biscuit market over the last 2 years. This coupled with a very large and unorganized local biscuit manufactures add to the competition. Britannia is fighting competition through its new launches positioned with a health and wellness tag and also its attempts to other new growing snack and dairy categories. o Volatility in raw material costs: Wheat, sugar and milk are the main raw material for the company. The prices have been volatile and continue to remain volatile. The company is open to taking calibrated price hikes to protect margins. o Increase in diesel cost to impact distribution costs: The staggered increase in diesel prices during this fiscal will have a negative impact on cost of distribution. To overcome these challenges, company has undertaken capex and has planned manufacturing capacities across regions, which will result in controlling distribution costs.

Valuations At the CMP of `515.25 the stock trades at 26.7x & 20.9x its FY13E & FY14E EPS of `19.3 & `24.7 respectively. The company is trading at hardly 1x its market cap to sales. Margins hereon will stabilize and improve going into FY14 on the back of stable raw material prices especially sugar, milk, wheat and packing material. The new products launches will further lower dependence on the biscuits category & help in volume growth in the business. We recommend investors to ACCUMULATE the stock on a long term basis.

Britannia Industries Ltd. (BIL)

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5th April 2013

Financials

Income Stmt.

FY11

FY12

FY13E

FY14E

Net Sales

4,609.4

5,485.4

6,148.0

6,969.4

Total Expenditure

4,372.7

5,174.5

5,781.5

6,532.9

236.7

310.9

366.6

436.6

59.0

59.1

65.0

72.0

PBIDT Other Income Interest

43.6

41.6

35.7

20.2

252.1

328.4

395.9

488.4

64.9

61.8

75.9

81.9

PBT

187.1

266.6

319.9

406.5

Tax

52.9

66.9

89.6

113.8

PAT

134.2

199.7

230.4

292.7

Minority Interest

0.1

(0.1)

0.1

0.1

Share in associates

0.1

(0.1)

0.1

0.1

134.3

199.6

230.6

292.9

11.3

16.7

19.3

24.5

Balance Sheet

FY11

FY12

FY13E

FY14E

SHAREHOLDERS' FUND

326.0

409.2

501.8

631.1

23.9

23.9

23.9

23.9

302.2

385.3

475.6

604.8

2.1

2.2

2.3

2.4

NON-CURRENT LIABILITIES

624.5

210.2

474.0

389.0

Long-term borrowings

476.7

61.7

320.0

230.0

22.4

28.1

30.0

34.0

PBDT Depreciation

Extraordinary Adj.

Adjusted Profit EPS

Share capital Reserves and surplus Minority interests

Other long-term liabilities Long-term provisions

125.3

120.4

124.0

125.0

CURRENT LIABILITIES

666.2

1,220.5

786.0

858.0

Short-term borrowings

127.6

117.0

60.0

58.0

Trade payables

268.0

387.0

425.0

465.0

Other current liabilities

270.6

716.5

301.0

335.0

1,618.8

1,842.1

1,759.4

1,872.4

NON-CURRENT ASSETS

795.1

862.2

904.0

936.4

Fixed assets

411.5

521.5

632.7

682.7

Non-current investments

142.4

36.0

22.0

28.0

Long-term loans and advances

122.9

78.4

80.0

82.0

12.1

12.1

12.1

12.1

CURRENT ASSETS

823.7

979.9

860.1

944.0

Inventories

347.0

431.8

445.0

502.0

81.0

113.0

78.0

89.0

TOTAL

Other non-current assets

Trade receivables Cash and bank balances

76.9

61.3

57.1

33.0

Short-term loans and advances

72.8

161.2

180.0

200.0

246.1

212.6

100.0

120.0

1,618.8

1,842.1

1,764.1

1,880.5

(a) Current investments TOTAL

Britannia Industries Ltd. (BIL)

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5th April 2013

Ratio Analysis

FY11

FY12

FY13E

FY14E

PBIDT(%)

5.1%

5.7%

6.0%

6.3%

PBDT(%)

5.5%

6.0%

6.4%

7.0%

PBT(%)

4.1%

4.9%

5.2%

5.8%

PAT(%)

2.9%

3.6%

3.7%

4.2%

28.3%

25.1%

28.0%

28.0%

EPS

11.3

16.7

19.3

24.5

P/E

45.6

30.9

26.7

20.9

BV

27.30

34.25

42.01

52.83

EV/EBITDA

29.6

21.1

18.5

15.3

Debt/NW

1.85

0.44

0.76

0.46

Interest Coverage

5.4

7.5

10.3

21.7

Current Ratio

1.2

0.8

1.1

1.1

Profitability Ratios

Tax Rate(%) Valuation Ratios

Liquidity Ratios

Britannia Industries Ltd. (BIL)

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5th April 2013

Team Analyst

Designation

Sector

Email

Telephone

Nilesh Doshi

President (Research)

Abhilasha Satale

Senior Manager

Metals & Mining, Textiles

[email protected]

+9122-6633 8950

[email protected]

+9122-6663 8953

Debashish Mazumdar

Sr. Research Analyst

Information Technology, Media

[email protected]

+9122-6663 8952

Shivani Mehra

Sr. Research Analyst

Auto, FMCG

[email protected]

+9122-6663 8956

Jigisha Jaini

Sr. Research Analyst

Capital Goods, Engineering

[email protected]

+9122-6146 2957

Nisha Harchekar

Sr. Research Analyst

Chemicals

[email protected]

+9122-6146 2952

Ashwini Manwatkar

Research Associate

Auto, FMCG

[email protected]

+9122-6146 2949

Institutional Sales

Designation

Email

Telephone

Shilpa Venugopal

Senior Manager

[email protected]

+9122-6164 2969

Anjali Dave

Sales Associate

[email protected]

+9122-6663 8954

Institutional Dealing

Designation

Email

Telephone

Ajay Prabhudesai

Assistant Vice President

[email protected]

+9122-4027 8930

Vipul Mehta

Manager

[email protected]

+9122-4027 8931

Gaurav Shah

Manager

[email protected]

+9122-4027 8933

Mitul Doshi

Senior Executive

[email protected]

+9122-4027 8932

Corporate Office: 3rd Floor, Hincon House, Tower - B, 247 Park, L.B.S. Marg,Vikhroli (W), Mumbai, Maharashtra – 400083, India. Tel No. 91-22 – 6663 8900

Email: [email protected]

website: www.technoworld.in, www.way2wealth.com

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Britannia Industries Ltd. (BIL)

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