Britannia Industries Ltd.

August 02, 2013

BSE Code: 500825 NSE Code: BRITANNIA Reuters Code: BRIT.NS Bloomberg Code: BRIT:IN

Britannia Industries Ltd (BRITANNIA) is a major player in the Indian Foods market Market Data
with leadership position in `124 bn Indian bakery market. The company with a
market share of ~38% in the industry, it has an annual production capacity of
Rating BUY
433,000 tonnes and has got 600,000 outlets across India. In international CMP (`) 704

markets, BRITANNIA brands are now available in over 30 Countries and a number Target (`) 820
two brand in the UAE and Oman. Notably, the company is soon going to set up a Potential Upside ~16.4%
new biscuit manufacturing plant in Gujarat. Duration Long Term
Face Value (`) 2
Investor’s Rationale 52 week H/L (`) 752.2/400.0
Adj. all time High (`) 4.5
 BRITANNIA has recently revamped its organization structure to focus on
Decline from 52WH (%) 6.2
local and international market both at the same time. The management aims at Rise from 52WL (%) 76.2
creating fresh opportunities in and outside India that will turn BRITANNIA from Beta 0.6
being a bakery company to a complete food company. Besides, we expect that the Mkt. Cap (`bn) 84.3
organizational change will bring more transparency in the work and aid to come up Enterprise Value (`bn) 86.6
with high growth to cater the dynamic food habit of the Indian customer. Fiscal Year Ended

Visibility on margin expansion has improved due to recent price hikes and Y/E FY12A FY13A FY14E FY15E

an improving product mix. We believe that the company’s strategy of extending Revenue (`bn) 55.4 62.3 71.0 82.3
brands in premium categories and continuous focus on increasing value-added EBITDA (`bn) 3.7 4.7 5.6 6.5
products in its overall sales mix will help to raise the ROCE to 33.6% and ROE to Net Profit (`bn) 1.9 2.5 3.1 3.7
41.8% by FY’14. Adj EPS (`) 16.7 21.7 26.6 31.1
P/E (x) 42.2 32.5 26.5 22.7
 Despite slower economic growth, the overall bakery sector is currently
P/BV (x) 20.6 15.3 11.1 8.2
growing at the rate of 12-14%. Considering the large base of Indian consumers, the
EV/EBITDA (x) 23.1 18.3 15.3 13.3
company expects that the bakery industry growth will go northward by 13-15% in
rd ROCE (%) 35.6 33.0 33.6 32.3
the coming year. BRITANNIA, with nearly a 3 share of the biscuit market and a
ROE (%) 48.8 47.1 41.8 36.3
dominant share of other baked categories is well poised to benefit from this
growth, driven by the diversity of its product range and its availability footprint.
One year Price Chart
 The company’s rising investment on its loads powerful brands like Good Day, 130

Marie Gold, Tiger, 50:50, Treat etc. which constitutes ~80% of its top line is likely to
110
further boost the revenues to `71 bn by FY’14 driven by new exciting innovations.
90
BRITANNIA after completing 2 new Greenfield units in Hajipur (Bihar) and
Jun-12

Nov-12

Dec-12

Jun-13
Jul-12

Sep-12

Oct-12

Feb-13
Aug-12

Apr-13
Jan-13

Mar-13

May-13

Khurda (Orissa) is all set to establish another biscuit & cake manufacturing plant in
Gujarat coupled with technology innovations that we project will boost its NIFTY BRITANNIA
manufacturing productivity to meet future demand for its products.
Shareholding Pattern Jun’13 Mar’13 Diff.
Key risk
Promoters 50.85 50.92 (0.07)
Rising material cost: The hike in raw material cost like wheat flour and sugar is
FII 19.48 17.89 1.59
adding stress to the company’s consumption basket. This rise in material cost will
DII 9.89 11.28 (1.39)
impact the firm’s aim to drive high double digit growth which in turn would dent
EBITDA margin and hence the profitability. Others 19.78 19.91 (0.13)
 BRITANNIA- Country's biscuit king

Established in 1892, traditionally ruling the leader board, BRITANNIA is an Indian food-products
BRITANNIA is the country’s corporation set up in Bengaluru, India. The Company's foremost function is to manufacture and
leading food processing sell biscuits, bread, rusk, cakes and dairy products. BRITANNIA which already occupies share of
company. It is growing at the the breakfast table with bread, butter and cheese has recently forayed into the breakfast
rate of 27% a year as against cereals category with the launch of buttermilk oats and sweet multi-grain porridge under
the industry's growth rate of ‘Healthy Start’ brand. The company’s overall business is primarily bifurcated into two i.e. Foods
20%. comprising (I) bakery products - biscuit, bread, cake and rusk, and (ii) dairy products - milk,
butter, cheese, ghee, dacha, milk-based ready to drink beverages and dairy whitener.

On Industrial front, Biscuits has been one of the fastest growing categories in the FMCG
segment, with annual volume growth rate of 12-15% in the last five years.
The company derives ~90%
of its revenue from the BRITANNIA, the biscuit king derives ~`90% of its revenue from the biscuits segment, where it
biscuits segment, where it has formidable brands such as Tiger (glucose biscuits), Treat (cream biscuits), 50-50 (crackers),
has formidable brands such Good Day (premium cookies and the company's highest selling brand) and NutriChoice
as Tiger, Treat, 50-50 and (premium high-fiber biscuits) whereas 10% of its total sales come from non-biscuits category
many more. and International market. More recently, the company has been growing at 27% a year,
compared to the industry's growth rate of 20%.

Britannia’s business structure

Primary Business
Segment

Foods processing

Bakery Products Dairy Products

Biscuit (Tiger, treat, 50-50, Milk, butter, cheese, ghee,

Good Day, NutriChoice dahi, milk-based ready to
etc.), bread, cake and rusk drink beverages & dairy
whitener
 BRITANNIA focusing aggressively on its brands for high premiumisation

The success story of BRITANNIA is driven by its premium brands like Good Day, Marie, Tiger
and many others. Biscuit-to-bread major, BRITANNIA witnessed a consolidated top line growth
BRITANNIA is all set to invest on
of `62.3 bn in FY13 and we believe that the improvement in volume growth will improve going
launching new and exciting
ahead supported by efficient investment on its brands advertising and promotions. Besides,
products and also introducing
applying the philosophy of premiumisation on rising disposable income has pushed the
customers with more value added
company to upgrade its backend capacity, supporting the brands and the business.
products to ensure better safety and
health. BRITANNIA in order to drive growth in other than biscuit segment is expanding distribution of
its products such as curd and cheese in supermarkets and modern trade outlets. Additionally, it
is also launching new quality products which would help to sustain operating margins. We
expect operating margins to marginally expand to 8% in FY’14.

Margin growth trend

7 9
6.5
8 7.9 8
6 7.6 5.6
7
The company undeterred to load 5 4.7
6
the market with novel products at 5.7
4 3.7 5
every point of time has experienced
` bn

high operating margins and is likely 3 4

to share the much improved results 3
2
in the way of increased margins in 2
FY’14. 1
1

0 0
FY12 FY13 FY14E FY15E

EBIDTA EBITDA Margin %

In December 2012, the company has completely finished the execution of its two new
Greenfield units in Patna & in Khurda in Orissa, meant for producing biscuits and cakes.
After these successful launch the company is further coming up with another facility in
Jhagadia in Gujarat, all with an average investment of over `0.6-0.8 bn. With this we
expect that the state-of-art facilities will help the firm in raising production capacity that
The company’s 3 biscuit
would support the robust demand for its products across the country.
manufacturing facilities coupled
with up gradation in the back-end Further these facilities will help the company in increasing its presence in the Western
planning process is likely to soar its markets and also ease the distribution facilities in Western India. We expect new units to
production capacity, hence focus on higher value-added biscuits which would boost profit margins for the company.
triggering the sales and turnover. Apart from this, the company has stretched lines in some existing manufacturing units
also.

To improve the back-end planning process and availability, BRITANNIA is in the process of
implementing Advanced Planning & Optimizing (APO) which is succeeding as per plan and
it is for sure that after its completion the result will be visible on front-end in the form of
high sales and revenues.
 3 Key Areas excelling Business Operations

 Newness & Innovation

 Cost Management
 Revenue Management

Newness & Innovation; to make reputed brand competitive globally

The Company is diligently working on lifting the delivered quality of its products and processes
to post an impressive growth rate and thus focusing on bringing innovations in current
products and coupled with the new product launches. Besides, the firm’s expectation for 13-
15% growth in bakery market this year has pushed the company into a positive zone to focus
BRITANNIA since long is working
on launching big-bang products and improve margins that was low on high raw material cost.
on its 3 strategies namely
newness& innovation and cost & The company a year ago has introduced different variant in product ranging from biscuit to
revenue management to raise breakfast and after witnessing its positive results is further set to go for an up-gradation in
the bar of unveiling new products product innovation to cater to the emerging and dynamic needs of the customers. To deeply
to intact its existing as well as understand the consumers need, the firm has hired consultants.
new customers.
Moreover, it will also focus on technological solutions to introduce new & differentiated
products and also upgrade existing offerings to explore new processes.

With these initiatives coupled with slew of changes in its product pack configurations across
the portfolio of biscuits, breads, rusks and dairy products, the company seems active to boost
its product line as well as top line.

Concentrating on 3 Key Areas to perform smooth operations

Newness &
Innovation

Prime
Growth
Drivers
Cost Revenue
Management Management
 Cost management; via improving operations

The company’s focus on cost management has showcased the story of high net profit of
`2.6 bn and sales `62.3 bn during FY13. It is very important for a business to closely monitor
The company’s consistent cost the cost and revenues figures in order to attain the operational excellence which led to post
management strategy is going profitable growth at the end.
to increase the margins. We
expect it to boost to 8% in FY14 Going ahead, to generate sustainable and profitable growth, the firm applies several cost
and 7.9% in FY15. improvement tools, using Kaizen, Total Productive Maintenance, Total Quality Management
and Six Sigma in several manufacturing units. The tool application has however, shown its
result in the form of strengthened operating margin that grew to 7.6%, the highest in 14
quarters in FY13, and is likely to stretch the same trend in FY14 by strengthening to 8%.

Revenue management; comes with understanding consumer needs

The company is transparently following the definition of revenue management i.e. selling
the right product to the right customer at the right time for the right price. The firm over the
years was successful in maintaining its balance sheet through launching & innovating
differentiated products for consumers, creating a higher preference and purchase.

BRITANNIA has nicely proved its philosophy of revenue management. In December 2012, it
In depth study of consumers
has launched Vita Marie with more value addition (inclusion of oats and honey) which in
changing behavior and
turn reflected its result in topline that was up at `15.0 bn in Q4FY’13 from `14.6 bn in
company’s race with itself to
Q3FY’13.
lead the market has given
birth to the concept of Moreover, it has undertaken stringent cost control measures like alternate fuels to lower
revenue management. the fuel cost and set up plants in different geographic locations to reduce freight cost.

Hence, BRITANNIA in terms of the products mix, geographies mix & amendments that
company make on its different brands considering different customers help the company
in selling more of a value-added brand which in turn boost the margins and consequently
the top line and bottom line.

Growing revenue trend (in `bn)

82.3
90 71
80 62.3
70 55.4
60
50
40
30
20
10
0
FY12 FY13 FY14E FY15E
 BRITANNIA’s peer comparison

*Standalone figures
BRITANNIA, with about a third
Glaxosmith
share of the biscuit market and a FY’13 (`bn) Britannia Jubilant Food
Consumer
dominant share of other baked
categories is well poised to Revenue (`bn) 15 3.6 9.7
compete from its peers. The
Net Profit (`bn) 1.0 0.3 1.5
standalone net revenue stood at
P/BV 32.5 17.0 13.7
`15 bn which is much higher than
its competitors and is playing 15.3 55.1 42.8
P/E
aggressively in the market to
achieve a milestone in the
following years.

BRITANNIA to see appetising earnings performance

BRITANNIA after posting continuous improving result has again witnessed a high growth in
FY’13. The company powered by its huge product portfolio is prepared to beat the
upcoming quarters. The FMCG space has been witnessing increasing competition since the
beginning of Q1FY’14. The category, which has witnessed increasing competitive action, is
packaged milk and milk products with the entry of Danone in India and Britannia is getting
aggressive.

The non-biscuit businesses- bread, rusk, cake, dairy and international are generating
~`1.5bn revenues annually, while the Dairy business has touched sales of ~`4bn and is
contributing to the bottom line. The management expects the biscuits category to continue
to grow at ~15%. We believe the long-term premiumisation story is intact and expect
Britannia to witness net profit growth of 22.5% and 16.9% in FY14 and FY15 respectively.

Looking at the positive side, we believe that the firms aggressive product development
strategy coupled with existing and emerging India’s customer base will shoot up the top
line as well as bottom line to `71.0 bn and `3.1 bn respectively during FY’14E.

Net Profit & NPM trend

40 4.5 4.5 5
4.2 4.5
35 37.1
3.6 31.7 4
30
25.9 3.5
25 3
19.9
` bn

20 2.5
15 2
1.5
10
1
5 0.5
0 0
FY12 FY13 FY14E FY15E
Net profit NPM%
Balance Sheet (Consolidated) Profit & Loss Account (Consolidated)
Y/E (`mn) FY12A FY13A FY14E FY15E
Y/E (`mn) FY12A FY13A FY14E FY15E
Share Capital 238 239 239 239
Total Operating
Reserve and surplus 3,853 5,269 7,371 10,012 55,445 62,376 71,088 82,399
Income
Net Worth 4,091 5,508 7,610 10,251
Operating
Share application 51,745 57,648 65,430 75,899
- 23 23 23 Expenses
money pending
Minority Interest 22 23 23 23 EBITDA 3,700 4,728 5,658 6,500
Capital Subsidy - 48 48 48
Loan funds 1,787 3,414 3,584 3,763 Depreciation 618 731 830 942
Provisions 2,471 2,786 2,786 2,786
EBIT 3,082 3,997 4,828 5,558
Current Liabilities 9,768 6,709 6,558 6,623
Net Deferred Tax
76 128 128 128 Interest 416 413 438 460
Liability
Other long term
205 196 187 178
liabilities PBT 2,666 3,584 4,390 5,098
Total Equity &
18,420 18,835 20,947 23,824
Liabilities
Fixed assets including Tax 668 986 1,207 1,376
7,356 8,841 10,018 11,372
Goodwill
Investments 2,485 1,082 1,082 1,082 Profit after tax 1,998 2,598 3,183 3,722
Loans and Advances 2,397 2,786 3,288 3,880 MI/Share of
Current Assets 6,061 6,004 6,438 7,369 Profit&Loss of (1.8) (3.8) (4.2) (4.6)
Associate
Other Assets 121 121 121 121
Net Profit 1,996 2,595 3,178 3,717
Total Assets 18,420 18,835 20,947 23,824

Key Ratios (Consolidated) Valuation and view

Y/E FY12A FY13A FY14E FY15E BRITANNIA focus towards maintaining its growth trajectory in
EBITDA Margin (%) 6.7 7.6 8.0 7.9 both the bakery and dairy segments supported by its premium
product portfolio.
EBIT Margin (%) 5.6 6.4 6.8 6.7
NPM (%) 3.6 4.2 4.5 4.5 The company’s persistent efforts in upgrading its existing as
ROCE (%) 35.6 33.0 33.6 32.3 well as creating new products every now and then proves its
ROE (%) commitment for customers. Looking ahead, the widening
48.8 47.1 41.8 36.3
consumer food basket with growth in disposable income will
Adj EPS (`) 16.7 21.7 26.6 31.1
enhance growth and open up new success paths. Hence we
P/E (x) 42.2 32.5 26.5 22.7 believe that the firm will continue to drive profitable growth
BVPS (`) 34.3 46.1 63.7 85.8 even in tough milieu with focus on consumers, customers and
P/BVPS (x) 20.6 15.3 11.1 8.2
cost effectiveness.

EV/Operating Income (x) 1.6 1.4 1.2 1.1 At a current market price (CMP) of `704.9, the stock trades at
EV/EBITDA (x) 23.1 18.3 15.3 13.3 26.5x FY14E and of 22.7x FY15E, earnings. We recommend
EV/EBIT (x) 27.7 21.7 17.9 15.6 ‘BUY’ with a target price of `820, which implies potential
upside of ~16.4% to the CMP from 1 year perceptive.
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