BRITANNIA INDUSTRIES LTD.
Equity Research Report
October 30th, 2020
- ADITYA MANJREKAR (41) TYBFM
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COMPANY PROFILE -
Company Name : Britannia Industries Ltd.
Company Location :
Registered Office
5/1/A Hungerford Street,
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Kolkata – 700 017
Area Served : Worldwide
Key Executives :
Chairman – Mr. Nusli N Wadia
Managing Director – Mr. Varun Berry
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Directors - Mr. A.K. Hirjee
Mr. Avijit Deb
Mr. Jeh N Wadia
Mr. Keki Dadiseth
Dr. Ajai Puri
Mr. Ness N Wadia
Dr. Ajay Shah
Dr. Y.S.P Thorat
Mr. Keki Elavia
Mrs. Tanya Dubash
Industry : Food Processing / FMCG
Products : Bakery products including biscuits, bread,
cakes and rusk. Dairy products including milk, butter,
cheese, ghee and dahi. Equity Research Report | [Pick the date]
Market Capitalization : Rs. 85,040 Crores
Parent : Wadia Group
Listing : NSE: BRITANNIA , BSE: 500825
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Background :
The company was established in 1892 by a group of British businessmen with an
investment of 295. The Mumbai factory was set up in 1924 and Peek Freans UK,
acquired a controlling interest in BBCo. Biscuits were in high demand during
World War II, which gave a boost to the company’s sales. In 1982, the American
company Nabisco Brands, Inc. acquired the parent of Peek Freans and became a
major foreign shareholder.
Britannia Company is the largest manufacturer of biscuits, and snacks for over 120
years. Britannia brands of Biscuits, Snacks and Dairy Products reaches to around
300 homes across India, and everyone love to eat them with more happiness and
satisfaction. Britannia products are available in more than 3 Million shops in the
world wide and this brand is world famous. Britannia has a leader which is mainly
in the sector of Bakery and Dairy products.
The company was founded in 1892 in Calcutta called as Britannia Biscuit
Company. Out of all other products from Britannia, one of its famous brands
Britannia Biscuits is famous for its taste which is sold all over the world at a
reasonable and affordable price. The products of Britannia Company consist of
Biscuits, Snacks and Dairy Products.
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The objective of Britannia Biscuit Company is to help people enjoy life through
healthy snacking which is available in all over the stores world-wide at anytime,
anywhere and every day.
The competitors for Britannia in the Biscuits sectors are Parle-G, Sun feast, etc.
Britannia Tiger Biscuits has big competition with Parle Biscuits called Parle-G.
Britannia 50-50 Biscuits has a big competition with Parle Krack-jack Biscuits.
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Britannia cream biscuits called Treat has huge competition with Sun Feast Cream
Biscuits. Britannia has a market share of 38%.
Segments in which Britannia Operates : -
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I) Economic Analysis :
Macro – Economic Outlook of India :
The downturn continued to moderate in recent months, after a
record GDP contraction in Q2 (Q1 FY 2020) due to the pandemic.
In August, industrial production fell at a softer pace than in July,
while the services sector PMI jumped notably in September.
Moreover, September’s manufacturing PMI hit the highest mark
since January 2012, while exports increased in the same month
for the first time since February of this year, hinting at improving
external sector conditions. Furthermore, household spending
should have gained traction in Q3 as some restrictions were
loosened, although elevated inflation may have stunted the pace
of recovery. On the fiscal front, in mid-October the government
unveiled a modest USD 10 billion stimulus package to combat the
fallout from Covid-19, which, although expected to provide a
temporary boost to sentiment, should have a marginal impact on
the overall recovery.
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GDP Growth Rate :
In 2019-20, the Indian economy grew by 4.2% against 6.1%
expansion in 2018-19.
Economic growth slowed to an 11-year low of 4.2% in 2019-20,
according to data released by the National Statistical Office.
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In the final quarter of the year, i.e. January-March, the growth rate
of Gross Domestic Product (GDP) fell to 3.1%, reflecting the
impact of the first week of the COVID-19 lockdown which began
on March 25.
Although this is the lowest growth rate in the last 44 quarters, it is
still higher than the 2.2% growth predicted by most economists
and ratings analysts.
“Agriculture and government expenditure have been the
saviours,” said Devendra Pant, chief economist at the Fitch
Group’s India Ratings.
Agriculture and mining sectors picked up steam in the fourth
quarter, growing at rates of 5.9% and 5.2% respectively, even
while the manufacturing sector contracted further, recording a
negative growth of 1.4%. Public administration, defense and other
services grew at 10.1%.
Although the budget estimate for GDP growth in 2019-2020 had
been pegged at 8.5%, the NSO’s previous estimates had pushed
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the projection down to 5%. On Friday, the NSO also revised
downward its estimates for the first three quarters of the year, and
pegged its provisional growth estimate for the whole year at 4.2%.
The Indian economy grew at 6.1% in 2018-19.
As the GDP growth rate is falling, company may opt to start
saving extra cash as a backup which means company may opt
layoffs and cost cutting measures.
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India - GDP per capita (USD) :
The steep drop-off in activity reflected the pandemic-related
lockdown measures in place for the majority of Q2. Despite the
slow and gradual easing of measures in April–May the economy
took a massive hit, with sharp contractions in private consumption
and fixed investment dragging on the headline figure. Private
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consumption tumbled 26.7% year-on-year in Q2 after growing
2.7% in Q1. Fixed investment sank at a more pronounced pace of
47.1% in Q2, from the 6.5% contraction logged in Q1. Public
spending growth, meanwhile, accelerated to 16.4% in Q2 (Q1:
+13.6% yoy).
On the external front, exports of goods and services slid at a
quicker pace of 19.8% in Q2 (Q1: -8.5% yoy). In addition, imports
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of goods and services contracted at a sharper rate of 40.4% in Q2
(Q1: -7.0% yoy), seemingly reflecting a drop in domestic demand
Consequently, the steeper fall in imports meant the external
sector contributed 5.5 percentage points to GDP in Q2, after
having detracted 0.2 percentage points from the reading in Q1.
According to the IMF, putting Q2 GDP figures on a comparable
scale for G20 nations, India’s economy was hit the hardest by the
pandemic on a quarter-on-quarter seasonally-adjusted basis.
High-frequency data suggests the economy likely bottomed out in
Q2 and is gaining some momentum, but remains well below its
pre-pandemic levels. In the week ending 6 September, data
stemming from electricity use, port volume, traffic congestion and
air pollution all pointed to improved economic activity compared to
the week prior.
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To put in simpler terms, the GDP per capita has increased, it
ultimately improves the standard of living and also increases the
buying capacity of the consumer which means he/she will buy
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more products of the company and hence company will earn
more profit.
Inflation Rate :
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The statistic shows the inflation rate in India from 1984 to 2019,
with projections up until 2021. The inflation rate is calculated
using the price increase of a defined product basket. This product
basket contains products and services, on which the average
consumer spends money throughout the year. They include
expenses for groceries, clothes, rent, power, telecommunications,
recreational activities and raw materials (e.g. gas, oil), as well as
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federal fees and taxes. In 2019, the inflation rate in India was
around 4.54 percent compared to the previous year.
India’s inflation rate has been on the rise over the last decade.
However, it has been decreasing slightly since 2010. India’s
economy, however, has been doing quite well, with its GDP
increasing steadily for years, and its national debt decreasing.
The budget balance in relation to GDP is not looking too good,
with the state deficit amounting to more than 9 percent of GDP.
Inflation may or may not result in an increase in production. As
long as the economy does not reach full employment stage,
inflation has a favorable effect on production. During inflation,
company may raise the prices of the products to earn better
profits.
Value growth of the FMCG sector in India
from Q1 FY 2019 to Q3 FY 2020 :
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The third quarter of the financial year 2020 in India saw the lowest
growth of the FMCG sector in the last seven quarters, with the
growth being valued at a meager 6.6 percent. There were multiple
reasons attributed to this. Some of them were lower GDP of the
country, rising inflation, and weak rural demand, which lead to
lower household spending.
A less growth in the FMCG sector is a concern for the company.
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The graph indicates that people are not buying more products
made by the companies in the same industry as people are
saving their money in the fear of ongoing Covid-19 pandemic.
Agriculture and Monsoon :
India has recorded August rainfalls at four decade high this year
with the monsoon season remaining robust in 2020 despite
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occasional hiccups a few weeks before. “Monsoon rains
continued a strong run, with rainfall in August now the strongest it
has been in 44 years, according to IMD,” a report by Barclays
said on Monday. The Kharif crop sowing has also crossed the
average area sown mark and has also surpassed last year’s area
sown. Crop sowing remains robust, and 100% of the total area
normally sown has been covered to date. As of 21st August, the
area sown was reported at nearly 106 million hectares which is
significantly ahead of around 97.9 million hectares sown last year
during the same period.
This year, agriculture is in focus because of the otherwise bleak
economic outlook. A good harvest can mitigate the economic
downturn even if it may not play an offsetting factor for India’s
growth profile. GDP forecasts have been downgraded amid the
pandemic, and the Indian economy is expected to contract 6.0%
on-year in FY 20-21.
If there is a good amount of rainfall then there will be sufficient
production of raw materials required for the production. Which
means that cost of raw materials will not increase a lot which will
ultimately help in pricing the product lower and also it will
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Interest Rate :
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The Reserve Bank of India held its benchmark repo rate at 4
percent during its October meeting, as widely expected.
Policymakers said the decision is consistent with neutral
monetary policy stance and is in line with achieving the inflation
target of 4 percent +/-2 percent while supporting economic growth
and mitigate the impact of COVID-19 on the economy. For 2020-
21, policymakers expect inflation to average 6.8 percent for the
second quarter of the year and a range of 5.4 - 4.5 percent for the
second half. GDP growth for 2020-21 is expected to contract 9.5
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percent, with risk tilted to the downside (-9.8 percent) in the
second quarter of 2020.
When interest rates are lower it helps the company to borrow loan
at a cheaper rate from commercial bank. Thus, company will face
less shortage of funds and paying interest on loan reduces tax
burden.
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Tax Slab Rate for Domestic Company :
A domestic company is taxable at 30%. However, the tax rate is
25% if turnover or gross receipt of the company does not exceed
Rs. 400 crore in the previous year.
Note 1: Section 115BA - A domestic company which is registered on or after
March 1, 2016 and engaged in the business of manufacture or production of any
article or thing and research in relation to (or distribution of) such article or thing
manufactured or produced by it and also It is not claiming any deduction u/s
10AA, 32AC, 32AD, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii)/35(2AA)/(2AB), 35AC, 35AD,
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35CCC, 35CCD, section 80H to 80TT (Other than 80JJAA) or additional
depreciation, can opt section 115BA on or before the due date of return by filing
Form 10-IB online. Company cannot claim any brought forwarded losses (if such
loss is related to the deductions specified in above point).
Note 2: Section 115BAA - Total income of a company is taxable at the rate of 22%
(from A.Y 2020-21), if the following conditions are satisfied:
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- Company is not claiming any deduction u/s 10AA or 32(1)(iia) or 32AD or 33AB
or 33ABA or 35(1)(ii)/(iia)/(iii)/35(2AA)/(2AB) or 35AD or 35CCC or 35CCD or
section 80H to 80TT (Other than 80JJAA).
- Company is not claiming any brought forwarded losses (if such loss is related to
the deductions specified in above point).
- Provisions of MAT is not applicable on such company after exercising of option.
Company cannot claim the MAT credit (if any available at the time of exercising of
section 115BAA).
Note 3: Section 115BAB - Total income of a company is taxable at the rate of 15%
(from A.Y 2020-21), if the following conditions are satisfied:
- Company (not covered in section 115BA and 115BAA) is registered on or after
October 1, 2019 and commenced manufacturing on or before 31st March, 2023.
- Company is not formed by splitting up or reconstruction of a business already in
existence.
- Company does not use any machinery or plant previously used for any purpose.
- Company does not use any building previously used as a hotel or a convention
center, as the case may be.
- Company is not engaged in any business other than the business of manufacture
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or production of any article or thing and research in relation to (or distribution of)
such article or thing manufactured or produced by it. Business of manufacture or
production shall not include business of -
Development of computer software;
Mining ;
Conversion of marble blocks or similar items into slabs;
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Bottling of gas into cylinder;
Printing of books or production of cinematographic film; or
Any other notified by Central Govt.
- Company is not claiming any deduction u/s 10AA or 32(1)(iia) or 32AD or 33AB
or 33ABA or 35(1)(ii)/(iia)/(iii)/35(2AA)/(2AB) or 35AD or 35CCC or 35CCD or
section 80H to 80TT (Other than 80JJAA and 80M).
- Company is not claiming any brought forwarded losses (if such loss is related to
the deductions specified in above point).
- Provisions of MAT is not applicable on such company after exercising of option.
Company cannot claim the MAT credit (if any available at the time of exercising of
section 115BAA).
Surcharge:
a) 7% of Income tax where total income exceeds Rs.1 crore
b) 12% of Income tax where total income exceeds Rs.10 crore
c) 10% of income tax where domestic company opted for section 115BAA and
115BAB
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Education cess: 4% of Income tax plus surcharge.
If there is a decrease in corporate tax then the company will have more amount
of profit with them which they can utilize for various purposes like diversifying the
product line up, expansion of business etc. which will ultimately help in increasing
the profits of the company. Similarly, if there is an increase, then it will obstruct
the company’s growth opportunities.
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Microeconomic factors affecting
Britannia :
Cost of Input materials :
Input materials are the major cost components of the industry and
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inflation in these can affect the profitability of the overall industry.
Food inflation is fairly stable, though input cost may see inflation
on the mandate of MSP (Minimum Support Price). Consumer
confidence in the economy is also a demand driver and currently
future Consumer Confidence Index is rising as per the RBI
Consumer Confidence Survey. According to IBEF, Consumption
expenditure is expected to increase in double digits in the period
2017-2021.
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Uniform GST rate on biscuits (18%) will provide level playing field
as opposed to 12% up to 100/kg biscuits and 24% on others.
Given this scenario, we anticipate Britannia to increase its
revenue and profitability in the forecasting period 2019-2028.
Shortage of Milk :
Even though the milk production has risen by 4.6% compound
annual average growth rate, it still cannot match up with the
increasing demand. The demand for milk has been growing at a
faster rate than the growth rate of milk production resulting in the
shortage of milk supply. India cannot meet its expected demand if
the demand and supply rise at the same rate. This can cause an
increase in the input cost for the dairy products and which in turn
can lead to hike in price or lower profit margins. If the company
increases the price of its products, it may affect the sales as it
might lose on consumers.
Requirements for Logistics :
Logistics in India suffer due to the poor infrastructure and other
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limitations. There is a high demand for sophisticated third party
logistics so the domestic logistics service providers are trying to
improve their service. Sophisticated logistics system will help in
proper supply chain management and on time delivery of goods,
which help in maintaining the shelf life of goods on meeting the
demand on time.
Globalization :
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Globalization a universal phenomenon is affecting each and every
industry. The world is coming closer, the communication gap is
closing and the businesses are going global. This can serve as an
opportunity to expand the business to a global level but on the
other hand there is a threat of new entrants from international
market.
II) Industry Analysis :
Porter’s Five Forces Model : Britannia
Threat of New Entrants – Medium
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Since there is very high product differentiation and a very
powerful distribution network which makes it very hard for a new
entrant to enter the market. The prices can’t be increased to a
great extent i.e. there is not much flexibility in prices, so we can
say that it is an extremely price sensitive. It has a great
dependency on the agricultural sector for wheat which is a main
component for most of its products.
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Rivalry among existing firms – High
The major players in this industry are Britannia, Parle, ITC Ltd.,
Priya Gold, Bakeman, Bonn etc. The companies Britannia & Parle
have an almost equal market share as compared to these ITC ltd
holds a lower market share. Since there is a neck to neck
competition the companies keep a close notice of the changing
strategies of each other.
Bargaining power of suppliers – High
The main ingredient required for the manufacturing of biscuits is
Wheat. When there is inflation they have to purchase wheat at the
price which the farmers quote since wheat does not have a close
substitute and leaves the companies with no other option.
Threat of Substitute Products – Medium
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The substitutes which are consumed instead of biscuits are
namkeens, chips, potato wafers etc. Even though the biscuits
have such substitutes they have become a staple part of people’s
everyday life. The biscuits are a low priced commodity, but even if
there is a small increase in the price, it would still be acceptable
by people in the urban areas but in case of rural areas it may
cause people to shift to substitutes.
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Bargaining power of buyers – High
The consumers have an option of switching from one brand to the
other with due accordance to their liking of price, quality and
taste. This is the reason why there is not much flexibility given to
the biscuit manufacturers to increase the prices of their products
or compromise on the quality of their product. The consumers are
also going for bulk purchases at cheaper rates from bakery
stores.
Britannia’s position in the biscuit industry –
While manufacturing new products, they don’t fail to remember
their competitor’s way of fighting against them, instead they pay
even more attention to each and every step they take towards
success as they want to be ahead of them and succeed. With eat
healthy, think better, Britannia positions itself as a healthy and
nutritious alternative. Britannia has an image that generates fun
along with a belief of good quality.
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TIGER : Positioning is done for modern mother choose for Kids.
LITTLE HEARTS: Positioning is to be a snacks for youth.
GOOD DAY: Positioning is as everyday biscuits which bring
happiness in everyones lives.
MARIE GOLD : Positioning as a tea time biscuits with proteins.
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NUTRI CHOICE : Positioning as a biscuit for diabetic people.
III) Company Analysis :
In order to identify the current financial statement of a company,
presence of the financial accounts is mandatory. The financial
accounts are mainly categorized into three, viz :-
Profit and Loss Account / Income Statement
Balance Sheet of the Company
Cash Flow Statement of the Company
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INCOME STATEMENT –
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BRITANNIA Income Statement Analysis –
Operating income during the year rose 4.3% on a year-on-
year (YoY) basis.
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The company's operating profit increased by 6.4% YoY
during the fiscal. Operating profit margins witnessed a fall
and down at 16.1% in FY20 as against 15.8% in FY19.
Depreciation charges increased by 14.2% and finance costs
increased by 746.0% YoY, respectively.
Other income grew by 35.3% YoY.
Net profit for the year grew by 20.6% YoY.
Net profit margins during the year grew from 10.3% in FY19
to 11.9% in FY20.
BALANCE SHEET –
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BRITANNIA Balance Sheet Analysis –
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The company's current liabilities during FY20 stood at Rs 26
billion as compared to Rs 19 billion in FY19, thereby
witnessing an increase of 38.6%.
Long-term debt stood at Rs 8 billion as compared to Rs 619
million during FY19, a growth of 1137.2%.
Current assets rose 4% and stood at Rs 37 billion, while
fixed assets rose 7% and stood at Rs 19 billion in FY20.
Overall, the total assets and liabilities for FY20 stood at Rs
78 billion as against Rs 62 billion during FY19, thereby
witnessing a growth of 26%.
CASH FLOW STATEMENT –
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BRITANNIA Cash Flow Statement Analysis –
BRITANNIA's cash flow from operating activities (CFO)
during FY20 stood at Rs 15 billion, an improvement of 28.4%
on a YoY basis.
Cash flow from investing activities (CFI) during FY20 stood
at Rs -15 billion, an improvement of 79.0% on a YoY basis.
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Cash flow from financial activities (CFF) during FY20 stood
at Rs 579 million, an improvement of 116% on a YoY basis.
Overall, net cash flows for the company during FY20 stood
at Rs 165 million from the Rs -491 million net cash flows
seen during FY19.
RATIO ANALYSIS –
Ratio analysis is a quantitative procedure of obtaining a look into
a firm’s functional efficiency, liquidity, revenues, and profitability
by analyzing its financial records and statements. Ratio analysis
is a very important factor that will help in doing an analysis of the
fundamentals of equity.
PE ratio: - Price to Earnings' ratio, which indicates for every
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rupee of earnings how much an investor is willing to pay for a
share. A general rule of thumb is that shares trading at a LOW
P/E are undervalued (it depends on other factors too). Britannia
Industries has a PE ratio of 49.5395994837467 which is high and
comparatively overvalued.
Return on Assets (ROA): - Return on Assets measures how
effectively a company can earn a return on its investment in
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assets. In other words, ROA shows how efficiently a company can
convert the money used to purchase assets into net income or
profits. Britannia Industries has ROA of 23.0011521496074 %
which is a good sign for future performance. (Higher values are
always desirable)
Current ratio: - The current ratio measures a company's ability
to pay its short-term liabilities with its short-term assets. A higher
current ratio is desirable so that the company could be stable to
unexpected bumps in business and economy. Britannia Industries
has a Current ratio of 1.44698112015024.
Return on equity: - ROE measures the ability of a firm to
generate profits from its shareholders investments in the
company. In other words, the return on equity ratio shows how
much profit each rupee of common stockholders’ equity
generates. Britannia Industries has a ROE of 35.9405115887144
%. (Higher is better)
Debt to equity ratio: - It is a good metric to check out the
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capital structure along with its performance. Britannia Industries
has a D/E ratio of 0.283646680376582 which means that the
company has low proportion of debt in its capital.
Inventory turnover ratio: - Inventory Turnover ratio is an
activity ratio and is a tool to evaluate the liquidity of a company's
inventory. It measures how many times a company has sold and
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replaced its inventory during a certain period of time. Britannia
Industries has an Inventory turnover ratio of 17.10762928676
which shows that the management is efficient in relation to its
Inventory and working capital management.
Sales growth: - Britannia Industries has reported revenue
growth of 4.81023043277096 % which is poor in relation to its
growth and performance.
Operating Margin: - This will tell you about the operational
efficiency of the company. The operating margin of Britannia
Industries for the current financial year is 15.3063314993063 %.
Dividend Yield: - It tells us how much dividend we will receive
in relation to the price of the stock. The current year dividend for
Britannia Industries is Rs 35 and the yield is 0.989 %.
OVERVIEW OF COMPANY’S PERFORMANCE –
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Company witnessed moderate growth in the first half of the year.
The last part of4th quarter was impacted by the unforeseen
development of the COVID-19 pandemic. Despite the challenging
business environment during the year 2019-20 company was
able to increase its market share and improve profitability through
innovations cost efficiency programs and expansion in
distribution.
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COVID-19 has had a catastrophic impact on people and economy
globally. Britannia focused on the following during this crisis:
(a) Safety of employees and other stakeholders
(b) Ensuring availability of products which are daily essentials
across the country.
Company in the quest of improving competitiveness in its
operations has been carrying out various Cost Efficiency and
Operational Excellence Programs across the value chain. During
the year, company implemented Small Group Activity Programs
across all its factories to strengthen the culture of safety of
workers in such programs.
A process was put in place to manage risks related to COVID-19
by day-to-day health monitoring of all employees and sanitizing
the workplace with the highest standard.
2019-20 was a challenging year due to economic slowdown in the
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country impacting consumer spending. However company's focus
on brand building delivering superior products and creating point
of view based communication ensured growth and market
leadership.
Company has a well-defined risk management framework in place
and a robust organizational structure for managing and reporting
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risks. Company has constituted a committee of the Board to
monitor and review risk management plan. Risk management
process has been established across company and is designed to
identify assess and frame a response to threats that affect the
achievement of its objectives.
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