Britannia Industries (BRIT IN)

February 10, 2020 1

Rating: BUY | CMP: Rs3,156 | TP: Rs3,725

Investing for growth; Upgrade to Buy

Quick Pointers:

Volume growth at 3%, Market share gains continue

3Q Inflation at 3-4%, favorable forward contracts provide gains of Rs1.25bn

We are upgrading BRIT from accumulate to BUY despite near term headwinds

emanating from poor growth and input cost inflation given that it remains on

track with its strategic plans like 1) distribution expansion in Rural India and

Hindi heartland 2) Innovation and renovation of Biscuits portfolio (1% of

sales) 3) Initial success in cream wafers, Milkshakes and salted snacks (1%

of sales) 4) Sustained cost efficiency program (2.1% of sales) and 5)

investment behind pull based sales, distributor health, product fine tunings,

SAP and cost control during current slowdown.

We expect BRIT to gain disproportionately in the expected demand recovery

given the investments behind distribution, innovations and new categories.

We believe fiscal gains from new units in Guwahati and Ranjangaon provide

gains exceeding 1% of sales and cushion any hit on margins due to input cost

inflation and competition. We are increasing FY20 EPS by 2.5% while

tweaking FY21 and FY22 estimates by a small -0.5% to 0.2%. We value the

stock at 45xFY22 EPS and arrive at SOTP based target price of Rs3725

(Rs.3433 based on Sept21 EPS). BRIT trades at 33% discount to Nestle and

remains our top pick in Processed foods segment. Buy

Concall Takeaways: 1) 3% volume growth and 1% value growth 2) competitive

intensity is rising in a muted demand environment with cometitors adopting push

based strategy with higher promotions 3) Operating other income higher because

of fiscal benefits from 2 new units in Guwahati and Ranjangaon, these benefits will

continue for upwards of 5 years 4) Gross margins unlikely to expand in near term

given ~4% inflation, Selective price increases likely 4) BRIT has not underatken

stock dumping and is adopting a pull based model with focus on distributor health,

lower wastages, tightened fixed cost, SAP process improvement and Innovations

5) cost efficiency gains at 2.1% of sales in FY20, will continue in FY21 as well. 6)

Croissant product is being fine tuned and a pan india rollout is likely in 3-4 months

7) Salted snacks pan India roll out likely in 6 months 8) 50% of growth has come

from existing categories, 1% from innovations and 1% from new categories 9) Some

new launches have been postponed on the back of slowdown. 8) Price covers are

taken as per season, wheat covers will expire in March/April and sugar in

October/November. 10) Capex has slowed down to Rs1.9 bn in FY20. 10) ICD to

group companies has not changed at Rs4.5bn. 11) Nepal operations are running at

rated capacity (600 tonnes/month), capacity can be doubled with a small capex.

Domestic Volume growth at 3%: Standalone Net sales increased by 4.3% YoY

to Rs 28.19bn. Gross profit increased 1.1% as higher input costs led to 130bps

margin contraction despite 180% increase in other operating income. Significant

increase in milk prices impacted the dairy business. EBITDA increased 8% to

Rs4.8bn on 190 bps decline in other expenses even as staff cost came in marginally

higher. PBT from operation were up 5%. PAT increased 19% to Rs 3.6bn mainly

on the back of tax benefits and increase in other income by 17%.

Britannia Industries (BRIT IN)

February 10, 2020

Q3FY20 Result Update

☑ Change in Estimates | ☑ Target | ☑ Reco

Change in Estimates

Current Previous

FY21E FY22E FY21E FY22E

Rating BUY ACCUMULATE

Target Price 3,725 3,433

Sales (Rs. m) 121,740 136,523 128,071 145,892

% Chng. (4.9) (6.4)

EBITDA (Rs. m) 20,445 24,026 20,999 24,923

% Chng. (2.6) (3.6)

EPS (Rs.) 66.2 78.6 66.1 79.0

% Chng. 0.2 (0.5)

Key Financials - Standalone

Y/e Mar FY18 FY19E FY20E FY21E

Sales (Rs. m) 93,041 104,825 111,271 121,740

EBITDA (Rs. m) 14,275 16,621 18,066 20,445

Margin (%) 15.3 15.9 16.2 16.8

PAT (Rs. m) 9,616 11,222 14,485 15,916

EPS (Rs.) 40.0 46.7 60.3 66.2

Gr. (%) 13.9 16.6 29.1 9.9

DPS (Rs.) 12.5 15.0 17.8 21.5

Yield (%) 0.4 0.5 0.6 0.7

RoE (%) 33.1 30.9 34.6 32.7

RoCE (%) 44.7 41.8 36.2 33.4

EV/Sales (x) 8.0 7.1 6.6 6.0

EV/EBITDA (x) 51.9 44.6 40.9 35.7

PE (x) 78.8 67.6 52.4 47.6

P/BV (x) 23.4 18.8 17.5 14.0

Key Data BRIT.BO | BRIT IN

52-W High / Low Rs.3,584 / Rs.2,300

Sensex / Nifty 40,980 / 12,032

Market Cap Rs.759bn/ $ 10,635m

Shares Outstanding 240m

3M Avg. Daily Value Rs.2334.56m

Shareholding Pattern (%)

Promoter’s 50.66

Foreign 16.28

Domestic Institution 12.93

Public & Others 20.13

Promoter Pledge (Rs bn) -

Stock Performance (%)

1M 6M 12M

Absolute 5.5 21.9 1.5

Relative 7.1 11.8 (9.5)

Amnish Aggarwal

[email protected] | 91-22-66322233

Raj Mehta

[email protected] | 91-22-66322381

Britannia Industries

February 10, 2020 2

3QFY20 Result Overview: Sales up 4.3% led by 3% volume growth, fiscal gains cushion margins

Y/e March (Rs m) Q3FY20 Q3FY19 YoY gr. (%) Q2FY20 9MFY20 9MFY19 YoY gr. (%)

Net Sales 28,192 27,032 4.3 28,961 82,947 78,145 6.1

Gross Profit 11,241 11,117 1.1 11,412 32,960 31,138 5.9

Margins (%) 39.9 41.1 39.4 39.7 39.8

Other Expenses 6,423 6,654 (3.5) 6,709 19,557 18,752 4.3

% of Sales 22.8 24.6 23.2 23.6 24.0

EBITDA 4,818 4,463 8.0 4,704 13,403 12,386 8.2

Margins (%) 17.1 16.5 16.2 16.2 15.9

Depreciation 384 369 4.3 367 1,124 987 13.8

Interest 221 4 140 445 12

Other Income 646 554 16.6 1,302 2,603 1,335 95.0

PBT 4,858 4,645 4.6 5,499 14,438 12,722 13.5

Tax 1,254 1,618 (22.5) 923 3,596 4,397 (18.2)

Tax Rate (%) 25.8 34.8 16.8 24.9 34.6

Adjusted PAT 3,604 3,027 19.0 4,576 10,841 8,325 30.2

Source: Company, PL

Volume growth at 3% in 3Q

10.0

8

7.0

1.52.0

2.5

6.0

13.012.0

13.012.0

7.0 7.0

3.0 3.0 3.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Q4

FY

16

Q1

FY

17

Q2

FY

17

Q3

FY

17

Q4

FY

17

Q1

FY

18

Q2

FY

18

Q3

FY

18

Q4

FY

18

Q1

FY

19

Q2

FY

19

Q3

FY

19

Q4

FY

19

Q1

FY

20

Q2

FY

20

Q3

FY

20

Source: Company Data, PL Research

Overall inflation was at 3-4%; Going forward inflation will be at 4%

Source: Company, PL


February 10, 2020 3

BRIT continues to increase GAP with No2 player in biscuits category

Source: Company, PL

Direct reach has increased to 2.17mn outlets

Source: Company, PL

Market share gains in Hindi Belt continues; Steady increase in Rural Preferred dealers

Source: Company, PL


February 10, 2020 4

New launches in consolidation mode

Source: Company, PL


February 10, 2020 5

Financials

Income Statement (Rs m)


Net Revenues 93,041 104,825 111,271 121,740

YoY gr. (%) 10.6 12.7 6.1 9.4

Cost of Goods Sold 57,735 62,776 67,026 73,346

Gross Profit 35,306 42,048 44,245 48,394

Margin (%) 37.9 40.1 39.8 39.8

Employee Cost 2,779 3,216 3,732 3,846

Other Expenses 5,297 5,985 6,037 6,514

EBITDA 14,275 16,621 18,066 20,445

YoY gr. (%) 18.5 16.4 8.7 13.2

Margin (%) 15.3 15.9 16.2 16.8

Depreciation and Amortization 1,198 1,350 1,577 1,737

EBIT 13,077 15,271 16,489 18,709

Margin (%) 14.1 14.6 14.8 15.4

Net Interest 15 15 647 557

Other Income 1,526 1,905 3,437 3,319

Profit Before Tax 14,589 17,161 19,279 21,471

Margin (%) 15.7 16.4 17.3 17.6

Total Tax 4,973 5,939 4,795 5,554

Effective tax rate (%) 34.1 34.6 24.9 25.9

Profit after tax 9,616 11,222 14,485 15,916

Minority interest - - - -

Share Profit from Associate - - - -

Adjusted PAT 9,616 11,222 14,485 15,916

YoY gr. (%) 14.0 16.7 29.1 9.9

Margin (%) 10.3 10.7 13.0 13.1

Extra Ord. Income / (Exp) (170) - - -

Reported PAT 9,446 11,222 14,485 15,916

YoY gr. (%) 12.0 18.8 29.1 9.9

Margin (%) 10.2 10.7 13.0 13.1

Other Comprehensive Income (4) (21) - -

Total Comprehensive Income 9,442 11,201 14,485 15,916

Equity Shares O/s (m) 240 240 240 240

EPS (Rs) 40.0 46.7 60.3 66.2


Balance Sheet Abstract (Rs m)


Non-Current Assets

Gross Block 17,736 21,961 24,001 26,546

Tangibles 17,389 21,583 23,583 26,083

Intangibles 347 378 418 463

Acc: Dep / Amortization 7,423 8,685 10,262 11,999

Tangibles 7,156 8,383 9,920 11,613


Net fixed assets 10,313 13,276 13,739 14,548

Tangibles 10,233 13,200 13,663 14,470


Capital Work In Progress 2,003 649 1,399 1,899

Goodwill - - - -

Non-Current Investments 6,055 11,607 11,562 11,654

Net Deferred tax assets 87 (39) 19 (131)

Other Non-Current Assets 141 295 146 162

Current Assets

Investments 15,542 17,117 25,598 35,027

Inventories 5,946 7,189 7,684 8,534

Trade receivables 2,303 3,510 3,618 3,815

Cash & Bank Balance 943 405 651 593

Other Current Assets 2,895 2,438 2,744 3,005

Total Assets 46,273 56,491 67,268 79,225

Equity

Equity Share Capital 240 240 240 240

Other Equity 32,113 40,154 43,113 53,873

Total Networth 32,353 40,395 43,354 54,113

Non-Current Liabilities

Long Term borrowings 3 3 7,214 7,214

Provisions - - - -

Other non current liabilities - - - -

Current Liabilities

ST Debt / Current of LT Debt 223 19 - -

Trade payables 8,664 10,325 10,706 11,449

Other current liabilities 4,774 5,480 5,711 6,150

Total Equity & Liabilities 46,273 56,491 67,268 79,225



February 10, 2020 6

Cash Flow (Rs m)

Y/e Mar FY18 FY19E FY20E FY21E Year

PBT 14,622 17,161 19,279 21,471

Add. Depreciation 1,198 1,350 1,577 1,737

Add. Interest 15 15 647 557

Less Financial Other Income 1,526 1,905 3,437 3,319

Add. Other (867) (3,276) (4,729) (4,851)

Op. profit before WC changes 14,967 15,251 16,775 18,913

Net Changes-WC (4,286) (1,185) (8,830) (9,550)

Direct tax (4,973) (5,939) (4,795) (5,554)

Net cash from Op. activities 5,708 8,126 3,150 3,809

Capital expenditures (4,822) (2,960) (2,790) (3,045)

Interest / Dividend Income 1,506 1,816 3,417 3,301

Others 183 (5,243) - -

Net Cash from Invt. activities (3,134) (6,387) 627 256

Issue of share cap. / premium 1,181 1,560 (5,731) 1,592

Debt changes 120 (204) 7,193 -

Dividend paid (3,179) (3,619) (4,346) (5,157)

Interest paid (15) (15) (647) (557)

Others - - - -

Net cash from Fin. activities (1,892) (2,278) (3,532) (4,122)

Net change in cash 682 (539) 246 (57)

Free Cash Flow 885 5,167 360 764


Quarterly Financials (Rs m)

Y/e Mar Q1FY19 Q2FY19 Q3FY19

Net Revenue 24,067 27,046 27,032 -

YoY gr. (%) 13.6 13.4 12.1 -

Raw Material Expenses 14,646 16,446 15,915 -

Gross Profit 9,421 10,600 11,117 -

Margin (%) 39.1 39.2 41.1 -

EBITDA 3,677 4,247 4,463 -

YoY gr. (%) 17.6 14.7 19.1 -

Margin (%) 15.3 15.7 16.5 -

Depreciation / Depletion 304 315 369 -

EBIT 3,374 3,932 4,094 -

Margin (%) 14.0 14.5 15.1 -

Net Interest 5 4 4 -

Other Income 385 395 554 -

Profit before Tax 3,754 4,323 4,645 -

Margin (%) 15.6 16.0 17.2 -

Total Tax 1,292 1,488 1,618 -

Effective tax rate (%) 34.4 34.4 34.8 -

Profit after Tax 2,462 2,836 3,027 -

Minority interest - - - -

Share Profit from Associates - - - -

Adjusted PAT 2,462 2,836 3,027 -

YoY gr. (%) 18.0 8.1 21.5 -

Margin (%) 10.2 10.5 11.2 -

Extra Ord. Income / (Exp) - - - -

Reported PAT 2,462 2,836 3,027 -

YoY gr. (%) 18.0 15.6 21.5 -

Margin (%) 10.2 10.5 11.2 -

Other Comprehensive Income (1) (1) (1) -

Total Comprehensive Income 2,461 2,835 3,026 -

Avg. Shares O/s (m) 240 240 240 -

EPS (Rs) 10.3 11.8 12.6 -


Key Financial Metrics


Per Share(Rs)

EPS 40.0 46.7 60.3 66.2

CEPS 45.0 52.3 66.8 73.5

BVPS 134.7 168.1 180.4 225.2

FCF 3.7 21.5 1.5 3.2

DPS 12.5 15.0 17.8 21.5

Return Ratio(%)

RoCE 44.7 41.8 36.2 33.4

ROIC 43.9 39.2 40.2 42.9

RoE 33.1 30.9 34.6 32.7

Balance Sheet

Net Debt : Equity (x) (0.5) (0.4) (0.4) (0.5)

Net Working Capital (Days) (2) 1 2 3

Valuation(x)

PER 78.8 67.6 52.4 47.6

P/B 23.4 18.8 17.5 14.0

P/CEPS 70.1 60.3 47.2 43.0

EV/EBITDA 51.9 44.6 40.9 35.7

EV/Sales 8.0 7.1 6.6 6.0

Dividend Yield (%) 0.4 0.5 0.6 0.7



February 10, 2020 7

Price Chart Recommendation History

No. Date Rating TP (Rs.) Share Price (Rs.)

1 3-Jan-20 Accumulate 3,433 3,039

2 15-Nov-19 Accumulate 3,433 3,196

3 3-Oct-19 Accumulate 3,307 2,903

4 9-Aug-19 Accumulate 3,068 2,602

5 4-Jul-19 Accumulate 3,145 2,841

6 2-May-19 Accumulate 3,145 2,783

7 5-Apr-19 Accumulate 3,142 2,994

8 11-Feb-19 Accumulate 3,159 3,108

Analyst Coverage Universe

Sr. No. Company Name Rating TP (Rs) Share Price (Rs)

1 Asian Paints Accumulate 1,815 1,779

2 Avenue Supermarts Reduce 1,639 1,877

3 Britannia Industries Accumulate 3,433 3,039

4 Colgate Palmolive Reduce 1,270 1,391

5 Crompton Greaves Consumer Electricals BUY 306 267

6 Dabur India Hold 486 479

7 Emami Accumulate 361 300

8 Future Retail Under Review - 332

9 GlaxoSmithKline Consumer Healthcare Hold 9,377 9,247

10 Havells India Reduce 567 601

11 Hindustan Unilever Accumulate 2,136 2,034

12 ITC BUY 310 235

13 Jubilant FoodWorks BUY 1,913 1,749

14 Kansai Nerolac Paints Accumulate 545 499

15 Marico Accumulate 357 315

16 Nestle India Reduce 12,093 14,594

17 Pidilite Industries Hold 1,447 1,522

18 Titan Company Hold 1,264 1,273

19 Voltas Hold 662 664

PL’s Recommendation Nomenclature (Absolute Performance)

Buy : > 15%

Accumulate : 5% to 15%

Hold : +5% to -5%

Reduce : -5% to -15%

Sell : < -15%

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

1530

2016

2502

2989

3475

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Au

g -

17

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Au

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18

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Au

g -

19

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0

(Rs)


February 10, 2020 8

ANALYST CERTIFICATION

(Indian Clients)

We/I, Mr. Amnish Aggarwal- MBA, CFA, Mr. Raj Mehta- MSc, CFA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

(US Clients)

The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report.

DISCLAIMER

Indian Clients

Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as “PL”) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com.

This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.

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PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report.

PL or its associates might have received compensation from the subject company in the past twelve months.

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It is confirmed that Mr. Amnish Aggarwal- MBA, CFA, Mr. Raj Mehta- MSc, CFA Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

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Britannia Industries (BRIT IN)