Britannia Industries Ltd Research Report Jun 20

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Microsec Research 20 JUNE 2013

BRITANNIA INDUSTRIES LIMITED

INITIATE BUY

TARGET PRICE 794

Analyst: Naveen Vyas Email: [email protected]

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We Rate Britannia Industries Limited a BUY. Britannia Industries Limited (BIL) is a major player in the Indian Foods market with leadership position in Bakery category and has a market share of ~ 30% in the industry. Britannia offers both delightfully indulgent and healthy choices in biscuits, bread, cake, rusk and a range of dairy products that include cheese, curd and specially formulated functional beverages with a dairy base. The company has recently added capacity in several existing manufacturing units and 2 new Greenfield units in Hajipur (Bihar) and Khurda (Orissa) were completed and commissioned towards the end of the year.

Investment Highlights

Strong brands portfolio in biscuits segment : Britannia Industries lead the biscuits category with market share of ~30% in the industry. It has strong brands in the fastest growing biscuit market like ‘Good Day’, ‘Marie Gold’, ‘Tiger’, ‘50:50’, ‘Milk Bikis’, ‘Treat’, ‘Burbone’, ‘Little Hearts’, ‘Pure Magic’ and ‘Nutrichoice’. The company is investing ~ 8% of its sales on the advertisement to enhance its brand value and market share.

Shift towards Premiumisation and Cost Rationalisation to help improve margin in the business: India is witnessing a major shift towards 'premiumisation' as consumer preferences change, fuelled by soaring disposable incomes in smaller towns and health awareness. To cater to the current trends, Britannia has launched various value added products to increase its mix towards premiumisation with its products like Pure Magic, Treat, Good Day, Burbone etc and has undertaken a cost rationalisation which is expected to improve the margin of the company going forward.

Increasing the Sales Mix of non-biscuits to improve profitability and diversifying the product portfolio: The company has been increasing its non-biscuits portfolio like Dairy (butter, Milk and Dahi), Bakery and Healthy breakfast (Poha, upma and Oats) to earn higher margin and diversify its product portfolio. It derives around 25% of its total sales from non-biscuits category whereas biscuits constitutes around 75% of the total sales.

Driving sales through focus on new and renovated offering: The Company has been driving its sales by introducing several new and renovated offerings acrosss the entire portfolio that includes NutriChoice Multigrain Thins and Roasty, Pure Magic, Treat Fruit Creams, Marie with Honey, Tiger-Zor chocolate and almond milk.

Exhibit 1. Britannia Industries – Historical Financials and Projections – INR crores

Particulars FY11A FY12A FY13 FY14E FY15E

Net Sales (incl OPI) 4,609.4 5,485.4 6,185.4 7,085.6 8,280.0

Growth (%) 19% 13% 15% 17%

EBITDA 236.7 310.9 420.6 503.1 587.9

EBITDA Margins (%) 5.1% 5.7% 6.8% 7.1% 7.1%

Adjusted Net Profit 134.4 199.6 259.5 319.8 379.8

Net Profit Margins (%) 2.9% 3.6% 4.2% 4.5% 4.6%

Net Profit Growth (%) 49% 30% 23% 19%

EPS (Adjusted) 11.25 16.71 21.71 26.75 31.77

P/E 59.56 40.10 30.86 25.05 21.09

P/BV 24.50 19.60 14.50 10.70 8.20

RoE 44.1% 54.3% 54.1% 49.3% 44.1%

Source: Company, Microsec Research ( Adj. Profit excludes Extra-ordinary Item)

BRITANNIA INDUSTRIES LTD – ‘INVEST HEALTHY’

BUY Sector – FMCG

Current Market Price (INR) 670

Target Price 794

% Upside 18%

52 Week High / Low (INR) 752 / 380

Market Capitalization (In INR cr) 8,014

Market Data

Shareholding

DII

11.28%

Others

19.91%

FIIS

17.89%

Promoters

50.92%

BSE Code 500825

NSE Code BRITANNIA

Bloomberg Ticker BRIT IN

Reuters Ticker BRIT.BO

Face Value (INR) 2.00

Equity Share Capital (Rs. cr.) 23.91

Average 5 Year P/E 32.0x

Beta vs Sensex 0.5x

Average Daily Volmes (6 M) 118,830

Dividiend Yield 1.24

Return (%) 1YR 30

STOCK SCAN

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Britannia SENSEX

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Company Profile

Britannia Industries Limited (BIL) is a major player in the Indian Foods market with leadership position in Bakery category and has a market share of ~ 30% in the industry. It was humble beginning for Britannia Industries limited, which was set up in Kolkata in 1892, with an initial investment of INR295. By 1910, with the advent of electricity, Britannia mechanised its operations, and in 1921, it became the first company east of the Suez Canal to use imported gas ovens. During the tragic World War II, the Government reposed its trust in Britannia by contracting it to supply large quantities of "service biscuits" to the armed forces. It has power brands in the form of Good Day’, ‘Marie Gold’, ‘Tiger’, ‘50:50’, ‘Milk Bikis’, ‘Treat’, ‘Burbone’, ‘Little Hearts’, ‘Pure Magic’ and ‘Nutrichoice. Britannia Offers both delightfully indulgent and healthy choices in biscuits, bread, cake, rusk and a range of dairy products that include cheese, curd and specially formulated functional beverages with a dairy base. In the recent years, Britannia is making several healthy endeavours in the bakery industry, which are expected to not only infuse health in the snacking and breakfast habits, but can also reshape the contours of the Indian bakery industry in the times to come The company has recently added capacity in several existing manufacturing units and 2 new Greenfield units in Hajipur (Bihar) and Khurda (Orissa) were completed and commissioned towards the end of the year. Additionally, technology innovations that increase manufacturing productivity have been implemented in several units.

Key Strategy for Profitable Growth

.

Understanding customer Needs Differentiated brands

New Product development Higher value realisation Cost efficiency and effectiveness

Continuous improvement in operations

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Business Overview

Britannia Industries Ltd business is divided into broad categories i.e. Bakery and Dairy.

A. Bakery Business

The Company’s Bakery business comprises biscuits, bread, cake and rusk and the market growth across these categories has been around 15-18%. In biscuits, Britannia brands have about one-third share and in all other categories Britannia is the only national player.

Biscuits Portfolio

Marie Gold: Britannia's oldest brand enjoys a heritage that spans 50 years - and going strong. Marie Gold is a loved brand that stands for Tea Time Vitality. It's balanced taste, crispiness and lightness along with the added vitamins and minerals makes Britannia Marie Gold the "healthy tea time biscuit". It is the # 1 brand in its category by a long shot.

Bourbon: India's first and favorite Bourbon's sweet adventure began in 1955. Bourbon consists of thick, rich and delicious chocolate packed between two crunchy chocolate biscuits, topped with sugar crystals

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Good DAY: Britannia is the leader in the cookies segment. Britannia Good Day was launched in 1986 in two delectable avatars - Good Day Cashew and Butter. Over the years, new variants were introduced - Good Day Pista Badam in 1989, Good Day Chocochips in 2000 and Good Day Choconut in 2004.

50-50: Britannia 50-50 positioned this product as an element of fun. Launched in 1993, 50-50 because of its "Hatke" taste and youthful appeal quickly emerged as the leader of category with more than one-fourth of market share. In 2008, 50-50 sharpened its focus on housewives and positioned it as a snack

Milk Bikis: Launched In 1996, Milk Bikis launched a variant called Milk Cream. These round biscuits come with smiley faces and are full of milk cream that makes them very popular with children. Milk Cream also promoted the idea of 'eating milk' in a yummy way, which makes mothers happy as well.

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TIGER: Tiger, launched in 1997, is the second largest brand in Britannia's portfolio. It is one of the biggest brands in the kids segment and symbolizes fun and energy on one hand and health and nutrition on the other. Tiger re-invented itself in November 2012, to revolutionize the concept of kids' nutrition in the country. This new position of Tiger is embedded in its every element of marketing mix and across all formats of Glucose, Krunch cookies and Creams. The product has undergone a complete formula change to include growth nutrients like iron, calcium, folic acid, vitamin A and D which are required for growing kids.

Treat: Made especially for kids of all ages, this is Britannia's much-loved range of cream goodies - Britannia Treat! Launched in 2002, Treat's been wowing the country in all shapes, sizes, flavours and forms for over 10 years now, earning the rightful place as market favorite for as long too

Pure Magic: Pure Magic is a premium cookies brand from Britannia Industries. However with competition increasing in premium cream biscuits, the company relaunched Pure Magic in 2012 to enhance the product experience and introduce international quality chocolate with two new flavors vanilla crème & chocolate crème

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Nutrichoice: Britannia NutriChoice provides with a range of snacks and NutriBix which are inherently healthy yet do not compromise on taste and come with a promise of adding goodness to the lives.

Healthy -Start Breakfast foods: Britannia Industries has entered the breakfast foods segment with the launch of Britannia Healthy Start, a range of ready-to-cook breakfast menus. Designed to cater to Indians in the urban market, the company has introduced ready-to-cook upmas, pohas, porridges and oats. ''The Britannia Healthy Start range is made with natural ingredients in just five minutes. It also has great health value as it contains no transfats, no cholesterol, no MSG and no preservatives.

Britannia Cakes: Britannia launched its cakes in 1963 in India. Today the Britannia Cakes portfolio has grown into an exciting collection of offerings like soft and scrumptious Bar Cakes, Chunk Cakes, Cup Cakes and Veg Cakes.

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Britannia Breads and Rusk: Britannia launched its branded Breads in 1963 in Mumbai. From a company offering 2 packs - the 400gm and the 800gm plain white sliced bread - Britannia has evolved into a company offering 22 packs, catering to a variety of taste and price segments in the bread consuming market. The last couple of years also saw the introduction of Whole Wheat Bread as a part of "Eat Healthy, Think Better" credo

Britannia launched its Rusks in the year 2005. They are made from the finest ingredients and baked with care as they are twice as crisper as and tastier than ordinary rusks.

B. Dairy Business

Britannia dairy business includes milk, butter, cheese, ghee, dahi, milk-based ready to drink beverages and dairy whitener.

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Raw Material Price Trend

Source: Bloomberg

Source : Bloomberg

Source : Bloomberg

Sugar Price (per 100 KG) Trend 3 years (weekly)

2000

2200

2400

2600

2800

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3200

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Wheat Price (Per Quintal) Trend 3 years (weekly)

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MCX Palm Oil Price (INR Per 10 KG) Trend 3 years (weeekly)

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Cost Breakup Trend last 5 years

Cost as (%) of Sales of last 5 years

Revenue Break-up - Consolidated

Source : Company database, Microsec Research

60% 56% 62% 60% 58%

7% 11%7% 8% 9%

21% 20% 19% 19% 20%

5% 5% 4% 4% 4%7% 8% 8% 8% 9%

0%10%

20%30%

40%50%

60%70%

80%90%

100%

FY09 FY10 FY11 FY12 FY13

Advertisement

Employee Cost

Other Expenses

Puchase Cost

Cost of Raw Material

56% 54% 59% 57% 55%

6% 11%7% 8% 8%

20% 20% 18% 19% 19%

5% 4% 4% 4% 4%7% 8% 7% 8% 9%

0%

10%

20%

30%

40%50%

60%

70%

80%

90%

100%


Advertisement

Employee Cost

Other Expenses

Puchase Cost

Cost of Raw Material

Gross Revenue Breakup for FY11

77%

9%

4%

5%3% 2% 1%

Biscuits

Bread & Rusk

Cake

Dairy

SFIC Food Dubai

Al Salan Foods Omon

Others


75%

9%

5%

5%3% 2% 1%

Biscuits

Bread & Rusk

Cake

Dairy

SFIC Food Dubai

Al Salan Foods Omon

Others

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Financial Highlights – Standalone and Consolidated

EBIDTA [INR‐Crore]

244

173

237

311

421

5.1% 5.7%6.8%

7.1%4.6%

0

60

120

180

240

300

360

420


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Normalised PAT [INR‐Crore]

133 134 134

200

260

0

60

120

180

240


Net Sales [INR‐Crore]

3,1123,403

4,198

4,947

5,564

‐

1,000

2,000

3,000

4,000

5,000

6,000


EBIDTA [INR‐Crore]

272

168

231

279

372

5.5% 5.6%6.6%

8.7%

4.9%

0

60

120

180

240

300

360

420


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Normalised PAT [INR‐Crore]

201

163145

187

234

0

60

120

180

240


Net Sales [INR‐Crore]

3,4213,773

4,590

5,461

6,136

‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000


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Industry Outlook

The biscuit market in India is estimated to be INR15,000 crore (US$2.68 billion) and the industry is also gearing up aggressively to tap the medium and premium segment within the country in the coming years. Biscuit industry is witnessing a major shift towards ‘premiumisation’ as consumer preferences change, fuelled by soaring disposable incomes in smaller towns and health awareness. People with lower incomes are also upgrading from the ‘affordable’ glucose biscuits to mass cream biscuits and mass cookies.

The biscuit industry, which consists of economy, middle, premium and super-premium segments, is likely to grow at 14-15 percent annually for the next five years. But the premium and super-premium segments, according to industry experts, are believed to be growing at a much faster rate, probably more than 20 percent on a year-on-year basis. Currently, economy and middle segments (mass segment) comprise about 70 percent of the total biscuit market in India.

While biscuits priced below Rs.100 a kg are in the economy segment and biscuits priced at Rs.100-150 per kg are categorised as middle segment. Whereas biscuits with an MRP of Rs.125-150 per kg fall in the premium category and above Rs.150 a kg in the super-premium segment.

Over the last few years, the biggest shift that has been happening (in the country’s biscuit industry) is the premiumisation shift and this is best borne out by the reducing contribution of the glucose segment. The glucose segment used to contribute 33 percent by value a couple of years ago and currently this is expected to dropped to around 24 percent .

Also more action is expected in the health and wellness segment, due to increasing concern about lifestyle-related ailments. There will be more products on the market which are naturally healthy. Many biscuits, which are good for health, but are not advertised as such, will see a change in their marketing pitch.

Annual Growth Rate of Biscuits of last 10 years

Source : IBMA * FY13 data as on 30 SEP 2012

Annual Growth Rate (%) of Biscuits

1314 14

1314

16

14

11 11

9

0

2

4

6

8

10

12

14

16

18

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 *FY13

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Annual Production Data of Biscuits (In lakh Metric Tonnes)

Source : IBMA

Main Category of Biscuits

Key Major Brands in Biscuits Industry

Annual Production (in Lakh Metric Tonnes) of Biscuits

1113

1416 17 18

19 1921

0

5

10

15

20

25

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

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Investment Thesis

Strong brands portfolio in biscuits segment : Britannia Industries lead the biscuits category with market share of ~30% in the industry. It has strong brands in the fastest growing biscuit market like ‘Good Day’, ‘Marie Gold’, ‘Tiger’, ‘50:50’, ‘Milk Bikis’, ‘Treat’, ‘Burbone’, ‘Little Hearts’, ‘Pure Magic’ and ‘Nutrichoice’. The company is investing ~ 8% of its sales on the advertisement to enhance its brand value and market share.

Shift towards Premiumisation and cost rationalisation to help improve margin in the business: India is witnessing a major shift towards 'premiumisation' as consumer preferences change, fuelled by soaring disposable incomes in smaller towns and health awareness. To cater to the current trends, Britannia has launched various value added products to increase its mix towards premiumisation with its products like Pure Magic, Treat, Burbone etc and has undertaken a cost rationalisation which is expected to improve the margin of the company going forward.

Britannia has been reducing the sales of its glucose bisuits from around 60% of its sales five years ago to currently around 20% of the sales and on the other hand pushing sales of cream and other high-margin biscuits to enhance its margin. In last 4 years, the EBITDA margin of the company has been gradually improving from 4.6% in FY10 to 6.8% in FY13 . Going forward we expect the margin to improve further to around 7.1% on back of cost rationalisation and improvement in value added product mix.

Advertisement Investment in Brands (last 5 years) INR Crores

236301

333

420

534

7.3% 8.3% 7.6% 8.1% 9.3%

0

100

200

300

400

500

600


0.0%4.0%8.0%12.0%16.0%20.0%24.0%28.0%

EBITDA (%) Margin Trends Last 5 Years

7.1%

4.6%

5.1%

5.7%

6.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%


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Increasing the Sales Mix of non-biscuits to improve profitability and diversifying the product portfolio: The company has been increasing its non-biscuits portofolio like Dairy (butter, Milk and Dahi), Bakery and Healthy breakfast (Poha, upma and Oats) to earn higher margin and diversify its product portfolio. It derives around 25% of its total sales from non-biscuits category whereas biscuits constitutes around 75% of the total consolidated sales.

Also the non-biscuits business has been growing much faster than the biscuits business which is benefiting the company in enhancement of its margin and diversifying into high growth product portfolio.

Source : company database


75%

9%

5%

5%3% 2% 1%

Biscuits

Bread & Rusk

Cake

Dairy

SFIC Food Dubai

Al Salan Foods Omon

Others

Growth Rate of Various Products (Last 3 YRS)

7%

22% 21%23%18%

62%

16%16%21%

40%34%

17%

0%

10%

20%

30%

40%

50%

60%

70%

Biscuits Bread & Rusk Cake Dairy

FY10 FY11 FY12

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Driving sales through focus on new and renovated offering: The Company has been driving its sales by introducing several new and renovated offerings acrosss the entire portfolio that includes NutriChoice Multigrain Thins and Roasty, Pure Magic, Treat Fruit Creams, Marie with Honey, Tiger-Zor chocolate and almond milk

Restructuring of Top Management

The management of Britannia Industries has undertaken a restructuring of top managament whereby Vinita Bali, who is the MD, will be focussing on the international business and Varun Berry, who is the COO, will now head the India business. Varun Berry has more than 27 years of experience with him in working at toplevel in companies like Hindustan Unilever Ltd and Pepsi.

Also Management has indicated that Britannia is gearing up for high growth in India operations by catering to the changing food habits of the evolving Indian consumer and pursuing opportunities for growth in the overall food domain.

Peer Comparison

Source : Bloomberg, Company Database Financials INR Crore

Note: Nestle India and GSK Consumer Healthcare year ending December

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Valuation

At the CMP of INR670, the stock discounts its consolidated FY14E EPS of INR26.7 by 25x and its FY15E EPS of INR31.8 by 21x. Its 3 year and 5 Year Average P/E works out to be 37x and 32x respectively as per Bloomberg. Also the company is relatively much cheaper in comparison to other food companies in its peer group. With Powerful brands in biscuits category, Non-biscuits division delivering healthy growth and Strong Financials, Britannia industries Limited looks to be a good bet for investment. We assign a multiple of 25x on its FY15E EPS of INR31.77 to arrive at a Target price of INR794 for a time horizon of 15 months.

Key concern

Volatility in the raw material prices- Any major sharp increase in the prices of wheat, sugar and palm oil will lead to decline in the EBITDA margin of the company and may affect its profitability.

Stiff competition- Britannia operates in a highly competitive industry so any aggressive expansion by the domestic companies may further enhance competition and may restrict further pricing power of the company.

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Income Statement Consolidated Financials INR Crore

Ratio Analysis

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Balance Sheet Consolidated Financials INR Crore

Cash Flow

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Microsec Research: Phone No.: 91 33 30512100 Email: [email protected]

Ajay Jaiswal: President, Investment Strategies, Head of Research: [email protected]

Fundamental Research

Name Sectors Designation Email ID

Nitin Prakash Daga IT, Telecom & Entertainment AVP‐Research [email protected]

Naveen Vyas Midcaps, Market Strategies AVP‐Research [email protected]

Sutapa Roy Economy Research Analyst s‐[email protected]

Sanjeev Jain BFSI Research Analyst [email protected]

Neha Majithia Mid Cap Research Analyst [email protected]

Soumyadip Raha Mid Cap Executive Research [email protected]

Saroj Singh Mid Cap Executive Research [email protected]

Kapil Bhati Mid Cap Executive Research [email protected]

Technical & Derivative Research

Vinit Pagaria Derivatives & Technical VP [email protected]

Ranajit Saha Technical Research Sr. Manager [email protected]

Institutional Desk

Puja Shah Institutional Desk Dealer [email protected]

Abhishek Sharma Institutional Desk Dealer [email protected]

PMS Division

Siddharth Sedani PMS Research AVP [email protected]

Ketan Mehta PMS Sales AVP [email protected]

Research: Financial Planning Division

Shrivardhan Kedia FPD Products Manager Research [email protected]

Research‐Support

Subhabrata Boral Research Support Asst. Manager Technology [email protected]

Recommendation

Strong Buy >20%

Buy between 10% and 20%

Hold between 0% and 10%

Underperform between 0% and ‐10%

Sell < ‐10%

Expected absolute returns (%) over 12 months

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Documents

Britannia Industries Ltd Research Report Jun 20