BUY Building blocks for growth - HDFC securities · Britannia Industries . BUY . HDFC securities Institutional Research is also available on Bloomberg HSLB & Thomson Reuters

RESULTS REVIEW 4QFY18 18 MAY 2018

Britannia Industries BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Building blocks for growth BRIT reported a solid quarter with revenue growth of 13% (volume-led) to Rs 25.1bn (exp. 12%). Brand investments and widening distribution is driving growth. International biz recovered with double digit growth. EBITDA/PAT was up 29/25% (exp. 20/17%). The quarter marks the beginning of aggressive product launches (50 products in the next 4-6 qtrs.) with focus on innovation and premiumisation. New launches will lead to category extensions (biscuits, cake, rusk & dairy) and entry in newer categories (croissant etc.). To support these launches BRIT plans capex of ~Rs 10bn over the next 3 years at Ranjangaon plant (located in a food park & milk belt). With this plant, BRIT is focusing on backward integration of dairy (earlier via contract packers) and flour (flour mill for scale). We like BRIT owing to (1) Premiumisation (~80% mix of premium biscuits vs. industry of 55%), (2) Distribution expansion (rural and weak states), (3) Entry in new segments (croissants and other macro snacking products), (5) Cost optimization (saving of Rs 2.40bn in FY19 vs. Rs 2.25bn in FY18).

A clear trend has emerged that during turbulent periods, leaders (HUL and BRIT) have outperformed their peers in terms of volume & EBITDA growth (BRIT posted 8/18% in FY18). We believe BRIT will be able to capitalize on the underlying improvement in consumption. We model 25% EPS CAGR over FY18-20E. We upgrade our multiple to 45x (42x earlier) Mar-20 EPS. Our TP is at Rs 6,020 and we maintain BUY. Highlights for the quarter Realigned strategy on dairy: BRIT has begun procuring

milk directly from farmers (~25,000) and will over the next 2 years begin in-house manufacturing of VAP (cheese) vs. outsourcing in order to stay competitive.

Stellar 29% EBITDA growth: Commodity inflation has seen a marginal uptick. GM expanded by 47bps to 38.5% on account of richer mix. Employee/other expense increased by 21/3% resulting in 192bps EBITDA margin expansion to 15.6% (vs. est. of 14.8%)

Near-term outlook: New product launches, stable RM, revival in demand (especially in rural) and continued cost optimisation can drive earnings in the ensuing quarters. Stock can continue to offer modest upside.

Financial Summary (Rs mn) 4QFY18 4QFY17 YoY (%) 3QFY18 QoQ (%) FY16 FY17 FY18P FY19E FY20E Net Revenue 25,375 22,444 13.1 25,675 (1.2) 83,972 90,541 99,140 113,294 131,349 EBITDA 3,971 3,081 28.9 3,984 (0.3) 12,144 12,782 15,017 18,077 22,778 APAT 2,632 2,109 24.8 2,637 (0.2) 8,246 8,846 10,040 12,387 16,060 EPS (Rs) 21.9 17.6 24.7 22.0 (0.2) 68.7 73.7 83.6 103.2 133.8 P/E (x) 79.6 74.2 65.4 53.0 40.9 EV/EBITDA (x) 53.4 51.0 43.0 35.4 27.7 Core RoCE (%) 74.8 44.1 39.2 45.7 53.0 Source: Company, HDFC sec Inst Research

INDUSTRY FMCG

CMP (as on 17 May 18) Rs 5,477

Target Price Rs 6,020

Nifty 10,683

Sensex 35,149

KEY STOCK DATA Bloomberg BRIT IN

No. of Shares (mn) 120

MCap (Rs bn)/(US$ mn) 658/9,711

6m avg traded value (Rs mn) 802

STOCK PERFORMANCE (%)

52 Week high / low Rs 5,622 /3,372

3M 6M 12M

Absolute (%) 14.5 15.3 49.2

Relative (%) 11.2 9.9 34.6

SHAREHOLDING PATTERN (%)

Promoters 50.70

FIs & Local MFs 12.61

FPIs 17.05

Public & Others 19.64 Source : BSE

Naveen Trivedi [email protected] +91-22-6171-7324 Siddhant Chhabria [email protected] +91-22-6171-7336

BRITANNIA INDUSTRIES : RESULTS REVIEW 4QFY18

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Quarterly Financials Year to March (Rs mn) Q4FY18 Q4FY17 YoY (%) Q3FY18 QoQ (%) FY18 FY17 YoY (%) Net Revenue 25,375 22,444 13.1 25,675 (1.2) 99,140 90,541 9.5 Material Expenses 15,613 13,915 12.2 15,745 (0.8) 61,071 55,887 9.3 Employee Expenses 1,084 897 20.9 936 15.8 4,016 3,526 13.9 Other Operating Expenses 4,707 4,551 3.4 5,010 (6.0) 19,036 18,346 3.8 EBITDA 3,971 3,081 28.9 3,984 (0.3) 15,017 12,782 17.5 Depreciation 424 322 31.5 329 28.8 1,421 1,193 19.1 EBIT 3,548 2,759 28.6 3,655 (2.9) 13,596 11,589 17.3 Other Income 444 335 32.5 359 23.6 1,664 1,505 10.5 Interest Cost 24 13 79.5 26 (7.1) 76 55 39.3 Exceptional item (6) 2 na 2 na (2) 3 (164.3) PBT 3,962 3,082 28.5 3,990 (0.7) 15,182 13,043 16.4 Tax 1,330 973 36.7 1,354 (1.8) 5,142 4,197 22.5 RPAT 2,632 2,109 24.8 2,637 (0.2) 10,040 8,846 13.5 EPS 21.9 17.6 24.7 22 (0.2) 83.6 73.7 13.4 Margin Analysis

Particulars (%) Q4FY18 Q4FY17 YoY (bps) Q3FY18 QoQ (bps) FY18 FY17 YoY (bps) Material Expenses 61.5 62.0 (47) 61.3 21 61.6 61.7 (12.5) Employee Expenses 4.3 4.0 28 3.6 62 4.1 3.9 15.6 Other Operating Expenses 18.6 20.3 (173) 19.5 (96) 19.2 20.3 (106.1) EBITDA Margin 15.6 13.7 192 15.5 13 15.1 14.1 103.0 Tax Rate 33.6 31.6 200 33.9 (35) 33.9 32.2 169.4 PAT Margin 10.4 9.4 97 10.3 10 10.1 9.8 35.6 Source: Company, HDFC sec Inst Research

Domestic revenue growth was driven by double digit volume growth Gross margin expanded by 45bps to 38.5%, supported by stable commodity inflation Cost optimisation supported EBITDA margin expansion Higher employee cost is driven by Rs 140mn of bonus on account of centenary year BRIT has expanded its geographic reach to Nepal. Margins will be accretive with capex of ~Rs 550mn


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Quarterly Net Revenue Quarterly Domestic Volume Growth

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Quarterly EBITDA Quarterly Gross And EBITDA Margin

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Consolidated net revenue grew by 12.5% with rural growing faster than urban Domestic volume growth picked up to 10% which was in-line with our expectations Despite declining gross margin trajectory, improving EBITDA margin trajectory is impressive

6%

9%

11%

14%

16%

37%

39%

40%

42%

Q1F

Y16

Q2F

Y16

Q3F

Y16

Q4F

Y16

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Q4F

Y18

Gross Margin (%) - LHS EBITDA Margin (%) - RHS

0.0%

4.0%

8.0%

12.0%

16.0%

-

5,000

10,000

15,000

20,000

25,000

30,000

Q1F

Y16

Q2F

Y16

Q3F

Y16

Q4F

Y16

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Q4F

Y18

Net Revenue YoY Chg (%) - RHSRs mn

8%

10%

12%11%

10%

8% 8%

2% 2%3%

6%

12%

10%

0%

2%

4%

6%

8%

10%

12%

14%

Q4F

Y15

Q1F

Y16

Q2F

Y16

Q3F

Y16

Q4F

Y16

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Q4F

Y18

0%

20%

40%

60%

80%

-

800

1,600

2,400

3,200

4,000

4,800

Q1F

Y16

Q2F

Y16

Q3F

Y16

Q4F

Y16

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Q4F

Y18

EBITDA YoY Chg (%) - RHSRs mn


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Revenue Performance Gross Margin


EBITDA Margin NPM


28 34 38 46 55

61 68

78 83 90 98.3

112

130

0%

5%

10%

15%

20%

25%

-

35

70

105

140

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

Net Sales YoY Gr. CAGR (%) - RHS

Rs bn

39%38%

36%

34%36%

38%

40%40%40%

38%38%39%

40%

28.00%

32.00%

36.00%

40.00%

44.00%

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

8%7%

5% 5% 6%7%

9%11%

14%14%15%16%

17%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

18.0%

21.0%

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

6%

4%

3% 3% 4%4%

6%

8%

10%10%10%11%

12%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

We expect revival in consumer demand, continued market share gains and new launches to support healthy growth in FY19 & FY20 BRIT’s cost saving for FY18 was Rs 2.25bn, higher than Rs 1.5bn achieved in FY17. Guidance for FY19 is at Rs 2.4bn


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Revenue Growth In Weak States

Source: Company, HDFC sec Inst Research Direct Reach Britannia’s Relative Market Share In Weak States


0.73

1

1.26

1.55

-

0.45

0.90

1.35

1.80

FY14

FY15

FY16

FY17

FY18

mnmn

1.84

UP grew strongly in FY18 which is a reflection of the success BRIT is attaining in the weak states BRIT’s market share is in the low teens in the weak states Gujarat, Rajasthan, UP, MP and Chhattisgarh combined comprise ~35% of India’s population. Further, gaining traction in these states would spur BRIT’s growth momentum BRIT’s market share in Gujarat, Rajasthan, UP and MP is just 1/5th that of market leader Parle BRIT has 1.75 million direct outlets as of Q3FY18 which is 2.4x as compared to FY14

100

20

Leader's Mkt Share Britannia Mkt Share

Britannia is 1/5 of the market leader

17%

10% 10%

19%

26%

15%

9%

19%

23%

13%

9%

20%

16% 15% 15%

27%

-8%

0%

8%

16%

24%

32%

Gujarat MP UP Rajasthan

FY15 FY16 FY17 FY18

Encouraging to see UP showing an uptick in growth


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BRIT’s Market Share

Source: Company, HDFC sec Inst Research

Management’s strategies have succeeded in gaining profitable market share in the last 2 years


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Stable 3% input inflation in FY18 Wheat Flour Prices Sugar Prices


RPO Prices Milk Prices


BRIT continues to enjoy stable commodity prices Overall inflation was at 3% in FY18 We expect commodity prices to remain modest in the near-term


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Key Assumptions Assumptions FY16 FY17 FY18P FY19E FY20E Revenue Growth (%)

Biscuits and high protein food 10.9 8.0 9.5 13.0 15.0 Bread, bread toast and rusk 12.2 8.0 8.0 13.0 13.0 Cake 18.3 12.0 9.5 18.0 18.0 Dairy Business (2.2) 5.0 5.0 5.0 5.0 International Business 28.1 (13.8) 8.0 14.0 14.0

Gross Margin (%) 40.3 38.3 38.4 39.1 40.2 ASP (% of sales) 5.3 4.3 4.0 4.2 4.3 Distribution (% of sales) 5.1 4.9 4.8 4.5 4.3 EBITDA Margin (%) 14.5 14.1 15.1 16.0 17.3 Tax Rate (%) 32.5 32.2 33.9 31.0 30.0 NPM (%) 9.8 9.8 10.1 10.9 12.2 Source: Company, HDFC sec Inst Research


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Income Statement Year End March (Rs mn) FY16 FY17 FY18P FY19E FY20E Net Revenues 83,972 90,541 99,140 113,294 131,349 Growth (%) 10.4 7.8 9.5 14.3 15.9 Material Expenses 50,127 55,887 61,071 68,996 78,547 Employee Expense 3,414 3,526 4,016 4,509 4,984 ASP Expense 4,461 3,850 3,966 4,758 5,648 Distribution Expense 4,310 4,459 4,709 5,098 5,648 Other Expense 9,517 10,037 10,362 11,855 13,744 EBITDA 12,144 12,782 15,017 18,077 22,778 EBITDA Growth (%) 40.6 5.3 17.5 20.4 26.0 EBITDA Margin (%) 14.5 14.1 15.1 16.0 17.3 Depreciation & Amortisation 1,134 1,193 1,421 1,647 1,926 EBIT 11,010 11,589 13,596 16,431 20,852 Other Income (Including EO Items) 1,244 1,505 1,664 1,575 2,145

Interest 49 55 76 53 53 PBT 12,205 13,040 15,184 17,952 22,943 Tax 3,961 4,197 5,142 5,565 6,883 RPAT 8,246 8,846 10,040 12,387 16,060 Adjustment - - - - - APAT 8,246 8,846 10,040 12,387 16,060 APAT Growth (%) 27.2 7.3 13.5 23.4 29.7 Adjusted EPS (Rs) 68.7 73.7 83.6 103.2 133.8 EPS Growth (%) 27.1 7.3 13.4 23.4 29.7


Balance Sheet Year End March (Rs mn) FY16 FY17 FY18P FY19E FY20E SOURCES OF FUNDS Share Capital - Equity 240 240 240 240 240 Reserves 20,739 26,767 33,629 42,403 54,129 Total Shareholders Funds 20,979 27,007 33,869 42,643 54,369 Minority interest 25 26 131 131 131 Long Term Debt 377 314 846 846 846 Short Term Debt 934 922 1,023 1,035 1,051 Total Debt 1,311 1,236 1,868 1,881 1,896 Net Deferred Taxes (444) (231) (226) (226) (226) Non Current Liabilities 282 307 341 388 444 TOTAL SOURCES OF FUNDS 22,153 28,344 35,984 44,817 56,615 APPLICATION OF FUNDS Net Block 8,343 10,322 12,174 16,232 17,846 CWIP 901 301 2,028 - - Goodwill 1,159 1,278 1,282 1,282 1,282 LT Loans & Advances 2,562 834 1,566 1,789 2,074 Other Non Current Assets 562 1,610 866 990 1,147 Total Non-current Assets 13,528 14,345 17,916 20,293 22,349 Inventories 4,407 6,615 6,528 7,460 8,649 Debtors 1,706 1,792 3,046 3,481 4,036 Other Current Assets 6,095 12,030 11,507 12,462 14,448 Cash & Equivalents 8,760 6,076 12,431 18,736 27,602 Total Current Assets 20,967 26,512 33,512 42,139 54,734 Creditors 9,827 9,822 12,293 14,014 16,294 Other Current Liabilities 2,516 2,691 3,150 3,600 4,174 Total Current Liabilities 12,343 12,513 15,443 17,614 20,468 Net Current Assets 8,625 14,000 18,068 24,525 34,266 TOTAL APPLICATION OF FUNDS 22,152 28,344 35,984 44,817 56,615



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Cash Flow Statement Year ending March (Rs mn) FY16 FY17 FY18P FY19E FY20E Reported PBT 12,205 13,040 15,184 17,952 22,943 Non-operating & EO Items (1,092) (1,395) - - - Interest Expenses 49 55 76 53 53 Depreciation 1,134 1,193 1,421 1,647 1,926 Working Capital Change 1,329 (4,514) 2,294 (139) (860) Tax Paid (4,032) (3,966) (5,142) (5,565) (6,883) OPERATING CASH FLOW ( a ) 9,593 4,413 13,832 13,948 17,180 Capex (2,494) (3,663) (5,057) (3,740) (3,540) Free Cash Flow (FCF) 7,099 750 8,775 10,208 13,640 Investments (5,217) 1,416 (5,924) (1,500) (1,500) Non-operating Income 659 749 163 (237) (386) INVESTING CASH FLOW ( b ) (7,052) (1,499) (10,818) (5,577) (5,426) Debt Issuance/(Repaid) (147) (70) 625 - - Interest Expenses (51) (55) (76) (53) (53) FCFE 2,343 2,790 3,563 8,417 11,700 Share Capital Issuance 43 58 - - - Dividend (2,308) (2,884) (3,177) (3,612) (4,335) Others - - - - - FINANCING CASH FLOW ( c ) (2,462) (2,951) (2,628) (3,666) (4,388) NET CASH FLOW (a+b+c) 79 (36) 386 4,805 7,366 EO Items, Others 379 355 45 - - Closing Cash & Equivalents 889 1,208 1,638 6,443 13,809


Key Ratios FY16 FY17 FY18P FY19E FY20E PROFITABILITY (%) GPM 40.3 38.3 38.4 39.1 40.2 ASP 5.3 4.3 4.0 4.2 4.3 EBITDA Margin 14.5 14.1 15.1 16.0 17.3 EBIT Margin 13.1 12.8 13.7 14.5 15.9 APAT Margin 9.8 9.8 10.1 10.9 12.2 RoE 49.3 36.9 33.0 32.4 33.1 RoIC (or Core RoCE) 74.8 44.1 39.2 45.7 53.0 RoCE 45.9 35.2 31.4 30.8 31.7 EFFICIENCY Tax Rate (%) 32.5 32.2 33.9 31.0 30.0 Fixed Asset Turnover (x) 4.4 4.0 3.8 3.6 3.7 Inventory (days) 19.2 26.7 24.0 24.0 24.0 Debtors (days) 7.42 7.22 11.21 11.21 11.21 Other Current Assets (days) 26.5 48.5 42.4 40.2 40.2 Payables (days) 42.7 39.6 45.3 45.1 45.3 Other Current Liab & Provns (days) 10.9 10.8 11.6 11.6 11.6

Cash Conversion Cycle (days) (0.6) 31.9 20.8 18.7 18.5 Net D/E (x) (0.4) (0.2) (0.3) (0.4) (0.5) Interest Coverage (x) 226.1 212.6 179.1 307.3 390.0 PER SHARE DATA (Rs) EPS 68.7 73.7 83.6 103.2 133.8 CEPS 78.2 83.7 95.5 116.9 149.8 Dividend 20.0 22.0 25.0 30.0 35.0 Book Value 174.8 225.1 282.1 355.2 452.9 VALUATION P/E (x) 79.6 74.2 65.4 53.0 40.9 P/BV (x) 31.3 24.3 19.4 15.4 12.1 EV/EBITDA (x) 53.4 51.0 43.0 35.4 27.7 EV/Revenues (x) 7.7 7.2 6.5 5.6 4.8 OCF/EV (%) 1.5 0.7 2.1 2.2 2.7 FCF/EV (%) 1.1 0.1 1.4 1.6 2.2 FCFE/Mkt Cap (%) 0.4 0.4 0.5 1.3 1.8 Dividend Yield (%) 0.4 0.4 0.5 0.5 0.6



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RECOMMENDATION HISTORY

Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 31-May-17 3,419 BUY 3,723 10-Aug-17 4,059 BUY 4,418 10-Oct-17 4,330 BUY 4,649 16-Nov-17 4,750 BUY 5,226 27-Dec-17 4,734 BUY 5,312 12-Jan-18 4,720 BUY 5,312 15-Feb-18 4,764 BUY 5,332 28-Feb-18 4,950 BUY 5,480 11-Apr-18 5,100 BUY 5,615 18-May-18 5,477 BUY 6,020

2,200

2,700

3,200

3,700

4,200

4,700

5,200

5,700

6,200

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov-

17

Dec-

17

Jan-

18

Feb-

18

Mar

-18

Apr-

18

May

-18

Britannia Inds TP


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Disclosure: We, Naveen Trivedi, MBA & Siddhant Chhabria, PGDBM, 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. HSL has no material adverse disciplinary history as on the date of publication of this report. 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. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. 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HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Research Analyst Reg. 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mailto:[email protected]


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Documents

BUY Building blocks for growth - HDFC securities · Britannia Industries . BUY . HDFC securities Institutional Research is also available on Bloomberg HSLB & Thomson Reuters