Britannia Industries

Britannia Industries
INITIATING COVERAGE

BRITANNIA INDUSTRIES
Bakes ‘n’ more: Widening basket to satiate appetite
India Equity Research| Consumer Goods
Britannia Industries (Britannia), the undisputed biscuits market leader, in EDELWEISS 4D RATINGS
our view has ample growth catalysts at its disposal to achieve its stated Absolute Rating BUY
target of becoming a “complete foods player”. Innovation‐led launches & Rating Relative to Sector Outperformer
re‐launches, aggressive rural distribution expansion, full integration in Risk Rating Relative to Sector Low
highly unorganised & fast growing dairy segment, coupled with rising Sector Relative to Market Underweight
salience of international business equip the company to clock industry
leading sales CAGR of 16.3% over FY16‐18E. Moreover, we envisage
MARKET DATA (R: BRIT.BO, B: BRIT IN)
premiumisation and cost saving initiatives will continue to expand
CMP : INR 2,620
margins by 56bps YoY leading to 21.4% earnings CAGR during FY16‐18E.
Target Price : INR 3,323
We initiate coverage with 'BUY' with target price of INR3,323.
52‐week range (INR) : 3,435 / 1,854
Share in issue (mn) : 120.0
Distribution expansion, entry in new segments: Revenue drivers M cap (INR bn/USD mn) : 321 / 4,727
Our analysis indicates that closing the 2.2mn distribution gap with value leader Parle Avg. Daily Vol.BSE/NSE(‘000) : 212.4
alone will help Britannia clock additional revenue CAGR of 12.7% over the next 4‐5
years. Also, expansion in the dairy segment (targets 5x in 5 years), sharpening focus on SHARE HOLDING PATTERN (%)
cake & rusk (realisation 1.5x biscuits) and prospering international business (salience Current Q2FY16 Q1FY16
likely to jump from 5% to 20% in 5 years) impart revenue visibility—16.3% CAGR over Promoters * 50.7 50.7 50.8
FY16‐18E—superior to many other consumer peers. MF's, FI's & BK’s 8.8 8.8 9.0
FII's 19.8 19.8 20.0
Premuimisation, cost optimisation: Potent margin kickers Others 20.7 20.7 20.2
* Promoters pledged shares : NIL
We anticipate Britannia’s commendable performance (margin improved 426bps YoY (% of share in issue)
over FY13‐15E) to sustain riding increased salience of margin‐accretive segments and
launch of premium products (at INR200‐400 per Kg). We also envisage cost saving PRICE PERFORMANCE (%)
measures—50% cut in SKUs, energy savings as ~60% factories still to be optimised,
Stock over
jump in in‐house production from 35% to 50%—to be potent margin kickers. Sensex Stock
Sensex

1 month (6.5) (10.0) (3.5)
Outlook and valuations: Crunchy bite; initiate with ‘BUY’ 3 months (11.8) (20.0) (8.2)
On strong growth visibility, we assign target multiple of 33x (last one year forward P/E 12 months (16.7) 1.4 18.1
at 37x) to FY18E earnings and arrive at a target price of INR3,323. We initiate coverage
on Britannia with ‘BUY/SO’ recommendation/ rating. Key risks are (i) slowdown in rural
demand and (ii) inflation in sugar and wheat prices.
Financials
Abneesh Roy
Year to March FY15 FY16E FY17E FY18E +91 22 6620 3141
Revenues (INR mn) 54,854 61,854 69,127 78,584 abneesh.roy@edelweissfin.com
Rev. growth (%) 13.7 12.5 14.4 17.9

Pooja Lath (Click on image
EBITDA (INR mn) 8,639 12,457 14,555 17,505 +91 22 6620 3075 to view video)
Adjusted profit (INR mn) 5,827 8,184 9,773 12,063 pooja.lath@edelweissfin.com

Adjusted Diluted EPS (INR) 48.6 68.3 81.6 100.7
Tanmay Sharma
EPS growth (%) 47.2 40.6 19.4 23.4 +91 22 4040 7586
Diluted P/E (x) 53.9 38.3 32.1 26.0 tanmay.sharma@edelweissfin.com

EV/EBITDA (x) 35.8 24.7 20.9 17.2
ROAE (%) 57.1 58.5 56.3 56.2 January 21, 2016
Edelweiss Research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Consumer Goods
Investment Rationale

Distribution expansion: Potent revenue growth lever
Ramping up of distribution reach is a low hanging fruit that will impart Britannia high
growth visibility over the next 4‐5 years. Our deep diving analysis indicates that filling
the 2.2mn distribution gap with value segment market leader, Parle, in the hinterlands
alone will drive incremental sales CAGR of 12.7% over the next 4‐5 years. What’s more,
this sales spurt is assuming status quo in the current distribution universe; thus if the
universe expands, the company’s sales will far exceed the 12.6% CAGR clocked over
FY13‐15. Moreover, the company may piggy ride its recently relaunched Tiger Glucose to
gradually seed premium products which will help it make further inroads in the
hinterlands.
Nusli Wadia, Chairman
Britannia has one of the highest visibilty in revenue growth in view of the gap and
opportunity it has in terms of distirbution expansion and rural market (largely the Hindi belt),
respectively, which is dominated by value leader, Parle. The growth opportunity for
Britannia is humungous as its current market share in the Hindi belt of Gujarat, Madhya
Pradesh (MP), Rajasthan and Uttar Pradesh (UP) is a mere one‐fifth of Parle’s market
Britannia’s market share in
share. Though rural sales of many consumer goods companies have sharply slowed in past
the Hindi belt is currently a
few quarters impacted by bad monsoon, lower spends in MNREGA, lower MSP price hikes,
mere one‐fifth that of value
etc., we believe Britannia is cushioned, to some extent, from rural slowdown owing to its
leader, Parle. Britannia is
high potential to narrow the distribution gap with Parle. Parle is the leader in the value
focused on widening its
category, which forms 45% of the total biscuit volumes. Britannia, current market leader in
distribution reach in these
the overall biscuit market (as per Nielsen), has one‐fifth of Parle’s market share in the value
states to cash in on the
segment.
humungous growth

opportunity
We believe Britannia can seize this huge opportunity by expanding its distribution network,
especially in the hinterland where consumption of value segment is the largest as GDP per
capita of these states is on the lower side. We, however, do not expect Britannia to
overtake Parle in the value segment, but reducing the distribution gap will definitely help
Britannia drive premium products in these market as well as premiumise the value
segment.

2 Edelweiss Securities Limited

Fig. 1: States with lower GDP per capita where Britannia can move up the value
segment in the biscuit portolio led by distribution expansion
Varun Berry, MD

Source: Statisticstimes.com, Edelweiss research

In light of this huge distribution gap with Parle, we envisage Britannia to potentially
surpass industry growth in next 4‐5 years. Currently, while Parle has retail presence in close
to 5.8mn outlets, Britannia has 3.6mn outlets. This gap of 2.2mn outlets is large enough to
sustain Britannia’s growth momentum. Filling this gap will help the company garner ~12.7%
sales CAGR over ensuing 4 years. In our analysis, we have assumed nil growth in current
Closing the gap in reach of
distribution, which is however not possible. This is assuming Britannia closes the gap with
2.2mn outlets with Parle can
Parle in 4 years. Even if Britannia fills the gap in next 5‐6 years, it will translate into revenue
itself potentially ensure
CAGR in the range of mid to higher teens.
additional revenue CAGR of

12.7% over the next 4 years
Table 1: Filling the distribution gap with Parle to take care of growth
Sales from biscuits and high protein food (INR mn) 60,520
Sales from bread and rusk (INR mn) 7,637
Sales from cake (INR mn) 4,022
Total domestic sales (INR mn) in FY15 72,178
Current distribution (mn) 3.6
Sales per outlet (INR) 20,049
Distribution gap with Parle (mn) 2.2
Total potential sales from new outlets (INR mn) 44,109
Total Potential sales with increased outlets 116,287
CAGR over the next 3 years 17.2
CAGR over the next 4 years 12.7
Source: Edelweiss research

Consumer Goods
Chart 1: Distribution gap with Parle stands at close to 2.2mn
7.0
6.0
"My mantra is every team has to
help the salesman sell that 1 kilo
extra. No outlet in the country 5.0
(mn)
that sells biscuits would reject a
Britannia biscuit. It’s our inability
4.0
to reach that outlet that pulls us
back. ”
‐ Varun Berry, MD, 3.0
2.0
Britannia Parle
Source: Company, Edelweiss research

Britannia follows a dual We believe with the right product and distribution strategy, Britannia can bridge this gap
distribution model for rural in next 5‐6 years. In distribution, the company has a dual model—urban is targeted in a
and urban areas. This has different manner than rural distribution. For urban, the company follows a split route
helped increase throughput model targeted at deepening distribution, i.e., throughput per outlet. Hence, 2 sales
per outlet and the company’s personnel go to an outlet (each with different products), which results in higher sales per
reach store. In rural, the company follows the hub‐and‐spoke model with focus on increasing the
number of outlets. This model has helped it enhance reach by over 8,000 outlets within a
year. The model helps in further increasing penetration in rural areas, which are growing
faster than urban areas.

Table 2: Britannia’s rural‐urban dual distribution structure
Urban Distribution Rural Distribution
Model of distribution Split route Hub & Spoke
Focus Increasing throughput per outlet Increasing the penetration
Result Total lines sold increased by 25% Rural distributor increased by 50%

These initiatives have culminated in Britannia’s distribution (direct and indirect) reach
increasing to 3.6mn in FY15. The company’s direct reach jumped 20% in 1 year and now
stands close to 1.2mn outlets in FY16. The next target is to bolster direct reach to 1.5mn
over next 2 years. Britannia is aggresively pushing its rural distriubution reach where its
market share is 67% of its share in urban areas.


Chart 2: Direct distribution doubled during FY13‐15, set to reach 1.5mn by FY18
2.0
1.6
1.2
(mn)
0.8
0.4
0.0
FY12 FY13 FY14 FY15 FY16 FY18E

Britannia’s realisation/outlet
is much higher than many Compared to other consumer companies, Britannia’s realisation per outlet is much higher
other consumer goods owing to its higher proportion of direct reach to overall reach. This also indicates that the
companies (refer Table new distribution strategy adopted by the company has resulted in increased throughput
below) per outlet. Sales per outlet is close to double that of Dabur’s and is 2/5th of HUL’s, which
also shows that efficiency per outlet can be ramped up further significantly.

Table 3: Britannia’s distribution and sales per total outlet versus other consumer companies
Distribution reach (in mn) Direct Total % of direct outlet in total outlet Sales per outlet (INR)
HUL 3.2 6.4 50.0 50,135
Dabur 1.0 5.3 18.9 10,248
Colgate 1.3 4.8 27.1 8,773
GCPL 1.0 4.5 22.2 9,844
Emami 0.6 4.0 16.0 5,077
Britannia 1.2 3.6 33.3 20,049
Marico 0.8 3.6 22.2 13,003
Bajaj Corp 0.7 2.9 24.1 2,832
Jyothy Labs 0.5 2.2 22.3 6,376
GSK Consumer 0.9 2.5 36.0 17,230

Consumer Goods
Riding Tiger to scale distribution gap
Britannia has lagged on distribution front, primarily owing to its weak presence in the
Britannia has mere mid to high
hinterlands of UP, Gujarat, Rajasthan, Harayana, MP and Chattishgarh. In the hinterland,
single digit market share in the
the distribution gap between Britannia and Parle is close to 3mn (in balance markets
glucose segment; recent
Britannia has higher distribution), in UP alone the gap is of ~1mn outlets. This gap is largely
relaunch of Tiger can help
due to Britannia’s weak presence in the glucose market where Parle is the leader (80% sales
reduce the distribution gap (of
from glucose biscuits). Parle has higher share in UP as it is a wheat and sugar producing
~3mn) with Parle in the
state, which are the key raw materials for glucose. In Gujarat, MP, Rajasthan and UP,
hinterland and gain some
Britannia’s market share is one‐fifth of Parle’s market share.
market share in the glucose

segment
To cash in on this huge opportunity, Britannia needs a strong product in the glucose
category, where it currently has mid to high single digit market share. Though the company
already has the strong Tiger brand in the value segment, it has failed to wrest share from
the iconic Parle–G in the glucose segment. Another reason for Parle’s strong show is its
constant focus on remaining the leader and pushing the glucose biscuit Parle–G where the
ticket price is not only lower but demand is also sensitive to price (makes it difficult to take
price hike). As Parle operates on lower single digit margin due to which Parle–G is priced
~9% lower than Britannia’s Tiger Glucose, it will not be possible for Britannia to ace Parle
on the pricing front.

Chart 3: Britannia enjoys much higher margins than Parle
12.0
10.6
9.2
(%)
7.8
6.4
5.0
FY09 FY10 FY11 FY12 FY13 FY14
Parle margins Britannia standalone margins

Source: Ace Equity, Edelweiss research

We believe though it is difficult for Britannia to attain leadership in the glucose market
from a pricing strategy, the company will certainly garner some share in this category with
recent relaunch of Tiger (Britannia recently relaunched Tiger glucose biscuit, which is
being positioned on health platform with 25% daily growth nutrients) and distribution
expansion. The company has 3 variants in the Tiger brand—glucose, cream and cookies. It
recently relaunched its Tiger portfolio and has now created a range of biscuits in the Tiger
brand – Tiger Butter Crunch, Tiger Glucose, Tiger Krunch Choco Chip and Tiger Cream. Also,
in the cookie segment Tiger Cookie was first of its kind square cookie with tiger stripes.


Table 4: Price comparison of biscuits in value segment
Britannia Parle
Price (INR per Kg) Price (INR per Kg)
Tiger Glucose 75.2 Parle ‐ G 68.8
Tiger brand straddles across the
Tiger Butter Crunch 100.0 Parle ‐ G Gold 100.0
INR75‐116/kg price range in the
Marie Gold 108.0 Magix Kream 100.0
value segment, which entails Tiger Cream 116.3 Milk Shakti 100.0
huge scope for up‐trading Coconut 100.0
within the value segment as 20‐20 Cookies Cashew 102.6
well 20‐20 Cookies Butter 102.6
20‐20 Cookies Pista Badam 102.6
Marie 111.1

Tiger to help seed premium brands, uptrade in value segment
The enhanced distribution reach achieved through Tiger, apart from the value segment,
will help Britannia launch premium offerings in the hinterland. Tiger, which is in the value
segment, has created sub segments which will help to uptrade within the value segment.
“We need to upgrade a market
Under the Tiger brand too, the company has biscuits ranging from INR75‐116/kg, entailing
which has been lying at the
enough scope for uptrading. Though the per capita income of these markets is at the lower
glucose biscuit level for many
end, the company can launch smaller SKUs of its premium brands which will not only help
years”.
drive growth, but also improve margins in these markets. For instance, the INR5 SKU of
‐ Varun Berry, MD,
Good Day has catapulted 20x in 3 years, implying strong demand for premium brands
even in rural areas and enough scope for premiumisation. Thus, the company can piggy
ride the distribution reach gained from Tiger to enhance sale of premium brands as well.

Fig. 2: Set to entrench position in Hindi belt (encircled)

Source: Internet

Consumer Goods
Innovation DNA revitalising growth
Britannia has imbibed the innovation culture anchored by its robust R&D capabilities,
which has helped it successfully launch a slew of new and innovative products over
the past 2 years. To further bolster its innovation drive, the company is investing
"We have a strong pipeline of INR650mn in another R&D centre in Bengaluru. Moreover, Britannia is also targeting
innovative products to be the less penetrated, higher margins and low competition above INR200/kg category,
launched through a new dedicated which should lend further fillip to growth.
marketing team. Our board is

clear and supportive of the idea
Innovation is the fuel that propels growth in the FMCG space and Britannia has mastered
that it's better to reinvest cash in
this art and galvanised its growth. The company, anchored by its robust R&D capabilities,
bank to generate better sales and
has successfully launched a slew of new and innovative products over past 2 years. To
profits”.
further bolster its innovation drive, the company is building another R&D centre in
Bengaluru towards which it has already invested close to INR650mn.

The innovation culture in the organisation flows from the top, ably spearheaded by Mr.
Varun Berry. Meetings are regularly held and chaired by Mr. Berry which are attended by
heads of various departments to brainstorm on innovation. As a result, Britannia has been
able to successfully launch many new products in past few years such as Good Day
Chunkies, Nutri Choice Heavens, Britannia Cakes, Chunk Cakes, Nut & Raisin Romance, etc.
Despite Good Day clocking The company has also relaunched its power brand, Good Day (it has 7 power brands: Tiger,
high double digit growth in Good Day, Marie, Milk Bikis, 50 50, Treat and Nutri Choice). Not only has the packaging of
past 2 years, Britannia Good Day been changed, but the look and feel of the cookies have also been tweaked, and it
revamped the product, is being promoted via a new ad campaign. This is a win‐win for both consumers and the
reflecting management’s company—margin accretive for Britannia and an attractive offering for consumers. Despite
proactiveness in reinventing Good Day clocking high double digit growth in past 2 years, Britannia revamped the product,
growth reflecting management’s proactiveness in being ahead of curve.

Fig. 3: Old Good Day (left) with straight lines, new offering (right) with smiling lines

Source: Company


Recently, Britannia relaunched another of its power brands, Milk Bikis (strong in South and
East India). Revamp of few other products is also on the anvil. In past few quarters, the
company launched many new products and most have been successful. Recently, it also
relaunched Tiger Glucose and a premium biscuit under the brand name Pure Magic – Deuce,
which is regarded as Britannia’s most disruptive innovation till date (being test marketed
currently) .

Table 5: Innovations by Britannia in past 5 years
Treat Choco‐Decker Treat ‐ O NutriChoice Multigrain Launches new products Jim Jam in new packaging NutriChoice Heavens
Thins and Roasty under NutriChoice on with chocolate variant
health platform
Britannia Cookies GoodDay Choconut Pure Magic ‐ Pure Crème, Good Day Chunkies
Pure Chocolate
Tiger Zor ‐ Chocolate Milk GoodDay Chocochip 50‐50 Snackuits Britannia Nut n Raisin
Drink Romance Cake
ActiMind ‐ milk based Tiger Krunch Vita Marie Honey Oats
drink
Diabetic friendly bisuits Healthy Start ‐ Oats,
under NutriChoice Porridge, Upma and Poha
Time Pass Toasted Snack Healthy range of breads ‐
variants Multi Fiber, Multi Grain,
Honey Oats and Whole
Wheat
Maska Chaska Variants 4 flavours in Health &
Delight Cheese
Tiger Zor Badam Milk in
new flavours
Source:Company, Edelweiss research

This slew of innovations has seen Britannia widen its value market share gap with
competitors, which had shrunk with the entry of ITC. The company aims to be a pioneer in
the biscuit industry with launch of best‐in‐class products and innovation playing a key role.

Robust R&D fuelling innovations
Britannia is test marketing it’s R&D is a vital cog in Britannia’s culture and management has mandated its R&D team to
recently launched premium develop best‐in‐the‐world products. The company’s innovations have sustained primarily
product, Pure Magic Deuce, owing to its strong R&D capability. As a result, overall R&D expenditure, as a percentage of
which is regarded as the most sales, has been on the rise having increased from 0.12% in FY12 to 0.21% in FY15. Also, by
disruptive innovation by the Q4FY16, Britannia’s new R&D centre in Bengaluru is expected to be ready.
company till now
For its premium offering, Milk Bikis, Britannia leveraged its R&D capabilites and launched
the product with the aroma of boiling milk keeping in mind the preference of consumers in
the South. In similar fashion, it launched Good Day Chunkies where care was taken to ensure
perfect balance of dark and milk chocolate chips in the cookie and that the chips remained
soft even after baking. The newly launched Chocolush has also met with encouraging
response.

Britannia believes that though share of super premium products in its overall portfolio is
minuscule, their salience will rise in ensuing years.

Consumer Goods
Chart 4: R&D expenditure, as a % of gross sales
0.4
0.3
0.2
(%)
0.2
0.1
0.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
% of gross sales

Source:Company, Edelweiss research

Fig. 4: Chunkies Cookies (left) and newly launched Pure Magic Chocolush (right)

Source: Company

Apart from Good Day amd Milk Bikis, Britannia has relaunched its glucose brand Tiger,
which had been a laggard in the glucose segment with single digit market share.
Generally, successful renovations have led to stellar growth post relaunch of a product.
For instance, HUL’s fairness brand, Fair & Lovely, witnessed significant pick up in growth
post relaunch in new packaging and formulation. It is now a INR20bn brand. Similarly,
Cinthol (soap from GCPL) logged good growth post its relaunch on a new proposition.
Likewise, renovation of Royal Challenge clocked good growth for USL post its relaunch.
Shoppers Stop too clocked healthy double digit growth in Q1FY16 post renovation of 4
stores.

Britannia’s past renovations have also resulted in significant spurt in its brands. For
instance, Treat catapulted 35% within 2 months of relaunch in April 2012.


Fig. 5: Stellar growth post relaunch of products

Source: Company ppt

Fig. 6: New product launched by Britannia

Source: Company

Consumer Goods
Chart 5: Britannia’s value market share versus other players (as per Euromonitor) –
Gap has increased riding strong innovations
43.0
34.4
25.8
(%)
17.2
8.6
0.0
2010 2011 2012 2013 2014
Britannia Parle ITC
Surya Foods and Agro Anmol Biscuits Cadbury
Unibic Others
Source: Euromonitor

There’s high potential for
Gaps in above INR200‐400/kg price point to drive premium offerings
new launches/premium
offerings in the above Britannia is a formidable player in the premium end (INR120/kg price point and above)
INR200/kg price point biscuits market. The company has close to 14 products in the INR120‐200/kg price point, but
owing to less competition. faces intense competition with the likes of Parle and ITC in the fray. The top‐3 players
This bodes well for top line dominate the competitive INR120‐200/kg segment. The INR200‐400/kg segment has very
and margins few offerings and it is less competitive, a low hanging fruit for the industry. Britannia has a
strong portfolio, which will help it tap the gaps in the above INR200/kg category and further
drive premiumisation. Britannia recently launched the INR500/kg brand Chunkies as well.
We expect new launches/innovations in this price point to pick up fuelled by the innovation
culture and new R&D centre.

Table 6: The INR120‐200 per Kg price point marked by intense competition
Britannia Parle ITC
Price (INR per Kg) Price (INR per Kg) Price (INR per Kg)
50‐50 125.0 KrackJack 125.0 Sunfeast Bounce Creme Biscuits 120.5
Time Pass 126.6 Gold Star 133.3 Sunfeast Hi Fi Cookies 125.0
Good Day Butter 133.3 Happy Happy 133.3 Sunfeast Sweet n Salt 125.0
Treat 133.3 Jam ‐ In 133.3 Sunfeast Mom's Magic Rich Butter 133.3
Nice Time 137.0 Monaco 133.3 Sunfeast Nice 133.3
Tiger Krunch Choco Chip 142.9 Simply Good Cracker 150.0 Sunfeast Snacky 156.3
Nutri Choice Cracker 150.0 Bourbon 166.7 Sunfeast Dream Cream Strawberry Vanila 166.7
Jim Jam 150.0 Simply Good Digestives 200.0 Sunfeast Bourbon Bliss 166.7
Vita Marie Gold 152.0 Hide & Seek Fab Cream 200.0 Sunfeast Mom's Magic Cashew & Almond 200.0
Good Day Cashew 166.7
Bourbon 173.3
Nutri Choice Digestive 200.0
Milk Bikis 200.0
Pure Magic Chocolate 200.0
Source:Edelweiss research


Table 7: Under‐served, less competitive above INR200/kg price points
Britannia Parle ITC
50‐50 Maska Chaska 208.3 Hide & Seek 208.3 Sunfeast Dark Fantasy Choco biscuit 250.0
Good Day Pista Badam 250.0 Hide & Seek Bourbon 250.0 Sunfeast Farmlite (Chocolate, Raisins, Alm 333.3
Little Heart 256.4 Parle Monaco Cracker Sand 250.0 Sunfeast Delishus Nut Biscotti 400.0
Good Day Choco ‐ Chip 266.7 Milano 333.3 Sunfeast Dark Fantasy Choco Fills Luxuria 400.0
Good Day Choco ‐ Nut 333.3 Golder Arch 333.3 Sunfeast Delishus Nuts & Raisins 400.0
Nutri Choice Heavens 400.0 Hide & Seek Milano Cookie 400.0 Sunfeast Dark Fantasy Choco Meltz 500.0
Nutri Choice Essentials 400.0
Pure Magic Chocolush 400.0
Good Day Chunkies 500.0

Our analysis indicates that Britannia’s recent new launches (Nutri Choice, Chunkies, Pure
Magic) are in the above INR400/kg category, and that the company is being proactive and
We expect Britannia to come trying to cash in on this less penetrated segment, which fetches higher margins and has
up with more launches in low competition.
the INR200 and above per kg
price Even in the lower end biscuits segment, there are opportunities aplenty for Britannia to
scale up by widening its portfolio. The company has only 4 biscuit brands (Tiger Glucose,
Tiger Butter Crunch, Tiger Cream and Marie Gold) in the below INR120/kg price point, while
competitor Parle has 7‐8 varieties.

Table 8: Top 3 players in sub‐premium segment ( opportunities galore for Britannia and ITC)
Britannia Parle ITC
Tiger Glucose 75.2 Parle ‐ G 68.8 Sunfeast Glucose 73.5
Tiger Butter Crunch 100.0 Parle ‐ G Gold 100.0 Sunfeast Milky Magic 83.3
Marie Gold 108.0 Magix Kream 100.0 Sunfeast Marie Light Oats, Orange 120.0
Tiger Cream 116.3 Milk Shakti 100.0
Coconut 100.0
20‐20 Cookies Cashew 102.6
20‐20 Cookies Butter 102.6
20‐20 Cookies Pista Badam 102.6
Marie 111.1

Besides, consumers now buy 5 to 6 categories of biscuits ranging from mass to premium
including glucose, cookies, cream sandwich, etc. The eating and buying habits are as per
the occasion like for tea the consumer might opt for a glucose or Marie biscuit. Similarly, to
satisfy his/her sweet tooth a consumer might go for a chocolate or cream biscuit. Thus,
every biscuit company now targets to have a biscuits portfolio that straddles across price
points and categories. The proportion of premium biscuits in consumers’ portfolio is rising,
which bodes well for premiumisation.

Consumer Goods
Total Foods Player: Straddle Across Food Segments
"We want to be the total foods Britannia aims to metamorphose into a total foods company — to move from side of
company. We want to encompass the plate to middle of the plate of the consumer. In this regard, it has already
the centre of the plate rather than sharpened focus on the dairy segment by revamping its business model from being a
being on the side with biscuits”. co‐manufacturer to becoming an integrated player. This strategy will propel the dairy
‐ Varun Berry, MD, segment’s contribution from current INR4bn to INR20bn in next 5 years. Entry into
Britannia Industries chocolates, snacks and breakfast is also on the anvil. Cumulative addressable market
size of these categories is ~INR1,173bn, which opens up enormous potential for
growth.

Britannia, leader in the biscuit segment, is thinking beyond biscuits and aspiring to become a
total foods company. It aims to move from the side of the consumers’ plate (biscuits) to the
middle of the plate (ready to cook, ready to eat food). The segments ‐ dairy, cakes, rusk –
where it is already present, provides huge growth potential as currently these constitute a
minuscule part (~20%) of its portfolio. But, Britannia is also looking at venturing into
categories like snacks, breakfast and chocolate.

Chart 6: Segment‐wise revenue break up
100.0
80.0
60.0
(%)
40.0
20.0
0.0
Biscuits and high protein food Bread Cake and rusk Others Subsidiaries


Fig. 7: Britannia to expand beyond the current segment in which it is present
Biscuits Biscuit
Chocolates Bread
Britannia
current Britannia as
Bread Dairy a total food
presence in
categories Snacks company Cake and
Rusk
Cake and Breakfast Dairy

rusk


Dairy and potential entry segments like chocolates, breakfast and snacks present
humungous growth opportunity for Britannia with market size of close to INR575bn. This
opportunity gets even bigger if one considers the entire organised dairy market (and not just
value added category), which is pegged at close to INR1,173bn.

Fig. 8: Humungous opportunity in new and current segments
Market size in the
emerging
categories (Total
INR1173bn)
Organised Dairy Snacking Breakfast cereals Chocolates

(INR750bn) (INR300bn) (INR13bn) (INR110bn)
Value added
Having a fully integrated dairy (INR150bn)
model in dairy will not only
help overall growth in this
segment, but also be cost Source:Industry, Edelweiss research
advantageous. Dairy products
can also be used as raw Dairy: Britannia is already present in the dairy business in categories like cheese, dahi,
material for the cakes and flavoured yoghurt, tetra pack milk, chaas, flavoured milk, butter, ghee, etc. Though currently
other biscuit segments. the segment contributes mere ~5% to overall sales (performance has been sluggish – logged
mere 4% CAGR during FY12‐15). However, the company aims to improve its show taking
into account the large market size and unorganised sector. Britannia is drawing up a
strategic plan (to be finalised in 6 months) to ramp up its dairy revenues by 4‐5x in next 5
Consumer Goods
years, which we believe is achievable considering the large unorganised space and
Britannia’s distribution muscle. However, back end and sourcing of milk is critical and
difficult.

Chart 7: Dairy segment revenues – Expected to see strong growth
3,500
3,000
2,500
(INR mn)
2,000
1,500
1,000
FY09 FY10 FY11 FY12 FY13 FY14 FY15


Dairy is a big opportunity (organised dairy size of INR750bn) with close to 70% being
unorganised. Within this segment, Britannia is focusing on the INR150bn value‐added dairy
segment. However, the overall dairy segment including the unorganised pie is close to
INR3,700bn in size (as per Crisil research).

Fig. 9: Milk industry in India
Processed dairy industry in India
(INR3650‐3700bn)
Processed milk Milk Products
(INR2160‐2170bn) (INR1490‐1530bn)
Ghee Paneer & Khoa Cheese Curd & Products Butter Ice Cream SCM & Milk

(~30%) (~32%) (~3.5%) (~22%) (~8%) (~2.5%) Powder (~2%)

Source: Crisil research

Britannia is evaluating the model to be adopted for this segment, which would be ratified
by dairy experts on aspects like milk collection, processing, sourcing, etc. If the company
decides to get aggressive in the dairy segment, it would like to do it on its own rather than
third party. The final plan is expected to be ready in 6‐8 months. Dairy will be capex
intensive and entail capex outlay of INR3‐4bn.

Notwithstanding high capex, it makes immense sense for Britannia to opt for a fully
integrated model in its dairy business owing to cost advantages. The company currently
follows the co‐packing model—its product are co‐manufactured by other players—leading
to high production costs. A fully intergated model will help save costs and give it an edge
over competition in terms of pricing of products. Britannia is also open to collaborating with
foreign players for the same (refer Annexure for integrated dairy models).

Table 9: Britannia’s prices at a premium – Integration will give cost advangtage
Mother
Due to co‐manufacturing Dairy Products (Amount in INR) Qty Britannia Amul Nestle Go Dairy
and outsourcing, Britannia’s Cheese Slices 200 gm 138 112 NA 140 130
dairy products are priced
Dahi 400 gm 55 40 55 50 50
higher. However, post
Tetra pack milk 1000 lt 75 62 60 62 65
adopting an integrated
model, the company’s Ghee 1000 lt 430 395 NA 375 390
production costs will reduce Chaas 100 ml 10 6 NA NA NA
in the dairy segment Source: Edelweiss research

Cake and rusk: Britannia is leader in the cake and rusk segment, which is expected to not
only see good growth but also be margin accretive (fetches higher margins than biscuits).
The segment has been growing in high double digits (clocked sales CAGR of ~14% during
FY12‐15). Cakes and rusk, as a segment, is a very nascent category but the growth potential
is enormous considering the company’s ability to premiumise, especially in cakes. Earlier, a
part of the biscuit segment, it is now a separate divison, highlighting Britannia’s sharpening
focus on the space. Leveraging its R&D capabilities, the company recently launched new
cakes and muffins which have met with good response. In rusk too, Britannia has started
advertising and launched a new product which has received significant response.
Management expects this segment too, like dairy, to become 4‐5x in next 5 years.

Chart 8: Sales, growth rate in cake segment has picked up
4,500 90.0
3,600 70.0
2,700 50.0
(INR mn)
(%)
1,800 30.0
900 10.0
0 (10.0)
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Sales (INR mn) Growth (%)


Consumer Goods
Fig. 10: Some innovations done in the cake segment



Sharpening focus on margin accretive international business
Britannia’s international business currently contributes ~5% to total sales, which it
targets to increase to 20‐25% over next 5‐6 years. The segment is margin accretive and
growing at a healthy pace. The company exports to 72 countries and is looking for tie
ups either via joint ventures (JV) or partnerships with local players in some countries.
Britannia is also exploring new geographies to cater to the Indian diaspora.

The segment contributes 5‐6% to total business (exports to markets like US, MENA, Canada,
Nepal, South East Asia). Britannia has 2 international subsidiaries: (1) Strategic Food
International (Dubai), which manufactures and sells biscuits and cookies in GCC and also
exports from there to other countries; and (2) Al Sallan Food Industries (Oman), which
largely involves sales to SFIC. The company also exports to other countries (which is
included in the standalone business). It currently exports to 72 countries.

Table 10: International subsidiaries of Britannia
Strategic Food International Co LLC, Dubai
key player in the biscuit and cookies segment Revenues (INR mn) 1,280 1,343 1,863 2,299 2,657 3,307
in the GCC and Middle East markets and export % growth 5 39 23 16 24
their products across the world Net profit / (loss) (INR mn) (185) (131) (43) (3) 47 323
Al Sallan Food Industries, Oman
Sales are primarily to SFIC Revenues (INR mn) 924 869 1,070 1,252 1,353
1,622
% growth (6.0) 23.1 17.0 8.1
19.9

International business is not only growing at a strong pace, but is also margin accretive.
"Ability to double exports from
Britannia is working towards enhancing share of international business from current 5‐6% to
India and to substantially increase
20‐25% of overall sales in next 5‐6 years, which bodes well for overall growth and margins.
the manufacturing footprint in the

Middle East can increase our
Chart 9: Expected increase in overall salience of international business
international sales to INR7bn or so
in a year to 18 months. But to get 25.0
beyond, company has to think of
setting up manufacturing facilities 20.0
in different markets and that can
happen through acquisitions, joint 15.0
(%)
ventures or a greenfield (project).
Our plan is to take this business 10.0
to INR10‐15bn”.
‐ Varun Berry, MD, 5.0
0.0
FY15 FY20E
Revenue share from International business


Consumer Goods
Britannia is closely studying 15 markets outside India and has identified 3‐4 countries to set
up operations. It is beneficial to set up a manufacturing facility in overseas rather than
exporting, as it not only provides cost advantage and lower distribution expenses, but
becomes a feasible option once business attains scale. Currently, the company is not
present in neighbouring markets like Sri Lanka and Bangladesh as it will require to set up
separate manufacturing facilities there. While evaluating outside markets, the company
considers the following points:

 Indian expat population residing in the geography, as the company caters to the Indian
diaspora.
 Ease of exports.
 Whether a manufacturing facility can be set up in the region.

In US for instance, Britannia is growing at 40‐50% YoY as it is focusing on Indian/Asian stores
there which cater to the Indian diaspora. The target is to be present in lower advertising but
higher distribution channels. The company seeks to replicate similar model in other markets
too. Britannia is also open to acquisitions and tie ups to expand in international markets.
Overseas too, Britannia is gaining ground riding product innovation, distribution expansion
and premiumisation. For instance, in the UAE Britannia used to be the No. 4 player, it is now
No.2 after Mondelez surpassing McVities and Tiffany.


Biscuits bites one of the largest shares of the food pie
Biscuit is the largest category in India’s food and beverage industry and forms 15% of
total industry. As per Euromonitor, India’s biscuit industry is expected to clock 6.4%
CAGR over CY14‐19. Unorganised segment still constitutes 30% of industry, which
Per capita consumption of
provides high growth potential for organised players. Per capita consumption of
biscuits in India is one of the
biscuits in India is one of the lowest at ~2.1kg compared to the developed countries
lowest at ~2.1kg compared to
where it is as high as 11kg. Also, though biscuits penetration is high in urban areas
the developed countries
(85%), it is still ~60% in rural areas (source: IBMA), which is an important driver of
where it is as high as 11kg
growth for the category.

Biscuits, one of the largest categories in packaged food market
Biscuit is one of the largest category in the overall foods & beverage market in India (largest
in packaged food category). The category constitutes ~7‐8% of overall FMCG market and
forms ~15% share of the foods & beverages industry. Pegged at ~INR250bn in FY15, the
biscuit category clocked ~16.6% CAGR during CY09‐14 (source: Euromonitor). Biscuits, being
one of the most penetrated categories in the packaged food market, will largely grow in line
with overall packaged foods industry in India. Growth will be driven by new sub‐categories
and innovations.

Chart 10: Food & beverages industry forms 47% of total FMCG market in India
Other non foods
9%
OTC
1%
Tobacco Food and
16% beverages
47%
Beauty Personal
Care Household Care
22%
5%
Source: FICCI‐ KPMG report

Consumer Goods
Chart 11: Biscuit one of the largest categories in packaged foods space (in bakery and
confectionery)
Bakery and
Baked foods Confectionery
5% 13%
Breakfast
Oils cereals
1%
21%
Snack foods
16%
Baby foods
2% Noodles and
Icecream pasta
2% Soups 3%
0%
Cooking aids
Dairy 4%
33%
Source: Nielsen

Biscuits is also the largest product category in terms of indulgence/impulse sales. Impulse
sales are also a function of disposable income and overall discretionary spending. Thus,
improvement in economic environment will help spur impulse sales in India in turn aiding
biscuit sales.

Chart 12: Biscuit largest category in terms of impulse sales
Sweet and Confectionery
savoury snacks 31%
25%
Ice Cream
7% Pastries
0%
Cakes
4%
Biscuits
33%
Source: Euromonitor

Britannia is value leader in biscuits
As per Euromonitor data, Britannia is leader (35% market share) in the biscuits category (in
value terms). The company has been able to increase the gap with the second largest player,
Parle (~29.5% market share) riding innovations, premiumisation, distribution expansion and
effective advertisements & promotions.


Chart 13: Britannia is value leader and the gap is increasing
50.0
40.0
30.0
(%)
20.0
10.0
0.0
2009 2010 2011 2012 2013 2014
Britannia Parle ITC
Surya Foods and Agro Anmol Biscuits Cadbury
Unibic Others
Source: Euromonitor

Chart 14: Britannia’s market share versus peers
Cadbury Unibic Others
2% 1% 9%
Anmol Biscuits
2%
Britannia
Surya Foods and 35%
Agro
6%
ITC
15%
Parle
30%
Source: Euromonitor

Britannia had lost share in CY11 (shaved off 76bps YoY) and CY12. However, it has since
regained market share amdist intensifying competition. Parle, on the other hand, has been
losing ground. As per Nielsen data, Britannia recently surpassed Parle to become leader in
the segment. However as per Euromonitor, Britannia is already the market leader in terms
of value for the last 5 years.

Table 11: Market share movement from CY11‐14
Change in value market share (bps YoY) 2011 2012 2013 2014
Britannia (76.0) (1.0) 49.0 20.0
Parle (92.0) (117.0) (129.0) (54.0)
ITC 17.0 61.0 41.0 2.0
Source: Euromonitor

Consumer Goods
We believe Britannia will continue to gain market share riding strong innovations (6 in FY15),
better execution, thrust on expanding distribution network and implementation of best
practices in the organisation (Mr. Berry has been inculcating the innovation culture).

Industry growth on gradient
India’s biscuit industry is estimated to clock 6.4% CAGR YoY over CY14‐19 (as per
Euromonitor). The unorganised segment constitutes 30% of industry, implying humungous
growth opportunity for organised players (source: Indian Biscuits Manufacturers’
Association). The unorganised to organised ratio was at 40:60 in CY01, which is at 30:70 now.
Thus, conversion to the organised sector will be key to drive growth. We believe though
industry is already organised (70%), conversion hereon will be gradual though it will be
slighltly faster than earlier period, as now consumers are becoming more health and quality
conscious, particularly in packaged foods. This trend has caught on particularly after the
Maggi imbroglio, which will expedite conversion to organised segment.

Chart 15: Unorganised to organised share in 2001 (on the left) and now (on the right)
Unorganise
d segment
30%
Unorganise
d segment
40%
Organised
segment
60%
Organised
segment
70%
Source: Indian Biscuit Manufacturer's Association, Federation of Biscuit Manufacturer of India

Also, per capita consumption of biscuits in India is one of the lowest at close to 2.1kg
compared to developed countries where it is as high as 11.0kg. This signals vast opportunity
for the category despite being highly penetrated in the foods space. Indonesia spends 1.5x
and Brazil spends ~10x more per capita on on biscuits than India.


Chart 16: Biscuits per capita consumption
13.0
10.6
(kg per capita)
8.2
5.8
3.4
1.0
South East
Belgium
Netherlands
Uruguay
Brazil
Ireland
Spain
Zealand
India
UK
US
Italy
New
Asia
Source :Euromonitor

GDP recovery to aid volume growth, premiumisation
Though India’s GDP growth has tapered off in past few years, recovery prospects remain
bright. Biscuits, as a food item, is the most common and largely penetrated. Thus, the
multiplier effect of growth in this industry with recovery in GDP will not be significant. Also,
though penetration of biscuits is high in urban areas (85%), it is still ~60% in rural areas
(source: IBMA).

However, given that biscuit is also the largest category in terms of impulse sales, growth will
certainly receive a boost once GDP recovery kicks in. Britannia will benefit more because the
average multiplier effect of biscuits sales growth of Britannia to GDP is better than overall
biscuit industry. While the biscuit industry has an average multiplier of 0.9x to GDP,
Britannia’s is close to 1.0x GDP. Also, with recovery in GDP, growth rate of biscuits in the
higher price or premium category will see better growth compared to rest of the portfolio. It
is advantage Britannia, as the company has been strong in terms of premium end launches.

Chart 17: Correlation of GDP with industry and Britannia
2.0
1.6
1.2
(x)
0.8
0.4
0.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Multiplier (Biscuit industry) Multiplier (Britannia)
Source: Industry, Edelweiss research
Consumer Goods
Premiumisation, cost savings: Much in store
Britannia’s EBITDA margin catapulted an impressive 426bps YoY during FY13‐15, led by
cost optimisation efforts, productivity & throughput improvement, supply chain
efficiencies and premiumisation. Company has already rationalised SKUs by half
without impacting sales. Process of centralisation of oven and improving efficiency,
which led to energy savings in FY15 (~60% factories still left to be optimised) is on.
Savings will continue from steps laid on reducing the distance travelled for making
products available at the retail level. In‐house production has jumped from 35% to 50%
and is set to further increase with 2 new factories coming up in FY16 (1 already
commissioned). Trade loads have been lowered by half (pull instead of push strategy).
Going ahead, we estimate gradual margin improvement considering higher growth in
superior margin and nascent categories like cakes & rusk and the international business
coupled with more savings from cost saving measures.

An important reason for Britannia’s re‐rating has been the sigificant ramp up in its margins.
Mix and cost savings are the primary catalysts that drive margins. On mix front, as discussed,
there is high scope for premiumisation—in the addressable market in the bisciut segment
(at various price points especially INR200 and above), with increasing focus and salience in
"We are not reducing costs where
the high margin segment of cake & rusk (realisation in cake & rusk is 1.5x that of
it is going to hurt the business, we
biscuits)—and international business and higher cost savings with a better integrated model
are only reducing costs where it is
in dairy business. As salience of these categories increases, overall revenue mix will further
going to make the business
improve in turn helping gross margin improvement.
better ”.

Chart 18: Realistion per tonne much higher in cake & rusk segment
150
110
(INR/tonne)
70
30
(10)
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Biscuits and high protein food Bread Cake and rusk


To train focus and premiumise the segment, Britannia has rationalised its portfolio. The
company has sharpened focus on maintaining a leaner portfolio—earlier had 250 SKUs of
biscuits, cakes & rusks, besides 120 SKUs of dairy products; around 80 biscuit and 65 dairy
non‐performing SKU’s have been weeded out, though without significant impact on sales.
As of now, the company has 155‐160 SKUs in biscuits and 60 in dairy.


Chart 19: SKU rationalisation largely done
Biscuit SKUs
300
240
180
(Nos.)
120
60
0
Previous Current

Cost efficiencies have led to jump in margins. In FY10, margins had dipped to 4.4% (as a % of
revenue), which improved to an impressive 11.0% in FY15. Though margins improved post
During FY13‐15, EBITDA FY10, improvement received a boost only post FY13 with the rejig in management and Mr.
margins catapulted by 426bps Varun Berry joining as COO and eventually taking over as CEO. During FY13‐15, EBITDA
YoY, led by cost optimisation margins catapulted by 426bps YoY, led by cost optimisation efforts, improvement in
efforts, improvement in productivity & throughput, efficiencies in supply chain and premiumisation.
productivity & throughput,
efficiencies in supply chain Chart 20: Margin improvement led by premiumisation, costs savings during FY13‐15
and premiumisation
1,200
960
720
(bps)
480
240
0
Savings in conversion
Improvement in gross
Other expenses
Savings A&P
FY13 EBITDA margins
FY15 EBITDA margins
Savings in staff costs
Saving in C&F
margins
costs


Consumer Goods
Various cost heads: Lot more left
Gross margins: Improvement in gross margin is a function of price hikes, raw material prices
"We have reduced waste by
and mix. Though the recent correction in raw material prices has played an important role in
almost 70%. We still have 30% to
expanding Britannia’s gross margin (~200bps YoY), the improvement was also led by new
go ”
launches, especially in the premium end (premiumisation). Another key reason for Britannia
attaining market leadership has been its new launches that are largely focused at the
premium end of the market, which has helped the company wrest share from the value‐
focused Parle. This contribution is expected to further increase as Britannia has a slew of
new launches lined up in the premium segment, not only in biscuits, but in cakes as well.

Chart 21: Gross margins have improved but still lower than the levels attained in FY00‐04
Gross margins 50
Gross margins
50.0
45
40.0
40
30.0
(%)
(%)
35
20.0
30
10.0
25 Q2FY11
Q4FY11
Q2FY12
Q4FY12
Q2FY13
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q4FY15
Q2FY16
0.0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15


Taking cue from the past, we observe the company operated at much higher gross margins
than it is currently operating at and amidst similar low inflationary environment. This,
Historically, Britannia
coupled with premiumisation indicates that Britannia can log higher gross margin going
operated at much higher
ahead, which we believe will be gradual. As evident from the graph below, historically in
margins amidst lower
FY04, Britannia operated at much higher margins amidst lower inflationary environment.
inflationary environment

during FY00‐04

Chart 22: Gross margins used to be higher than the current levels in FY00‐04
17.5 70.0
14.0 56.0
10.5 42.0
(%)
(%)
7.0 28.0
3.5 14.0
0.0 0.0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
"“The biggest component for us in CPI Inflation Gross Margin (RHS)

manufacturing is energy as we are Source: Company, Edelweiss research
in the baking business. We
brought in new energy‐efficient Conversion costs: This cost head is defined as the total of direct labour costs and direct
ovens, biogassifiers, which are all manufacturing overheads incurred in the manufacturing process to convert raw materials
expensive, to our plant ”. into finished products. Supply chain efficiency impacts conversion costs. Britannia has
‐ Varun Berry, MD, initiated costs saving measures like TQM, Kaizen and Lean to reduce wastage and bring
Britannia Industries efficiency in its supply chain. As a result, conversion cost as a percentage of sales declined
from 6.8% in FY13 to 6.2% in FY15.

Chart 23: Improvement in conversion costs led by cost saving initiatives
Conversion costs Conversion and other charges
10.0 10.0
8.0 9.0
6.0 8.0
(%)
(xxx)
7.0
4.0
6.0
2.0
5.0
Q2FY11
Q4FY11
Q2FY12
Q4FY12
Q2FY13
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q4FY15
Q2FY16
0.0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15


Britannia’s energy conservation measures include improving insulation of ovens (results in
reduced requirement of heat), installation of efficient & right sized burners in baking ovens,
recovery of heat wasted in baking via air pre‐heaters and installation of variable frequency
drives, which reduces power consumption in the baking process. Alternative fuels are
utilised in 40% of the company’s production. Its energy efficient initiatives in the
manufacturing process have started bearing fruits as the energy consumed to produce a
unit of output has dropped.
Consumer Goods
Chart 24: Drop in consumption of electricity (Kwh/MT)
165
152
139
(Kwh/MT)
126
113
100
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15


Carriage, freight and distribution expenses: Carriage, freight and distribution expenses, as a
percentage of sales, have dipped from 6.1% in FY12 to 5.4% in FY15, aided by various cost
cutting initiatives. Britannia has been focusing on reducing the distance travelled by the final
The distance travelled has product to retail outlets, which not only reduces the total distance travelled and in return
already dipped from 650km to the carriage costs, but also results in lower breakage and hence lower sales returns. This
600km and can potentially fall distance travelled will dip further as the company plans to reduce it by 10% in FY16; the
to 450km. distance travelled has already dipped from 650km to 600km and can further fall to 450km.
Focus is also being laid on consolidation of factories, which will lead to larger but less
number of factories. Though this may appear counter intuitive, larger factories will bring in
economies of scale. The company’s cost efficiency programmes have led to precision in
measurement and recipe optimisation, which has reduced wastage.

Chart 25: Carriage, freight and distribution costs coming down (as % of sales)
Carriage, freight and distribution
8.0
7.0
6.0
(%)
5.0
4.0
3.0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15



Chart 26: Sales returns have declined 30% since FY13
100
80
60
(Nos)
40
20
0
FY13 FY14 FY15 Q1FY16


Factory rationalisation: Better and bigger at one place
Britannia has opened new, large and efficient factories in and around large consumption
areas, which has helped reduce the total distance travelled by 20% in past 3 years. The
company has also set up 2 new large facilities—Erode (Tamil Nadu) and Bengaluru—which
Total factories have come
will increase overall production capacity. It has been focusing on reducing reliance on
down from close to 75‐80, 5
outsourced factories to ensure better quality. Currently, Britannia operates close to 14
years back to ~50 now.
owned units. Earlier (around 5 years ago), it had 75‐80 factories (inlcuding outsourced). The
number has now been rationalised to ~50 (including outsourced manufacturing). Thus, the
strategy is to have less, but larger technologically efficient factories (with more production
line at one place) and reduce reliance on outsourced manufacturing. Due to these efforts,
Britannia’s in‐house manufacturing has increased from 35% in FY13 to 50% FY15. This is
expected to increase further as 2 new factories are coming in FY16 (one already
commissioned).

Chart 27: Proportion of outsourced manufacturing reduced
100
80
60
(%)
40
20
0
Earlier Present
Outsourced production Inhouse manufacturing

Consumer Goods
Advertisements and promotions: From push to pull
Britannia has cut down trade spending (below the line) and sharpened focus on brand
building through above‐the‐line spending. The company is focusing more on pull than on
push strategy. In past 3 years, the company has reduced its trade load (incentives given to
distributors). Earlier, due to high trade load, distributors were tempted to take higher
inventory, which resulted in higher stock in trade and also higher returns and wastage. The
company is now ploughing back savings from the trade load to mainstream advertising
(above the line), which is more effective in propelling demand. To improve visibility,
Britannia has associated itself with events like Filmfare and the Indian Premier League. Also,
proactively it has partially passed on benefits of benign commodity environment to
consumers, thereby boosting volumes and market share. Apart from the normal advertising
platforms like TV, print, outdoors, etc., the company is also investing in increasing overall
display in stores (in line with HUL, Colgate, etc).

Chart 28: Trade spends have also declined by close to 35% since FY13
100
80
60
(Nos)
40
20
0
FY13 FY14 FY15 Q1FY16


Chart 29: Focus more towards brand visibility rather than pushing the brands through trade channels (as % of sales)
10.0
A&P 10
Ad and sales promotion
8.0 9
6.0 8
(%)
(%)
4.0 7
2.0 6
0.0 5
Q2FY11
Q4FY11
Q2FY12
Q4FY12
Q2FY13
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q4FY15
Q2FY16
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15



Fig. 11: Focus towards brand visibility and proactive passing of benefits to the consumers

Source: Company

Consumer Goods
Valuation

Sanguine growth outlook; initiate with ‘BUY’
On strong growth visibility, sustained margin improvement, better cushion from rural
slowdown and entry in allied high‐growth segments, we assign target multiple of 33x
FY18E earnings and arrive at a target price of INR3,323. Britannia stock is trading at
32.1x and 26.0x FY17E and FY18E earnings. We initiate coverage with ‘BUY/SO’.

Britannia is current value leader in the biscuit category, ahead of Parle. The stock witnessed
significant re‐rating in past 2 years following surge in margins (surged by 426bps YoY during
FY13‐15), led by cost saving measures, mix improvement, market share gain (increased
share gap with Parle in past 2 years, as per Euromonitor) and innovations (many launches/
relaunches in past 1 year).

Despite this significant re‐rating, we expect current multiples to sustain as Britannia has
much better growth visibility now than 2 years ago when the re‐rating happened.
We perceive the following growth enablers:
(1) the number of launches and re‐launches will drive growth (re‐launches not only infuse
new excitement in the brand, but some of them will become margin accretive too) with
other new innovations in the pipeline.
(2) We envisage low hanging fruits in the highly penetrated biscuit category, especially in
higher priced segments of above INR200/kg where competition is low, but margins are
high.
(3) Focus on driving growth in the highly unorganised and fast growing dairy segment (70%
is unorganised; likely to finalise plan in next 6‐8 months).
(4) Emphasis on enhanced innovation, focus on the nascent and margin accretive cake and
rusk segment coupled with increasing overall salience of international business.
(5) Aggressive expansion of rural distribution will fill the 2.2mn gap that Britannia has with
Parle.
Thus, there is clear revenue growth visibility and we estimate Britannia to easily sustain the
12.7% revenue CAGR over next 5 years.

The above growth drivers not only lend immense revenue visibility, but are margin accretive
as well. Also, the cost saving measures are still not fully reflecting in margins. This instills
confidence that even if the commodity cycle turns, Britannia will see sustained and gradual
margin improvement, which will help retain premium valuations. We, however, would like
to caution that being in a highly penetrated category, the company in the near term is likely
to face some heat from rural slowdown. We maintain Britannia is better placed to counter
the rural slowdown compared to other consumer companies, as distribution is already on
the lower side compared to urban and this slowdown blues can be tackled with distribution
expansion.

On strong growth visibility, sustained margin improvement, better cushion from rural
slowdown and entry into allied high‐growth segments, we assign target multiple of 33x
FY18E earnings and arrive at a target price of INR3,323. We initiate coverage with ‘BUY’
recommendation and ‘Sector Outperformer’ rating. Britannia is currently trading at 32.1x

and 26.0x FY17E and FY18E, respectively. If we compare the valuation gap with HUL (the
largest FMCG company in India with large market dominance) and Colgate (sales coming
from single category with similar penetration levels), the same has increased. Considering
this and better growth prospects for Britannia than HUL and Colgate, further convinces us
that the current premium valuations will sustain.

Chart 30: 1 year forward PE chart of Britannia
4,000
45x
3,200 40x
35x
2,400
(INR) 30x
25x
1,600 20x
15x
800
0
Jan‐11
Jan‐12
Jan‐13
Jan‐14
Jan‐15
Jan‐16
Jul‐11
Jul‐12
Jul‐13
Jul‐14
Jul‐15


Chart 31: P/E premium of HUL over Britannia has increased recently
72.0
54.0
36.0
(%)
18.0
0.0
(18.0)
Dec‐15
Dec‐15
Aug‐15
Aug‐15
Oct‐15
Oct‐15
Apr‐15
Apr‐15
May‐15
Nov‐15
Sep‐15
Jan‐16
Jun‐15
Jun‐15
Jul‐15


Consumer Goods
Chart 32: P/E Premium of Colgate over Britannia has increased recently
140.0
105.0
70.0
(%)
35.0
0.0
(35.0)
Sep‐14
Sep‐15
Mar‐14
Mar‐15
Jul‐14
Jul‐15
May‐14
Nov‐14
May‐15
Nov‐15
Jan‐14
Jan‐15
Jan‐16



Key Risks

Increased competitive intensity: Rising competitive intensity (especially from players like
Patanjali) can potentially result in volume pressures. Also, it can result in increased A&P
spends and investments towards the brand resulting in margin pressure. Maintaining
market share becomes challenging in such a scenario.

Raw material prices: Rise in the raw material prices like wheat, flour, RPO, milk can lead to
pressure on the gross margins. Inability to pass on the pricing pressure to consumers due to
higher competition can result in further pressure.

Unorganised segment: Softening of the raw material prices leads to cropping up of many
unorganised players which can lead to pressure on market share.

Rural slowdown: Biscuit is a highly penetrated category and slowdown, particularly in rural
areas, will lead to slowing of the category growth rates.

No recovery in urban growth: Delay or no recovery in urban growth will lead to slowing of
the fast growing and higher margin premium segment and can potentially lead to price wars
in that category.

Failure in new innovations and segments: Britannia has a strong pipeline of new
innovations and it also plans to solidify its hold in the dairy, cake, rusk and international
markets. However, failure of new launches and disappointing entry in new segments cannot
be ruled out completely.

Regulatory hurdles: Any debacle like that of Maggi (FSSAI issuing notice against Maggi) can
potentially impact the brand name and the category growth itself.

Consumer Goods
Company Description

The 123 years old brand Britannia is a leading food company in India with over INR60bn
revenue, delivering products in over 5 categories through 3.6mn retail outlets to more than
half of India’s population. The company holds the distinction of being the first to devise
category‐defining innovations like Cream Cheese and introduce a host of international
cheese flavours for cubes and spreads in India. Dairy products contribute 10% to the
company’s revenue reaching 3mn outlets on pan‐India basis. The company has 5 broader
categories including biscuits, breads, dairy, cakes and rusk. In the bakery segment, biscuits is
the largest category accounting for a little over two‐third of the overall bakery industry,
growing at 10‐14% per annum in past 5 years; cake, rusk and bread constitute the balance.
Cake and rusk have clocked mid to high single digits growth in past 5 years. In continuation
of its cookie‐cutter approach to innovation spree Britannia plans to open new R&D centres
and enter chocolate, breakfast and snacks segments. The company aims to be a total food
entity considering its brands’ fungibility. Among its several changes, large brands Good Day
and Tiger have gone for a makeover to enhnace market penetration and tackle competition.

Fig. 12: Britannia’s important milestones

• Established in Kolkata with an investment of INR295
1892
• With the advent of Electricity operations were mechanised
1910
• Industrial Gas Ovens were Imported to Increase Production
1921
• Development of High Quality Sliced and Wrapped Bread in India was pioneered by the Company
1954
• Launched Bourbon Biscuits
1955
• Britannia Cakes hit the Markets
1963
• Changed name from Britannia Biscuits Co to Britannia Industries Ltd
1979
• Sales Cross INR1000mn
1983
• Launched Good Day Brand
1986
• Little Hearts and 50‐50 were launched
1993
• Launched Dairy Products and incorporates "Eat Healthy .Think Better" corporate identity.
1997
• Voted in top 300 small companies by Forbes Global
2000
• Accorded the status of being a superbrand.
2004
• Awarded Global Performance Excellence Award (GPEA) by Asia Pacific Quality Organization (APQO)
2012



Table 12: Awards won by Britannia
2013 ‐ 2014 Bronze Award, Winner of Best Brand Campaign at Times of India, Big Bang Awards 2013.
2013 ‐ 2014 Platinum Award (Packaged Foods category) in the Reader's Digest Trusted Brand Awards 2014
2013 ‐ 2014 Britannia features in the Top 10 of the ET Brand Equity ‐ India's Most Trusted Brands/Most Trusted Food
2013 ‐ 2014 Most Attractive Brand 2013 (F & B‐ Diversified Category) in the TRA‐ India’s Most Attractive Brands Survey
2013
2013 ‐ 2014 India’s 2nd Most Meaningful Brand 2013
2012 ‐ 2013 National Quality Award
2012 ‐ 2013 Global & Quality Excellence Award
2012 ‐ 2013 Manufacturing Supply Chain Awards
2012 ‐ 2013 APQO best in class Large Manufacturing Organisation
2012 ‐ 2013 Golden Peacock National Quality Award
2012 ‐ 2013 Global Performance & Excellence Award
2011 ‐ 2012 7th Most Trusted Brand Economic Times Brand Equity Trusted Brands Survey
2011 ‐ 2012 Creative HR Practices Award by Employer Branding Institute, India
2011 ‐ 2012 Manufacturing Performance Excellence Trophy by IMCRBNQA (Indian Merchant Chambers Ramakrishna Bajaj
National Quality Award)
2011 ‐ 2012 CII Quality Award for Outstanding Performance in Food Safety Excellence in the category of ‘Large Food
Businesses ‐ Manufacturing'

Biscuits
Britannia enjoys market leadership in India’s biscuit market. India lags far behind the rest of
the world in biscuit consumption on per capita basis—while Indonesia spends 1.5x, Brazil
spends ~10x more per capita than India on biscuits. The biscuit category’s growth can be
explained by 2 major gaps ‐ volume consumption depth and extent of value addition. Many
of its brands are market leaders in their categories. Further, consumers have been
consistently seeking better products, leading to premiumisation. Britannia’s brands include
Good Day, Crackers, Nutrichoice, Marie Gold, Tiger, Milk Bikis, Jim Jam, Bourbon, Little
Hearts, Pure Magic and Nice Time.

Table 13: Biscuits in sub categories
Good Day Crackers Nutri Choice Marie Gold Tiger Milk Bikis Jim Jam Bourbon Little Hearts Pure Magic Nice Time
Good Day Cashew 50‐50 Sweet Nutri Choice Marie Gold Tiger Butter Milk Bikis Jim Jam Bourbon Chocolush
and Salty Heavens Krunch Vanilla Original
Good Day Pista 5050 Maska Digestives Vita Marie Tiger Krunch Milk Bikis Jim Jam Chocolate
Badam Chaska Wholesome Gold Choco Chip Milk Cream Chocolate Creme
Good Day Butter Time Pass Digestives 5 Tiger Glucose Treat Vanilla
Grains Chocolate Creme
Choco Chunkies Britannia Essentials Oats Tiger Elaichi Treat
Top Orange
Good Day Choco‐ Essentials Ragi Tiger Treat
Chip Pineapple Strawberry
Good Day Choco Cracker Simply Tiger Treat
Nut Lite Strawberry Pineapple
Cracker Nature Tiger Orange
Spice
Thin Arrowroot Tiger
Chocolate


Consumer Goods
Breads
Bread, being a category with relatively low shelf life, primarily sees localised production
reaching proximate markets. Although Britannia is the largest national player, it does face
local competiton. Products in this category include white sandwich breads, whole wheat
breads and assorted breads.

Table 14: Different products in bread segment
White Sandwich Breads Whole Wheat Breads Bread Assortment
Vitamin Enriched Bread 100% whole wheat bread Fruit Bread
Healthy Slice Bread Multi Grain Bread Fruit Bun
Honey Oats Bread Burger Bun
Multi Fiber Bread Pav
Brown Bread

Dairy
Depite being the largest producer and consumer of dairy products, India trails the world in
respect of per capita dairy consumption. However, with altering dynamics, this situation too
is changing with demand far outsripping supply. Rising affluence is bound to spur demand
for value added products, thus shifting of the dairy industry from basic to processed. In the
dairy segment, Britannia’s sub categories are cheese, fresh dairy and accompaniments.
Products in these sub‐categories are:

Table 15: Different products in dairy segment
Accompaniments Fresh Dairy Cheese
Cow Ghee Dahi Cheese Slices
Danedar Ghee Flavoured Yoghurt Slimz Cheesy Slices
Dairy Whitener Britannia Milk Cheese Cubes
Butter Masala Chaas Cheese Block
Tigerzor Badam Milk Cheezza
Tigerzor Choco Milk Cheese Spreadz Plain
Cheese Spreadz Asli Pepper
Cheese Spreadz Masala Mania
Natural Cheddar Cheese
Processed Cheese Tin
Cream Cheese

Cakes and Rusks
Although cake is in nascent stage in India with dominance of basic and less differentitated
products, Britannia as a national player has a major share in the market along with a few
notable regional players who are strong within their regions. Rusk is also similar to cake in
market and competition structure. Britannia has various products in cake and rusk
categories, details are as follows:


Table 16: Different products in cake and rusk segment
Bar Cakes Rusk
Fruit Bar Cake Premium Bake
Chocolate Maska Rush
Butter
Pineapple
Milk Bar Cake
Orange Bar Cake
Veg Fruit Bar Cake
ChunkCake
Nut & Raisin Romance

Consumer Goods
Management team
Mr. Varun Berry, Managing Director: Mr. Berry is the Managing Director of Britannia since
April 2014. He joined the company in Jannuary 2013 and became Executive Director in
November 2013. Before joining Britannia he has experience of 27 years working with
Hindustan Unilever and PepsiCo both in India and overseas. His last assignment was as CEO
of PepsiCo Foods, South Asia. In the past Mr. Berry had also worked as CEO of various
divisions like International Dairy and Juice business Middle East, Beverages and Foods in
Philippines. Before joining PepsiCo in 1993, he worked with Jumbo Electronics in UAE and
Hindustan Unilever, India. Mr. Berry is a graduate in BE Mechanical from Punjab University
and has also attended course in Strategic Management from Wharton University and Global
Leadership Program at IMD, Switzerland. He comes with a successful track record of
startups, turnaround, joint ventures and growth businesses.

Mr. Manoj Balgi, General Manager, Procurement: Mr. Balgi is General Manager in
Procurement and joined Britannia in 2009. His responsibility includes procurement of raw
material, packing material, capex and projects. Mr. Balgi did BE (Mechanical) from Pune
University and PG in Industrial Management from National Institute of Industrial
Engineering.

Mr. Manjunath Desai, Vice President, Office of Strategy & Business Development: Mr.
Desai joined Britannia in 2008 as Head of Marketing Services and was designated as Vice
President in Strategy and Business Develpoment in May 2014. Along with his existing role,
he works closely with Mr. Berry to drive initiatives and programmes across the company. Mr.
Desai, before joining Britannia, had over 19 years of experience in consumer insights, media
and marketing in India and overseas.

Mr. Anindya Dutta, Business Head, Dairy: Mr. Dutta joined Britannia in 2000 as Area Sales
Manager and has donned many roles in the company including Sales, Marketing, Business
Leadership. He also handles additional charge of Dairy Bread Business. Real test of his skills
was when he took over the breads business in 2013 when it was going through a rough
patch. He managed to successfully exceed revenue and profitability targets while bringing in
more controls.

Mr. Vinay Singh Kushwaha, Vice President, Supply Chain: Mr. Kushwaha joined in August
2010 as Vice President–Supply Chain in Britannia. Currently, he is responsible for
manufacturing, projects, technology, planning and replenisment where he is reponsible for
creating capability and technology for new products and their commercialization through
supply chain. Earlier, he had also led the Quality Assurance function and BNext
transformation projects. Mr. Kushwaha did his Btech (Mechanical) from IIT Delhi and joined
HUL in 1986 as a management trainee and worked 22 years in the company in various roles
in North Africa, Singapore and other Asian countries.

Mr. Amlan Datta Majumdar, CFO: Mr. Majumdar joined Britannia as CFO in early 2015.
Prior to joining, he was with ABB India as President & Country CFO. He has experience in
dealing with Board matters, market analysts and the media. Mr. Majumdar is a Chartered
Accountant.

Mr. Sudhir Nema, Vice President, R&D & Quality: Mr. Nema joined Britannia in August
2014 and his role includes driving the company’s product innovation agenda and Quality

Assurance. He had joined Hindustan Lever Research Center after his post graduation and
worked there for 8 years in beverages R&D and also worked on various food categories for
11 years; his last role was as Director (R&D) Foods. Mr. Nema is Msc in Foods Technology
from CFTRI (Mysore) and Agriculture graduate from J.N.K.V.V Jabalpur.

Mr. Gunjan Shah, Head, International Business: Mr. Shah has been with Britannia for the
past 7 years and currently handles the company’s international business across countries
including its subsidiaries opartaing out of Middle East. Mr. Shah has held numerous key
positions wihin the company such as Regional Sales Manager, Head of Cost Efficiency
Project and General manager–Replenishment.

Mr. Ali Harris Shere, Director, Marketing: Mr. Shere joined Britannia in 1998 as
management trainee and has been with the company for more than 16 years. Previous
positions held by him in the organisation include Marketing Manager, Regional Sales
Manager and Group Product Manager.

Mr. Hemant Rupani, Vice President, Sales: Mr. Rupani joined Britannia in 2014 as Vice
President‐Sales. Previously he worked for 4 years with Vodafone India where he was VP‐
Distribution. His career spans across sectors including FMCG, Consulting and Telecom. Prior
to Vodafone, he had worked with PepsiCo in roles ranging from Sales, Franchise
Management, Field Marketing, Planning Distribution and Trade Marketing. He is MBA in
marketing from FMS Delhi and B.E. Mechanical from REC, Jaipur.

Consumer Goods
Financial Outlook

Britannia is estimated to clock 16.2% revenue CAGR over FY16‐18E driven by
distribution expansion, new launches and increased salience of other segments like
dairy, cakes, rusks and international business. Though margins have expanded 426bps
YoY over FY13‐15 we expect that still costs savings measures and premiumisation will
drive margins but it will be gradual (expect 56bps YoY margins improvement over FY16‐
18E). PAT is expected to growth at a CAGR of 21.4% YoY over FY16‐18E.

Revenue growth trajectory strong
Aided by new launches and relaunches coupled with strong innovation pipeline we believe
that revenue growth trajectory will remain strong. Growth will also be bolstered by
increased distribution (especially in the hinterland) and focus towards increasing the
salience of other segments like diary, cakes, rusks and the international business. Hence we
expect the company to clock revenue CAGR of 16.2% over FY16‐18E (15.1% over FY15‐18E).

Chart 33: Topline growth to remain strong
150,000 20.0
120,000 16.0
90,000 12.0
(INR mn)
(%)
60,000 8.0
30,000 4.0
0 0.0
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Revenue Revenue growth (RHS)


Premiumisation and costs saving measures to sustain margin expansion
Premiumisation (aided by new launches especially in the above INR200 per kg price point)
and costs savings measures (still lot of scope left in terms of efficient factories, savings in
wastage etc) will help to sustain margins expansion. We expect EBITDA to clock 18.5% CAGR
over FY16‐18E (will gradual margin recovery) while PAT is expected to grow at a CAGR of
21.4% over FY16‐18E.


Chart 34: Margins sustain expansion Chart 35: PAT growth robust
20,000 17.5 15,000 60.0
16,000 14.0 12,000 48.0
9,000 36.0
(INR mn)
12,000 10.5
(INR mn)
(%)
(%)
8,000 7.0 6,000 24.0
4,000 3.5 3,000 12.0
0 0.0 0 0.0
FY16E
FY17E
FY18E
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY12
FY13
FY14
FY15
EBITDA EBITDA margins (RHS) PAT PAT growth (RHS)


Strong Balance sheet to support growth
Britannia’s cash flow generation is strong enough to support any expansion or capex
requirement that it might need to incur for segments like dairy or for its international
business.

Chart 36: Robust free cash flow generation
Free cash flow
10,000
8,000
6,000
(INR mn)
4,000
2,000
0
FY12 FY13 FY14 FY15 FY16E FY17E FY18E


Consumer Goods
Annexure I

Can Patanjali leave a mark in biscuits?
Patanjali Ayurved has created a lot of buzz in the market as it has entered many consumer
categories ranging from personal care, foods, home care etc. Key reasons behind the
brand’s success have been the ayurvedic proposition, attractive price (15‐30% discount to
comparable competitor), good product quality and brand equity of Patanjali/Baba Ramdev.
Patanjali clocked revenue of ~INR20.3bn in FY15 with EBITDA margin of ~20%. The company
is targeting revenue of INR50‐60bn in FY16 itself.

Table 1: Pricing of Patanjali products versus other consumer goods companies
Patanjali Comparable
Product Name Qty Products Prices Price Comparable Company Discount
Special Chyawanprash 500 gm 115 160 Dabur Chyawanprash 28.1%
Pineapple Juice 1 Ltr 85 99 Dabur Real Juice 14.1%
Cow Ghee 1 Ltr 450 710 Parsi dairy farm Cow ghee pure 36.6%
Honey 500 gm 135 199 Dabur Honey 32.2%
Patanjali Saundraya Face Wash 60 gm 60 80 Pears Face Wash 25.0%
Patanjali Kesh Kanti Anti Dandruff Shampoo 200 gm 110 159 Head & Sholders Anti Dandruff Shampoo 30.7%
Patanjali Dant Kanti (Tooth Paste) 200 gm 68 84 Pepsodent Germicheck 19.0%
Patanjali Kanti Neem Bathing Soap 75 gm 15 24 Himalaya Neem & Turmeric 37.5%
Patanjali Super Dish Wash Bar 175 gm 10 15 VIM Dish was Bar 32.8%
Patanjali Corn Flakes Mix 500 gm 145 182 Kelloggs Corn Flakes ‐ Original 20.2%
Patanjali Detergent Powder Popular 250 gm 13 19 RIN Detergent Powder 31.6%

Though the biscuit category has close to ~500 players, it is dominated by only 3 players—
Britannia, Parle and ITC. We believe Patanjali does not have a big edge in biscuits that it has
in other categories because: (1) biscuits is a low gross margin category and hence scope to
price the brand cheaper than competitors is limited; and (2) the ayurvedic/health
proposition in this category may not work because already there are healthy options in the
market. Rather, there can be shift of consumers from these B Brands which form 32% of the
market (B Brands include players like Anmol, Patanjali etc which have lower single digit
share and are largely regional) to the top 3 players in the industry which pose well for
Britannia.

Table 2: Price comparison of Patanjali with Britannia
Patanjali Product Price per kg (INR) Britannia product Price per kg (INR) Price difference
Patanjali Namkeen Biscuits 100.0 Time Pass 126.6 (21.0)
Patanjali Marie Biscuit 100.0 Marie Gold 108.0 (7.4)
Patanjali Aarogya Biscuits 120.0 NA NA NA
Patanjali Nat Khat 125.0 50‐50 125.0 ‐
Patanjali Elaichi Delite Biscuits 133.3 Treat 133.3 ‐
Patanjali Choco Delite 133.3 Treat 133.3 ‐
Patanjali Orange Delite Biscuits 133.3 Treat Orange 133.3 ‐
Patanjali Nutty Delite 150.0 Good Day Cashew 166.7 (10.0)


Annexure II

Different models in dairy business adoped by private companies
As per Crisil Report 2015, private companies operate in either or a combination of various
business models: (i) forward integrated; (ii) fully integrated; (iii) supplier of ingredients; and
(iv) contract manufacturing.

The fully integrated business model is similar to the co‐operative business model. The major
difference lies in the structure of payment to dairy farmers. In the fully integrated private
company business model, the farmer is paid only once, as opposed to dual payments made
in the co‐operative model. However, the private company pays the farmer 10‐15% higher
than initial payment by co‐operatives, to incentivise them to supply milk.

In the forward integrated business model, the private company does not deal directly with
dairy farmers. Instead, it procures milk (processed/unprocessed) through other routes such
as village collection centres, franchisee chilling centres, bulk private coolers, district union
factories and regional co‐operative federation factories. Companies, working on this model,
usually get into higher value‐added products and exports; realisation of milk usually ranges
between INR36 and INR40 per litre for cow’s milk and INR52 and INR54 per litre for buffalo
milk and at such cost it becomes non‐remunerative to enter the high‐volume pouched milk
segment.

Fig. 1: Value chain of a fully integrated player (in case of buffalo milk)
Payment to Sale of milk to
Payment to Transportation, Cost of Packaging,
farmers ‐ customers ‐
agents ‐ INR3‐4 chilling cost ‐ processing ‐ selling cost ‐
INR36‐38 per INR52‐54 per
per litre INR3‐4 per litre INR2‐3 per litre INR5‐6 per litre
litre litre

Source: National Dairy Development Board

Consumer Goods
Fig. 2: Value chain of a fully integrated player (in case of cow milk)
Payment to Sale of milk to
Payment to Transportation, Cost of Packaging,
farmers ‐ customers ‐
agents ‐ INR2‐3 chilling cost ‐ processing ‐ selling cost ‐
INR19‐21 per INR36‐40 per
per litre INR2‐4 per litre INR2‐3 per litre INR5‐6 per litre
litre litre

Source: National Dairy Development Board

Given the fragmented landscape of Indian dairy farmers (in terms of smaller animal
holdings), most private companies prefer forward integration rather than becoming a fully
integrated company. The latter requires building a strong procurement system (at farmer
level) and further undertaking production of value‐added products. Within the corporate
segment, few companies have been successful in establishing themselves as fully integrated
players such as Prabhat Dairy and Parag Milk Foods. On the other hand, the entry barriers
are fewer in case of forward integration as building a strong raw material procurement
platform is not mandatory. However, those working on the fully integrated model have
been successful in establishing their brand and are relatively well placed to face competition.

Under the supplier of ingredients model, companies supply key ingredients such as
processed milk and other intermediary products manufactured out of processed milk to
manufacturers of consumer foods (including chocolates, confectionaries, bakery items,
snack foods, etc.). Manufacturers such as Britannia, Nestle, Cadbury, Dominos, etc., depend
on small and mid‐sized dairy companies for supply of these vital ingredients. These
companies place greater emphasis on quality, reliability and timeliness of delivery by dairy
players. Thus, it becomes imperative for companies which supply key ingredients to large
consumer food players to have an efficient procurement supply chain to match the latter’s
quality needs at competitive prices. Processed milk, milk powder and sweetened condensed
milk constitute a major proportion of the overall market of ingredients supply.

Mid‐sized and regional dairy companies, generally, operate across multiple models such as
dedicated supplier of ingredients, contract manufacturing for large dairy companies, etc.
This enables them to gain credibility in terms of quality & health standards and market
positioning in industry. These companies are likely to further establish their own brands in
the milk products segment while continuing to be dedicated suppliers of key ingredients for
large customers.

The contract manufacturing model is not used widely in the Indian dairy and milk products
industry. As per CRISIL’s 2015 report, manufacturing through the contract model, which
accounts for 5‐10% of the overall industry’s production, is prevalent in cases where a large
company (either co‐operative or private company) wants to expand its product bouquet
without incurring significant capital expenditure. For example, Britannia and Mother Dairy
partly produce dairy and milk products in this manner as of now.

Consumer Goods
Annexure III

Fig. 1: SWOT analysis
Strengths Weakness
•Strong Brand Equity •Not strong in the value
•Attained market segment (one fifth
leadership market share to that of
•Strong management Parle in value segment)
under Mr Varun Berry •Distribution gap of
2.2mn compared to
Parle.
Opportunity Threat
•Value segment in the •Increase in the
biscuit category. competitive intensity
•Largely unorganised leading to margin
dairy market. pressure.
•Entry into other food •Entry of other
categories like organised players in
breakfast, snacks etc. the market especially
•Premiumisation MNCs.



Financial Statements

Key assumptions Income statement (INR mn)
Year to March FY15 FY16E FY17E FY18E Year to March FY15 FY16E FY17E FY18E
GDP(Y‐o‐Y %) 7.2 7.4 7.9 8.3 Net revenues 77,751 87,644
100,400
118,478
Inflation (Avg) 5.9 4.8 5.0 5.2 Other operating income 833 800 800 800
Repo rate (exit rate) 7.5 6.8 6.0 6.0 Total operating income 78,584 88,444
101,200
119,278
USD/INR (Avg) 61.2 65.0 67.5 67.0 Cost of materials 46,918 50,921 58,433 68,954
Company Assumptions Gross profit 31,666 37,523 42,767 50,324
Revenue growth (Y‐o‐Y %) Employee costs 2,806 3,330 3,715 4,384
Biscuits and high protein food 13.9 10.0 12.0 15.0 Advertisement & sales costs 6,517 7,187 8,132 9,478
Bread 12.7 10.0 10.0 10.0 Conversion charges 4,881 5,083 5,723 6,635
Cake and rusk 32.2 30.0 30.0 35.0 Carriage and distribution 4,271 4,645 5,221 6,042
Dairy 10.1 30.0 30.0 40.0 Other expenses 4,552 4,820 5,422 6,279
International business 15.8 30.0 30.0 30.0 EBITDA 8,639 12,457 14,555 17,505
EBITDA margin assumptions Depreciation 1,445 1,274 1,443 1,649
COGS as a % of sales 60.3 58.1 58.2 58.2 EBIT 7,194 11,182 13,112 15,856
Employee cost as % of sales 3.6 3.8 3.7 3.7 Add: Other income 880 1,068 1,296 1,923
Conversion charges as % of sales 6.3 5.8 5.7 5.6 EBIT incl. other income 8,074 12,250 14,408 17,779
Carriage & distribution as % of sales 5.5 5.3 5.2 5.1 Less: Interest Expense 39 36 38 41
A&P as % of sales 8.4 8.2 8.1 8.0 Profit before tax 8,035 12,214 14,370 17,739
Other expenses as % of sales 5.9 5.5 5.4 5.3 Less: Provision for Tax 2,611 4,030 4,598 5,676
Financial assumptions Less: Minority Interest 1 1 1 1
Tax rate (%) 27.5 33.0 32.0 32.0 Add: Share of profit from assoc. 2 2 2 2
Debtor days 6 6 6 6 Add: Exceptional items 1,461 ‐ ‐ ‐
Inventory days 32 32 31 31 Reported Profit 6,886 8,184 9,773 12,063
Payable days 49 52 52 52 Less: Except. Items (Net of Tax) 1,059 ‐ ‐ ‐
Cash conv. cycle (days) (11) (14) (15) (15) Adjusted Profit 5,827 8,184 9,773 12,063
Depreciation as % of gross block 9.4 7.5 7.5 7.5 No. of Shares outstanding (mn) 120 120 120 120
Capex (INR mn) 1,135 2,000 2,500 3,000 Adjusted Basic EPS 48.6 68.3 81.6 100.7
Dividend as % of net profit 39.6 42.0 42.0 42.0 No. of Dil. shares outstand. (mn) 120 120 120 120
Yield on cash 18.7 16.0 17.0 17.0 Adjusted Diluted EPS 48.6 68.3 81.6 100.7
Adjusted Cash EPS 60.6 79.0 93.6 114.5
Dividend per share (DPS) 16.0 28.7 34.3 42.3
Dividend Payout Ratio (%) 39.6 42.0 42.0 42.0
Tax rate 27.5 33.0 32.0 32.0
Common size metrics (%)
Year to March FY15 FY16E FY17E FY18E
Cost of materials 60.3 58.1 58.2 58.2
Employee costs 3.6 3.8 3.7 3.7
Advertising & sales costs 8.4 8.2 8.1 8.0
Conversion charges 6.3 5.8 5.7 5.6
Carriage and distribution 5.5 5.3 5.2 5.1
Other expenses 5.9 5.5 5.4 5.3
EBITDA margins 11.1 14.2 14.5 14.8
EBIT margin 9.3 12.8 13.1 13.4
Net profit margin 7.5 9.3 9.7 10.2
Growth metrics (%)
Year to March FY15 FY16E FY17E FY18E
Revenues 13.7 12.5 14.4 17.9
EBITDA 37.7 44.2 16.8 20.3
PBT 41.1 52.0 17.7 23.4
Adjusted Profit 47.4 40.4 19.4 23.4
EPS 47.2 40.6 19.4 23.4
Consumer Goods
Balance sheet (INR mn) Cash flow metrics (INR mn)

As on 31st March FY15 FY16E FY17E FY18E As on 31st March FY15 FY16E FY17E FY18E
Share capital 240 240 240 240 Operating cash flow 5,845 8,139 10,317 12,136
Reserves & surplus 12,176 15,261 18,945 23,493 Financing cash flow (1,814) (5,237) (5,926) (7,556)
Shareholders funds 12,415 15,501 19,185 23,733 Investing cash flow (4,503) (1,949) (704) (1,077)
Minority interest 24 22 20 18 Change in cash (472) 953 3,687 3,503
Long term borrowings 433 400 500 500 Capex 1,135 2,000 2,500 3,000
Short term borrowings 1,015 946 1,046 1,046 Dividends paid (2,309) (5,099) (6,088) (7,515)
Total Borrowings 1,448 1,346 1,546 1,546
Long term liabilities & prov. 57 57 57 57 Ratios
Deferred tax liability/asset (234) (234) (234) (234) As on 31st March FY15 FY16E FY17E FY18E
Sources of funds 13,711 16,692 20,575 25,121 ROAE (%) 57.1 58.5 56.3 56.2
Gross Block 15,989 17,989 20,489 23,489 ROCE (%) 69.2 79.7 76.6 77.2
Net Block 7,206 7,932 8,989 10,340 Debtor days 6 6 6 6
Capital work in progress 484 1,500 1,000 1,000 Inventory days 32 32 31 31
Intangible Assets 1,234 1,234 1,234 1,234 Payable days 49 52 52 52
Total Fixed Assets 8,924 10,666 11,224 12,574 Cash conversion cycle (days) (11) (14) (15) (15)
Non current investments 771 771 771 771 Current ratio 1.3 1.4 1.6 1.7
Cash and cash equivalents 6,672 7,625 11,312 14,816 Gross Debt/EBITDA 0.2 0.1 0.1 0.1
Inventories 4,040 4,464 4,963 5,856 Gross Debt/Equity 0.1 0.1 0.1 0.1
Sundry debtors 1,358 1,441 1,650 1,948 Adjusted debt/equity 0.1 0.1 0.1 0.1
Loans & advances 5,563 5,563 5,563 5,563 Net Debt/Equity (0.4) (0.4) (0.5) (0.6)
Other Current Assets 372 372 372 372 Interest coverage (x) 186.4 306.6 346.9 391.5
Total Current Assets (ex cash) 11,333 11,839 12,548 13,738
Trade payable 7,034 7,255 8,325 9,824 Operating ratios
Other Current Liab. & ST Prov. 6,955 6,955 6,955 6,955 As on 31st March FY15 FY16E FY17E FY18E
Total Current Liabilities & Prov. 13,989 14,209 15,279 16,778 Total asset turnover 6.7 5.8 5.4 5.2
Net current assets (ex cash) (2,656) (2,370) (2,732) (3,040) Fixed asset turnover 9.2 10.0 10.4 10.9
Uses of funds 13,711 16,692 20,575 25,121 Equity turnover 7.6 6.3 5.8 5.5
Book value per share 103.5 129.4 160.1 198.1
Valuation parameters
Free cash flow (INR mn) As on 31st March FY15 FY16E FY17E FY18E
As on 31st March FY15 FY16E FY17E FY18E Adjusted Diluted EPS (INR) 48.6 68.3 81.6 100.7
Reported Profit 6,886 8,184 9,773 12,063 Y‐o‐Y growth (%) 47.2 40.6 19.4 23.4
Add: Depreciation 1,445 1,274 1,443 1,649 Adjusted Cash EPS (INR) 60.6 79.0 93.6 114.5
Interest (Net of Tax) 28 24 26 28 Diluted P/E (x) 53.9 38.3 32.1 26.0
Others (2,158) (1,057) (1,286) (1,912) Price to Book Ratio (P/B) (x) 25.3 20.2 16.4 13.2
Less:Changes in WC 356 286 (362) (308) Enterprise Value / Sales (x) 3.9 3.5 3.0 2.5
Operating cash flow 5,845 8,139 10,317 12,136 Enterprise Value / EBITDA (x) 35.8 24.7 20.9 17.2
Less: Capex 1,135 2,000 2,500 3,000 Dividend Yield (%) 0.6 1.1 1.3 1.6
Free cash flow 4,710 6,139 7,817 9,136
Peer comparison valuation
Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%)
Name (USD mn) FY16E FY17E FY16E FY17E FY16E FY17E
Britannia Industries 4,727 38.3 32.1 24.7 20.9 58.5 56.3
Berger Paints 2,631 47.3 37.2 27.0 21.9 26.8 29.7
Asian Paints 12,463 45.0 37.9 28.5 23.7 34.1 34.1
Colgate 3,686 36.5 32.9 24.8 21.0 78.5 69.8
Hindustan Unilever 25,717 41.6 36.9 28.3 24.9 98.9 100.5
ITC 37,279 25.1 22.3 15.7 13.9 30.1 30.4
Pidilite Industries 4,212 38.6 32.3 24.1 20.3 28.7 28.5
United Spirits 5,755 70.8 40.1 34.2 23.4 44.4 42.6
AVERAGE ‐ 41.8 33.2 25.9 21.2 49.3 48.1

Additional Data
Directors Data
Mr. Nusli N Wadia Chairman Mr. Varun Berry Managing Director
Mr. A K Hirjee Non Executive Director Mr. Jeh N Wadia Non Executive Director
Mr. Ness N Wadia Non Executive Director Mr. Avijit Deb Independent Director
Mr. S S Kelkar Independent Director Mr. Nimesh N Kampani Independent Director
Mr. Keki Dadiseth Independent Director Dr. Ajai Puri Independent Director
Mr. Nasser Munjee Independent Director Dr. Vijay L Kelkar Independent Director

Mrs. Ranjana Kumar Independent Director

Auditors ‐ BSR & Co LLP
*as per last annual report

Top 10 holdings
Perc. Holding Perc. Holding
Arisaig Partners Asia Pte Ltd 4.36 Life Insurance Corp Of India 1.39
Morgan Stanley Asia/Singapore 1.10 General Insurance Corp Of India 1.08
Sbi Funds Management 1.00 Kotak Mahindra 0.85
Motilal Oswal Asset Management 0.74 Vanguard Group Inc 0.70
Goldman Sachs Group Inc 0.68 Robeco Institutional Asset Mgmt 0.58
*as per last available data

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price

No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
22 April 2015 Arisaig India Fund Limited (AIF) Sell 114078
19 June 2015 Varun Berry Sell 50000
*in last one year
RATING & INTERPRETATION
Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk
Asian Paints BUY SO M Bajaj Corp HOLD SU H
Colgate HOLD SP M Dabur BUY SO M
Emami BUY SP H GlaxoSmithKline Consumer HOLD SP M
Healthcare
Godrej Consumer BUY SP H Hindustan Unilever REDUCE SU L
ITC BUY SO L Marico BUY SO M
Nestle Ltd HOLD SU L Pidilite Industries BUY SP M
United Spirits BUY SP H Berger BUY SO L
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91‐22) 4009 4400, Email: research@edelweissfin.com
Nirav Sheth
Head Research
nirav.sheth@edelweissfin.com

Coverage group(s) of stocks by primary analyst(s): Consumer Goods
Asian Paints, Bajaj Corp, Berger Paints, Colgate, Dabur, Godrej Consumer , Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, Pidilite Industries,
GlaxoSmithKline Consumer Healthcare, United Spirits

Recent Research
Date Company Title Price (INR) Recos
20‐Jan‐16 Berger Vibrant vistas; scaling the 246 Buy

Paints premium pitch;
Initiating Coverage
18‐Jan‐16 Asian All round beat; Sleek leaves a 850 Buy
Paints bitter taste;
Result Update
15‐Jan‐16 Hindustan Resilient volume growth, 804 Hold
Unilever margins to swell further;
Result Update
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 155 45 8 208 Buy appreciate more than 15% over a 12‐month period
* stocks under review
Hold appreciate up to 15% over a 12‐month period
> 50bn Between 10bn and 50 bn < 10bn

Reduce depreciate more than 5% over a 12‐month period
Market Cap (INR) 151 54 3
One year price chart
3,500
3,000
2,500
(INR)
2,000
1,500
1,000
Dec‐15
Aug‐15
Oct‐15
Apr‐15
Nov‐15
May‐15
Jan‐15
Feb‐15
Sep‐15
Jan‐16
Mar‐15
Jun‐15
Jul‐15
Consumer Goods
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Diluted P/E (x) 53.9 38.3 32.1 26.0 tanmay.sharma@edelweissfin.com

Cake and Breakfast Dairy

Organised Dairy Snacking Breakfast cereals Chocolates

Ghee Paneer & Khoa Cheese Curd & Products Butter Ice Cream SCM & Milk

Biscuits and high protein food Bread Cake and rusk

16,000 14.0 12,000 48.0

4,000 3.5 3,000 12.0

Balance sheet (INR mn) Cash flow metrics (INR mn)

Company Absolute Relative Relative Company Absolute Relative Relative

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

Date Company Title Price (INR) Recos

20‐Jan‐16 Berger Vibrant vistas; scaling the 246 Buy

ESL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to

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