Consumer

India I Equities
Flash

22 February 2011

Britannia Industries
Key takeaways from analyst meet
Britannias management talked about the vast opportunities in packaged foods in India. It also indicated that the company is poised for strong growth in coming years but was cautious on margins because of higher raw material prices and intensifying competition.

Rating: Sell Target Price: `313 Share Price: `359

Indias packaged foods doing well. The company indicated that opportunities in packaged foods are vast. About 9% of food products in India are branded. With growing food consumption as well as growing share of branded foods, Britannia sees strong growth opportunities in coming years. Revenue growth intact. It indicated that, huge investments in ad-spend is resulting in expanding the market. With new products focusing on health awareness, such as Nutrichoice-biscuits and Healthy start ready to eat breakfast products, Britannia is confident of maintaining strong revenue growth in coming years. Profitability to be a concern. With mounting competition as well as higher commodity prices, profitability of the entire sector has been squeezed. With rising raw material prices and less pricing power in value-for-money products, Britannia expects profitability to remain at lower levels than in the past. Valuation. We value the stock at a target of `313, at a target PE of 20x FY12e earnings. Our target PE is at a 25% premium to the 12-month forward Nifty PE.

Key data
52-week high/low Sensex/Nifty 3-m average volume Market cap Shares outstanding Free float Promoters Foreign Institutions Domestic Institutions Public

BRIT IN/BRIT.BO `535/`300 18438/5519 US$0.8m `42bn/US$925m 119m 49.0% 51.0% 9.9% 17.1% 22.0%

Key financials
Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Relative price performance

34,212 1,464 12.3 (22.4) 29.3 6.1 22.1 19.2 2.2 (24.4) 37,708 1,330 11.1 (9.1) 32.2 15.5 21.0 11.3 1.4 90.3 44,386 1,420 11.9 6.8 30.2 12.6 46.0 20.8 1.6 70.2 52,249 1,878 15.7 32.2 22.8 9.7 47.9 24.7 1.7 30.1 61,511 2,286 19.1 21.7 18.8 7.4 44.5
Aug-10 Apr-10 Dec-10 Jun-10 500 450 400 350 300 Feb-10 Feb-11 Oct-10 Sensex Britannia

Sales (`m) Net profit (`m) EPS (` Growth (%) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
Source: Company, Anand Rathi Research

32.1 1.8 (0.3)

Source: Bloomberg

Anand Rathi Financial Services Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities

22 February 2011

Britannia Key takeaways from analyst meet

Key takeaways from analyst meet

Branded foods sector growing well Britannia indicated that only 9% of food items in India are branded. As food consumption in India is growing faster, vast opportunities for branded food products are being thrown up. The company indicated that various sub-segments (such as packaged drinking water) have grown in the past 10 years. Pickles, dahi and papads are great examples of branded products eating into the share of home-made and unorganized products.
Fig 1 Major segments in branded food products in India
(`bn) 140
120 100 80 60 40 20 Non refined oil Packaged tea Salty Snacks Biscuits Refined oil

Source : Company

Premium biscuits growing faster than basic biscuits Britannia indicated that premium biscuits are growing much faster than basic biscuits Glucose and Marie. It indicated that out-of-home consumption and availability of premium products at lower prices are driving that growth. It indicated that Bourbon and Good Day, at a price point of `5, are growing faster than the basic products Glucose and Marie at `5.
Fig 2 Biscuit industry breakup Sept 07

Dec 10

Delight 42%

Basic 32%

Basic 25% Delight 48%

Value Added 26%

Value Added 27%

Source: Company, Anand Rathi Research

Anand Rathi Research

22 February 2011

Britannia Key takeaways from analyst meet

New sub-segments, such as choco-biscuits, to grow faster The company is aggressively investing in creating new sub-segments. It has created a new product, Choco Decker, a chocolate biscuit. It is investing much behind premium products such as cookies and cream biscuits. It expects the innovation and creation of new sub-segments to lead to growth. All power brands doing well The company indicated that there are seven power brands. Good Day, Tiger, Milk Bikis, Treat, 50:50, Nutrichoice and Marie account for 75% of Britannias turnover. It indicated that, for the past five years, all brands are growing at a CAGR of around 20% except Nutrichoice, which is growing faster than other brands. Initiatives on health awareness to pay off in the long run Focus on health awareness is driving revenue growth as well as create new market. Britannia is focusing on healthier biscuits and is investing in sub-segments such as Nutrichoice. It has created biscuits prepared from five grains. It has also fortified all its brands with iron and calcium. It is also taking out trans fats from its biscuits. It expects that the impact of these measures would be seen in the medium to long term. Middle East and Sri Lanka businesses are in investment mode The company has ventured into the Middle East and Sri Lanka. It expects these two businesses to be in investment mode in the coming quarters. However, it expects both the businesses to soon turn profitable. It indicated that there is a huge Indian community in the Middle East. Sri Lankas consumption patterns and eating habits are similar to those of India. This opens up opportunities for the company to grow these businesses in those countries. Profitability of the entire sector has fallen The company indicated that profitability of the entire biscuit sector has fallen and that investments to build the brands have risen. Biscuit companies are offering more freebies to grow revenues and gain market share. With mounting competition, it expects lower margins for all players. The company indicated that profit margins of other players have fallen more than Britannias. Volatile raw material prices, a concern The company indicated that it is more worried about the volatile prices of the raw materials. Pricing of products is difficult when prices of wheat, sugar and palm oil are extremely volatile. The company indicated that, with the growing economy and higher inflationary situation, its margins would be more volatile than in earlier years. Income tax rates to be higher As income-tax benefits at the tax-efficient production unit in Uttaranchal have come down, the company expects income tax rates to move up in coming quarters. As some subsidiaries are still suffering losses, overall tax rates for the company would be less than 33%.

Anand Rathi Research

Appendix 1
Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures on subject companies
Rating and Target Price History (as on 21 February 2011)

600 500 400 300 1 200 100 0 Jan-08 May-08 Jan-09 May-09 2

Britannia
1 2
4 3

Date 29-Jul-08 2-Feb-09 16-Jul-09 9-Jul-10

Rating Buy Buy Sell Sell

TP (`) 303 350 242 313

Share Price (`) 270 280 317 385

3 4

Jan-10

May-10

Sep-08

Sep-09

Nov-08

Nov-09

Sep-10

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Anand Rathi Ratings Definitions Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below. Ratings Guide Large Caps (>US$1bn) Mid/Small Caps (<US$1bn) Buy >20% >30% Hold 5-20% 10-30% Sell <5% <10%

Anand Rathi Research Ratings Distribution (as of 6 December 10) Buy Anand Rathi Research stock coverage (138) 69% % who are investment banking clients 5%

Hold 17% 4%

Nov-10

Mar-08

Mar-09

Mar-10

Jan-11

Jul-08

Jul-09

Jul-10

Sell 14% 0%

Other Disclosures This report has been issued by Anand Rathi Financial Services Limited (ARFSL), which is regulated by SEBI. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). ARFSL and its affiliates may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. ARFSL, its affiliates, directors, officers, and employees may have a long or short position in any securities of this issuer(s) or in related investments. ARFSL or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report. This research report is prepared for private circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. This document is intended only for professional investors as defined under the relevant laws of Hong Kong and is not intended for the public in Hong Kong. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. No action has been taken in Hong Kong to permit the distribution of this document. This document is distributed on a confidential basis. This document may not be reproduced in any form or transmitted to any person other than the person to whom it is addressed. If this report is made available in Hong Kong by, or on behalf of, Anand Rathi Financial Services (HK) Limited., it is attributable to Anand Rathi Financial Services (HK) Limited., Unit 1211, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong. Anand Rathi Financial Services (HK) Limited. is regulated by the Hong Kong Securities and Futures Commission. Anand Rathi Financial Services Limited and Anand Rathi Share & Stock Brokers Limited are members of The Stock Exchange, Mumbai, and the National Stock Exchange of India. 2010 Anand Rathi Financial Services Limited. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Anand Rathi Financial Services Limited. Additional information on recommended securities/instruments is available on request.