Britannia Industries Ltd

CMP Target Price Rs 469.60 Rs 600.00

Britannia Industries is one of the biggest brands of the country, has a market share of 33%. More-than-a-century old Britannia has launched big brands in FMCG Segment. The company bread, cake and rusk portfolio has grown more than five times in the last five years and its dairy portfolio has doubled in four years. The company has launched new products in biscuits to capture the growing trend for healthier snacks and to widen the appeal for biscuits-competing with chocolates. It has launched new products like Nutri Choice Diabetic Friendly, Treat ChocoDecker and Britannia Healthy Start during the year to tap new opportunity segments. The company has registered strong numbers for the quarter ending March 2011. Revenues surged about 20% from a year ago quarter to stay at Rs.11237.80 million translating operating profit of Rs.705 million which skyrocketed from year ago quarter. It witnessed a turnaround performance on a reported PAT basis, despite of interest expense surging manifold. Operating profit margin stood at 6.27%, turned positive from last years level and an expansion of 90bps from preceding quarter. Increase in volumes together with better product mix has lead to this kind of growth for the company. Even ease in input prices also helped. Britannia expects new launches within bakery-cake, bread or even biscuits segment together with new introductions in dairy business. It also expects to increase its foray in caf business.

BSE Code NSE Code Market Cap (Rs Mn) 52 Week High/Low Industry Face Value Shares O/S

500825 BRITANNIA 56094.10 534.70/324.00 FMCG Rs 2.00 119450815

EPS Book Value P/E P/B

12.16 37.78 38.62 12.43

Shareholding Pattern

Valuation
Presently, the stock is trading at Rs 469.60 which is at a standalone PE of 28.88x and 24.09x to its FY12E and FY13E EPS of Rs 16.26 and Rs.19.49 respectively. Since the stock offers good investment opportunity, we initiate a BUY signal on the stock with a target price of Rs 600 expecting an appreciation of about 28% from the current level with the short to medium term investment horizon.

Business Details
Britannia Industries Limited (BIL) is a major player in the Indian Foods market with leadership position in Bakery category and has a market share of 33%. Its brand portfolio includes Tiger, Marie Gold, Good Day, 50:50 and Treat. The Company was born in 21st March of the year 1918 as a public limited company. The Company's plants are situated in Kolkata, Delhi, Chennai, Mumbai and Uttarakhand. In 1921, it became the first company east of the Suez Canal to use imported gas ovens. Britannia's business was flourishing. But, more importantly, Britannia was acquiring a reputation for quality and value. The primary business segment of the Company is Foods comprising (i) bakery products - biscuits, bread, cakes and rusk, and (ii) dairy products milk, butter, cheese, ghee and dahi. In 1997, the company unveiled its new corporate identity - "Eat Healthy, Think Better" - and made its first foray into the dairy products market. In 1999, the "Britannia Khao, World Cup Jao" promotion further fortified the affinity consumers had with 'Brand Britannia'. Increasing relevance and footprint of Britannia

Britannia strode into the 21st Century as one of India's biggest brands and the pre-eminent food brand of the country. It was equally recognized for its innovative approach to products and marketing: the Lagaan Match was voted India's most successful promotional activity of the year 2001 while the delicious Britannia 50-50 Maska-Chaska became India's most successful product launch. In recognition of its vision and accelerating graph, Forbes Global rated Britannia 'One amongst the Top 200 Small Companies of the World', and The Economic Times pegged Britannia India's 2nd Most Trusted Brand. Today, more than a century after those tentative first steps, Britannia's fairy tale is not only going strong but blazing new standards, and that miniscule initial investment has grown by leaps and bounds to crores of rupees in wealth for Britannia's shareholders. The company's offerings are spread across the spectrum with products ranging from the healthy and economical Tiger biscuits to the more lifestyle-oriented Milkman Cheese. Having succeeded in garnering the trust of almost one-third of India's one billion population and a strong management at the helm means Britannia will continue to dream big on its path of innovation and quality. And millions of consumers will savour the results, happily ever after.

Sectoral Outlook
The Indian FMCG sector is the fourth largest sector in the economy and is growing at a fast pace despite of the economic downtrend. The increasing disposable income and improved standard of living in most tier II and tire III cities are spearheading the FMCG growth across the nation. The changing profile and mind set of the consumers has shifted the thought to Value for Money from Money for Value. Further, it has a strong MNC presence and is characterised by a well established distribution network, intense competition between the organised and unorganised segments and low operational cost. Availability of key raw materials, cheaper labour costs and presence across the entire value chain gives India a competitive advantage. Currently, India is the worlds second largest producer of food in the world and the food processing industry is the one of the largest industries in India. In terms of production, consumption, export and expected growth, India is ranked fifth in the world. The industry size has been estimated at US$ 70 billion by the Ministry of Food Processing, Government of India. The industry employs 1.6 million workers directly. Value addition of food products is expected to increase from the current 8 per cent to 35 per cent by the end of 2025. Fruit & vegetable processing, which is currently around 2 per cent of total production will increase to 10 per cent by 2010 and to 25 per cent by 2025. The highest share of processed food is in the dairy sector, where 37 per cent of the total produce is processed, of this only 15 per cent is processed by the organized sector. The food processing industry in the country is on track to ensure profitability in the coming decades. The sector is expected to attract phenomenal investments of about Rs 1,400 billion in the next decade. FDI inflows to Food Processing Industries has set a target of USD 25.07 billion to be achieved by 2015. (Source-ibef.org) Food processing industry accounts for 32 per cent share in the entire food industry. This industry contributes to 6.3 per cent of the GDP and about 13 per cent to export production. The food processing industry is expected to witness a growth of 10 per cent in the recent years to come. The biscuit market recorded double digit growth in 2010 and this is likely to sustain in the coming year even though volatile commodity prices may impact margins. The food processing sector attracted US$ 130 million of foreign direct investment (FDI) in the first eight months of the fiscal 2011 as compared to total FDI of US$ 1.2 billion. Growth is also likely to come from consumer 'upgrading' in the matured product categories. With 200 million people expected to shift to processed and packaged food by 2010, India needs around US$ 28 billion of investment in the food-processing industry. Vision 2015 was announced by the Government of India, which suggested the strategy to ensure faster growth of the food processing sector.

Strong brand name

Britannia is one of the Indias biggest brands of the country, has a market share of 33%. The company has got a large base of consumer at virtually every price points, from a Rs.3 pack of Tiger Glucose biscuits to a Rs.50 pack of Pure Magic. This is the leading edge for operating in country like India, catering to both urban and rural markets. Britannias brands now have greater availability in rural markets and pervasive presence in modern trade. It launched various brands in biscuits, bread, cake and rusk business. It has launched brands like Tiger, Britannia 50:50, Good Day, Britannia Treat, Marie and many more. The company is expanding its customer base by launching new products and renovating existing ones. The company has about six power brands and has added a seventh power brand to that which is Nutri Choice. Nutri Choice diabetic friendly range of products; after significant amount of R&D and innovation and testing are especially formulated to meet the requirements of people who are either diabetic or borderline or who just want to be careful.

Cooling raw material prices will trigger growth

The company has maintained a healthy growth momentum and improved margin in a year of intense competitive activity and high commodity inflation. Britannia is enjoying a compound annual growth in excess of 22% and has guided that it has got plans to generate profitable growth going ahead. It has plans to launch new products to consolidate the one it has already launched and to establish new categories to enter the market. Looking forward to the commodity scenario, prices are likely to be more moderate than what it was last year, thus taking the companys margins higher. In fiscal 2012, the companys management believes to maintain sales growth around last years levels and also expects to have current trends in material costs with relatively lower increase in other expenses such as salaries, advertising and operating expenses which will leave the company with better margins. And even small increase in its operating margins will add significantly to profit growth going forward.

Foray in different segments

Britannia has forayed into the ready-to-eat space segment with the launch of breakfast mixes consisting of upmas, pohas, porridges and oats. The breakfast range is fortified with multigrains, vegetables, pulses and nuts and takes only 5 minutes to cook. It is priced between Rs.33 and Rs.45 for 150-170 gm packets. It is focused on healthy snacking options, and it sees this move as a natural extension of its biscuits and bakery product line. The companys strategy is to occupy a larger shelf space in a consumers larder, to sell both impulse and steady consumption items like these which would enable it to break free from a low operating profit margin. The company is planning to scale up its fledgling caf business. The caf foray is being lead by Daily Bread Gourmet Foods, a wholly owned subsidiary of Britannia. The subsidiary of the Wadia group company has tied up with large-format retailers such as Spencer's to set up shop-in-shop formats. While the company currently has 22 company-owned and eight franchisee stores in Bangalore, it has five stores in Hyderabad and three in Goa in master franchisee formats. It is investing around Rs.15-20 lakh per store and is focusing on the catchment areas and will prioritize them. Further, it has plans to open 75 more stores across major cities. The company claims that these stores have already started generating profit as they cater both institutional and retail clients. This business is growing in high double digits. Daily Bread is now looking at franchisees for its formats ranging from 100 square feet kiosks to 300-700 square feet premium cafs. It also intends to appoint franchisees for 4,000 square feet decentralised production units costing Rs 2 crore each. Franchisees for kiosks are expected to invest Rs 10 lakh, while those for cafes are expected to pony up Rs 15-25 lakh.

Decent Financial performance

Britannia has registered strong numbers for the financial year ending 2011. Revenues shoot up about 24% from Rs.34014.03 million to Rs.42199.70 million translating in operating profit of Rs.2279.10 million, up about 40%. This growth has come on the back of a solid volume growth which has been 15% and the balance of it is due to mix improvement and better pricing. Also the launch of some premium products either in biscuits category or any other products like Choco Decker has helped the mix. The company has witnessed a reported bottom line growth of 24%. Operating profit margin increased 60bps at 5.40% from 4.8% a year ago. EPS for FY11 stood higher at Rs.12.16.

Recent new launch

Britannia has launched Tiger Krunch Chocochips the cookie with the richness and delight of real chocochips. Besides being delicious, Tiger Krunch Chocochips is wholesome and healthy and is fortified with Iron Zor giving children the delight of eating Real Chocochip Cookies along with the feeling of satiation. With a view of solving every mothers problem and making every kids summer enjoyable, Britannia has suggested 5 different ways to enjoy Tiger Krunch Chocochip Cookies this summer. With Tiger Krunch Chocochip, Britannia Tiger which currently operates in the Glucose, Creams and Coconut Biscuit category has now entered the Affordable Cookie space. Tiger Krunch Chocochips is the only cookie with the Delight of Chocochips + Energy of Tiger @ an affordable price of just `.5/-.

Key risks
Milk prices continue to rise, which is a cause for concern. Any adverse movement in commodity prices would impact margins of Britannia; even tough input prices (wheat and sugar) have stablised. Rising intense competition, both from old and new players, local and MNC players, is a bigger concern for the company.

Standalone Profit & Loss Account

Rs. Million Particulars
Net sales Growth Expenditure EBITDA Growth EBITDA margin Other income Depreciation EBIT EBIT margin Interest PBT Tax Adjusted PAT Growth Exceptional item Reported PAT Net Profit margins Equity Capital Res. & Surplus Equity Shares EPS EPS adjusted for bonus (206.30) 1804.00 6.46% 238.90 8006.51 23.89 84.15 16.83 8.44% 398.95 334.56 2691.54 8.65% 160.07 2531.47 521.18 2010.29

FY09
31122.14 28494.99 2627.15

FY10
34014.03 9.29% 32381.23 1632.80 -37.85% 4.80% 561.16 375.43 1818.53 5.35% 82.06 1736.47 42.66 1693.81 -15.74% (528.70) 1165.11 4.98% 238.90 3723.62 23.89 70.90 14.18

FY11
42199.70 24.07% 39920.60 2279.10 39.58% 5.40% 525.60 445.90 2358.80 5.59% 377.40 1981.40 528.50 1452.90 -14.22% 0.00 1452.90 3.44% 238.90 4274.10 119.45 12.16 12.16

FY11E
49584.65 17.50% 46609.57 2975.08 30.54% 6.00% 595.02 495.85 3074.25 6.20% 413.21 2661.04 718.48 1942.56 33.70% 0.00 1942.56 3.92% 238.90 5,261.06 119.45 16.26 16.26

FY12E
58014.04 17.00% 54417.17 3596.87 20.90% 6.20% 638.15 571.97 3663.05 6.31% 473.12 3189.93 861.28 2328.65 19.88% 0.00 2328.65 4.01% 238.90 6,574.38 119.45 19.49 19.49

Ratios
Particulars
Return on Equity Return on Capital employed Debt/Equity Asset turnover Current Ratio Working capital turnover ratio

FY09
24.38%

FY10
42.75%

FY11
32.19%

FY11E
35.32%

FY12E
34.18%

26.67% 0.03 2.44 1.30 24.69

15.22% 1.08 2.59 1.07 95.79

20.62% 0.96 2.84 1.05 147.50

23.78% 0.88 2.86 1.10 71.96

24.18% 0.83 2.83 1.17 42.73

Balance Sheet
Rs. Million

c
Share Reserves &

FY09
238.90 8006.51 8245.41 251.62 tax of 99.42 8596.45 5,115.05 2,336.65 2778.39 work in 60.20

FY10
238.90 3723.62 3962.52 4296.17 8258.69 5,478.33 2,663.32 2815.01 116.39

FY11
238.90 4274.10 4513.00 4314.50 62.40 8889.90 6,115.90 3,109.22 3006.68 147.12

FY11E
238.90 5,261.06 5499.96 4,861.24 62.40 10423.60 7083.52 3,605.07 3478.45 164.29

FY12E
238.90 6,574.38 6813.28 5,632.43 62.40 12508.11 8170.99 4,177.04 3993.95 188.17

Gross Net

I
I Cash and bank Other Loans and Total tax

4,230.97
2,536.33 496.14 407.98 137.09 1,815.88 5,393.42 4,132.90

4,906.39
2,683.44 394.87 233.61 144.65 1,753.61 5,210.17 65.81 4,855.08 355.10 8,258.69

5,450.00
3,112.00 572.70 287.50 121.20 2,161.20 6,254.60 5,968.50 286.10 8,889.90

6,091.83
3,713.89 697.30 416.87 136.43 2,614.88 7,579.37 6,890.33 689.03 10,423.60

6,968.22
4,597.56 841.02 523.30 158.86 3,223.90 9,344.63 7,986.86 1,357.77 12,508.11

Net Uses of

1,260.52 266.37 8,596.46

Quarterly Financial Highlights

Rs. Million Particulars
Sales Expenditures Operating Profit Adjusted Net Profit Reported Net Profit OPM% Adjusted NPM % Reported NPM% Adjusted EPS* Q4FY11 11237.80 10532.8 705.00 419.50 432.50 6.27 3.73 3.85 3.51
*Adjusted for bonus

Q4FY10 9343.80 9418.30 (74.5) 128.80 (190.40) (0.79) 1.38 (2.04) 1.08

Q3FY10 10828.60 10247.40 581.20 373.40 373.40 5.37 3.45 3.45 3.13

YoY% 20.27 11.83 ---3.26 ------235bps ---225

QoQ% 3.78 2.79 21.30 12.35 15.83 90bps 28bps 40bps 12.14

Past Price movement of the stock