Company Update

Britannia Industries
July 8, 2013

ACCUMULATE
CMP Target Price Stock Info
Sector Market Cap (Rs cr) 52 Week High/Low Avg. Daily Volume (3m, 000) Avg. Daily Value (3m, cr) Dividend Yield (%) Sensex Nifty BSE Code NSE Code FMCG 8,034 752/380 165 10.7 1.3 19,321 5,809 500825 BRITANNIA

The White Revolution

Rs672 Rs750

With Indias growing dairy consumption, increasing appetite for western form of cooking and growing demand for better-for-you products, we believe Britannia Industries (BIL) with strong dairy foothold and leader in healthy snacking is firmly entrenched to ride this boom. We introduce subsidiary financials in our valuation methodology and expect the subsidiaries (recently achieved profitability) to contribute significantly to the earnings for BIL going forward

Activating slogan Eat healthy, Think better into brand credo: BIL has unlocked the true potential of its 16-year slogan by launching a slew of products in the health and wellness platform without compromising on the taste. With a new slogan Zingai Mein Life, the company completely revamped itself in 2009. BIL has successfully parried the onslaught of the foreign as well as Indian brands and has maintained its second lead in the biscuits market with ~31% market share (Source: Euromonitor International). The white revolution within the company: The thrust on the high margin dairy business has ensured consolidated subsidiaries financials of the company (in slumber till now) to report profit (dairy contributes 49-50% of total subsidiaries revenue). The recent corporate restructuring with Ms. Vinita Bali taking charge of BILs global operations along with strong growth potential in the dairy business (albeit on a low base) are the key triggers for us to view BIL on consolidated level (currently valued at standalone level). Emerged successfully from internal business turmoil: Under the helm of Ms. Vinita Bali Britannia reinvented itself (after facing numerous internal turmoils) by renewing investments towards brand innovation and launched slew of new products under its umbrella brands Good Day (premium variants launched with increased brand spends celebrating 25 years of existence), NutriChoice (brand extensions to finger snacks -Thins and namkeen Roasty), Tiger (brand extension to milk) and 50:50 (brand extension to finger snacks Snackuits). The constant innovation leading to launch of new products coupled with sustained brand spends is also reflected in the stock price movement.

Stock Performance
(%) 1-week 1-month 1-year
BIL

NSE (1.5) (1.2) 9.3

(2.2) (2.6) 25.9

Shareholding Pattern (%)

Outlook and Valuation

We like BIL for its strong portfolio, and its focus on increasing revenue traction from its ex-biscuits business. With subsidiaries financials becoming a significant contributor to consolidated earnings of the company, we now value BIL on its consolidated
Stock Price Chart

business (currently valued on standalone financials). We view the recent topmanagement restructuring for BIL as positive, as under the helm of Ms. Vinita Bali BIL has quadrupled its revenues (refer Exhibit-8) and hence, our reasonable expectations of the global operations of BIL to be the next turnaround story under her leadership. At the CMP, the stock is trading at 20.6xFY2015E EPS of Rs32.6, which is attractive. Hence we recommend an Accumulate on the stock with a Target Price of Rs750.

Risks to the view

Analyst: Chitrangda Kapur chitrangda.kapur@rcap.co.in

Lower than anticipated volume growth will impact our estimates Lower than anticipated price led growth on account of increased competitive intensity will impact our estimates Persistent inflation will impact our estimates

EBITDA (Rs cr)

286 371 454 549

Year End
FY2012 FY2013 FY2014E FY2015E

Net Revenues (Rs cr)

5,461 6,136 6,959 7,882

Net income (reported) (Rs cr)

200 260 318 390

RoE %
26.0 34.3 31.7 32.2

RoCE %
29.2 39.4 37.1 37.7

EPS (Rs)
16.7 21.7 26.6 32.6

Valuations (x) P/E

40.2 31.0 25.3 20.6

% growth
19.0 12.4 13.4 13.3

% margin
5.2 6.0 6.5 7.0

% growth
48.8 30.0 22.4 22.7

EV/EBITDA
27.6 22.0 18.0 14.8

Activating slogan Eat healthy, Think better into brand credo

BIL has unlocked the true potential of its 16-year old slogan by launching a slew of products in the health and wellness platform without compromising on the taste. The company has successfully parried the onslaught of the foreign as well as Indian brands and has maintained its second lead in the biscuits market with ~31% market share (Source: Euromonitor International).

Well entrenched Britannia to ride the biscuits industrys growth

BIL has successfully parried the onslaught of the foreign as well as Indian brands and has maintained its second lead in the biscuits market with current ~31% market share

Biscuits market in India is estimated to be ~Rs16,840cr market with Parle, Britannia and ITC dominating the market with cumulative ~79% market share. In the past 3 years, the biscuits market has registered a CAGR of ~9% in volumes and a robust ~18% CAGR in value terms over FY2010-13, clearly indicating the growing acceptance of premium biscuits amongst consumers. Going forward, the Biscuit industry is expected to grow at 8-9% yoy till FY2015E in terms of value to reach an estimated size of ~Rs19,750cr. Britannia with innovation backed market proposition of health-and-wellness coupled with its formidable second rank in the industry is expected to ride the biscuit industrys growth. We expect BIL to record ~12% CAGR in revenue from biscuits over FY2013-15E.

Exhibit 1: Biscuit Market volume growth

Exhibit 2: Biscuit Market Value Growth

Exhibit 3: Market share of top-3 companies

Source: Euromonitor International, RSec Research

Revenue growth to be aided by higher volumes

Biscuit category grew at 7.4% CAGR by volumes over FY2011-13 aided by higher per capita consumption of biscuits and pick up in sales in modern retail. We estimate, BIL recorded a volume growth of 8.2% CAGR during the same period

Biscuit category grew at 7.4% CAGR by volumes over FY2011-13 aided by higher per capita consumption of biscuits (per capita consumption of biscuits is estimated at 2.1kg vis--vis 1.8kg in FY2010), and pick up in sales growth in Supermarts and Hypermarts (refer exhibit 4). We estimate, BIL recorded a volume growth of 8.2% CAGR during the same period aided by significant efforts made by the company to provide its premium brands Treat (cream variants) and Tiger (fortified and chocolate/cream variants) at lower price points of Rs5. Going forward, the Rs5 price point is expected to continue being the volume driver for the company coupled with continued momentum pick up in revenue contribution from Supermarkets/Hypermarkets (primarily owing to increasing footprint) is also expected to aid volume growth. In modern retail channels, most FMCG companies offer discounts on their products by bundling their brands (buy 1, get 1 free; buy2/3 get 1 free are very common sights in modern retail stores). Hence, over the forecast period (FY2013-15E), we expect BIL to record 7.5% CAGR in biscuit volumes against the industry volume growth of 6.5% CAGR over the same period.

Exhibit 4: Distribution format share as per sales of biscuits

(%) Small grocery retailers Other grocery retailers Supermarkets/Hypermarkets Total Source: Euromonitor International, RSec Research FY2006 80.8 12.9 6.3 FY2007 80.4 12.8 6.8 FY2008 82.1 12.8 5.1 FY2009 83.0 11.1 5.9 FY2010 83.3 11.1 5.6 FY2011 83.5 10.6 5.9 FY2012 83.7 10.2 6.1 FY2013 83.4 10.1 6.5

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

Baking Premiumisation
BIL is practicing premiumisation by consistently variants (Good within Day launching its existing and premium brands and

Nutrichoice)

changing its biscuit packaging to folding carton packs. We factor into our numbers 4% CAGR in average price realization over FY2013-15E

In the past few years, BIL has consistently launched premium variants within its existing brands (Good Day and Nutrichoice). Since, the product is launched with the same brand name, it has an immediate consumers attention. Case in point is BIL segregating its biscuit brands in delight and enjoyment and health and wellness categories and launching Good Day Premium Bakes, Britannia Pure Magic in the delight and enjoyment category, and Nutrichoice Ragi and Nutrichoice Oats in the health and wellness category. Another form of premiumisation practiced by BIL is changing the biscuit packaging to folding carton packs and increasing unit prices thereby giving consumers a brand enhancement perception. Packaging change to folding carton based packaging is mostly westernized concept targeting adults (who would like to keep the biscuits in the pack for a longer period of time), thus giving a consumer a perception that they are buying a premium brand. All variants of Nutrichoice, Good Day cookies, 50:50 Snackuits, and Bourbon (gift pack) support folding carton based packaging, while, Britannia Pure Magic is also sold in cylindrical carton based packaging with metal lid (similar to popular cult brand Pringles). According to Euronomonitor, cookies and sandwich biscuits are the fastest growing categories with an annual growth rate of 20% and 10% respectively. We believe, there will be higher competitive intensity in these categories and BIL is also expected to launch more variants under its umbrella brands. Hence, we factor into our numbers 4% CAGR in average price realization over FY2013-15E and higher ad-spends (~8.7% of net sales) to support existing brands, aiding OPM of 6-7% over the forecast period.

Exhibit 5: Folding carton packed premium brands of Britannia Industries

Source: RSec Research

Zindagi Mein Life takes over from Eat Healthy, Think Better
With the birth of new slogan - Zindagi Mein Life in 2009, BIL positioned itself as a brand which is both healthy and enjoyable and has since stood firm on its promise

In 2009, Britannia revamped itself with a new slogan Zindagi Mein Life positioning itself as a brand which is both healthy and enjoyable. The company has hence stood firm on that promise. Britannia was the first completely trans fat free biscuits in the country and has continuously fortified its products with vitamins and minerals. With the introduction of new slogan, the company broadened its menu from plain vanilla biscuits company to a company competing with savouries, chocolates and other snacks. Britannia Time Pass, 50:50 Snackuits, Nutrichoice Thins, Britannia Pure Magic and Nutrichoice Roasty are case in point.

The white revolution within the company

The thrust on the high margin dairy business has ensured consolidated subsidiaries financials of the company (in slumber till now) to report profit (dairy contributes 49-50% subsidiaries revenue) of total

Britannias business other than domestic biscuits business comprise of Dairy, Cake, Bread, Rusk and international businesses; Dairy being a significant contributor to revenues (49-50% of total revenue of subsidiaries). Subsidiaries consist of (1) Britannia Dairy Pvt. Ltd. (BDPL) engaged in distribution and selling of dairy portfolio of the company comprising of milk drinks, sour milk drinks, curd, UHT Milk, Butter and Cheese; (2) Daily Bread Gourmet Food (Daily Bread) is manufacturer of premium breads, cakes, pastries and cookies sold through modern retail channels as well as own retail outlet in Bangalore; (3) Strategic Food International, Dubai (SFIC) and Al Sallan Food Industries (ASFI) are BIL subsidiaries engaged in business in GCC countries of UAE, Oman, and Saudi Arabia; (4) Britannia and Associated (Mauritius) is the holding company of Britannia and Associates (Dubai) Private Company Ltd., a Jebel Ali Free Zone, which in turn holds investments other companies including SFIC and ASFI; (5) 5 associate companies which are engaged in the manufacturing of biscuits for BIL across the country.

The Dairy Thrust

While, organized dairy market is estimated to be a size of ~Rs33,200cr, BIL is currently present in categories which comprise of only ~20% of the total organized dairy market. Hence, going ahead, there exists considerable opportunities for BIL to scale up

Organised Dairy Market is estimated to be a size of ~Rs33,200cr (media sources), out of which polypack milk comprise a lions share of ~75%, cheese, yogurt and UHT Milk are other major dairy categories which are registering strong growth. Cheese, Yogurt and UHT Milk are mostly urban phenomenon and with lower base of Urban population to Rural population in India, the category size is considerably small (we estimate, Cheese, Yogurt and UHT Milk to comprise ~1%, 10% and 3% of the total Organised Dairy Market) in India. However, with increasing urbanization, higher disposable income, on the rise aspirations and growing instances of working women (decision makers for kitchen supplies purchases), the category is expected to grow exponentially (albeit on a low base). Understanding this trend, BIL increased its presence in the organized dairy market (since FY2010) by launching milk based drinks (Tiger Zor; estimated category market size of ~Rs190cr), UHT Milks (Britannia Slimz and Britannia Naturally Good; estimated category market size of ~Rs870cr), and Cheese (Britannia Gourmet cheese, Britannia Cream Cheese, and Britannia Cheese Cubes in different flavors)

Say Cheese with Britannia

The processed cheese market in India is estimated to be ~Rs480cr recording CAGR of ~24% over FY2010-13. BIL is a strong No.2 cheese selling company in India enjoying ~16% market share, with the lagging closest competitor (MMD Dairy) at 4% market share

According to Euromonitor International, the per capita consumption of cheese in India is less than 100gm vis--vis developed markets average per capita consumption of ~10kg. Low cold storage facilities and supply chain issues coupled with popularity of paneer (loose cheese mostly prepared in Indian homes) maybe the reasons attributed with abnormal low per capita consumption figures reported by Euromonitor. Nonetheless, the processed cheese market is estimated to be ~Rs480cr recording CAGR of ~24% over FY2010-13. BIL is a strong No.2 cheese selling company in India enjoying ~16% market share, with the lagging closest competitor (MMD Dairy) at 4% market share. The other important Dairy segment for Britannia is Yogurt and Sour Milk products (estimated category market size of ~Rs3,400cr). BIL lags behind the state co-operative giants of Gujarat, Karnataka, Tamil Nadu, Kerela and Orissa with a market share of ~2.5%. Out of the private players, only Nestle leads BIL in yogurts with market share of ~8% (industry sources). With low base and apparent achievement of economies of scale (for FY2012, BDPL recorded 34% yoy growth in revenue to Rs293cr and PAT of ~Rs16cr), we believe, the subsidiary, BDPL to record revenue CAGR of ~15% over FY2013-15E with OPM of ~8% over the same period. We estimate, cheese, yogurt and other dairy products (including ghee, UHT Milk) to contribute 52%, 32% and ~16% respectively to BDPLs revenue.

EXHIBIT 6(a): Segment share of ~Rs33,200cr organized dairy market

EXHIBIT 6(b): Segments of significance to BIL

Source: Media Sources, Euromonitor International, RSec Research

The Gourmet delight

BIL derives significant revenue

Britannia derives significant revenue contribution from its Baked goods portfolio i.e. breads, cakes and pastries. BIL has been for a long time a single commodity company deriving 85-90% revenues from its biscuit sales, while the baked goods portfolio of the company has been a constant 13-14% revenue contributor. However, increasing footprints of modern retail outlets and growing awareness of health and wellness (with consumers shifting preference to healthy variants of breads, and eggless packaged cakes) has given a fresh impetus to the baked goods portfolio of BIL. While, BIL records revenue from cakes, rusk and breads in its standalone financials, its subsidiary Daily Bread (having a standalone retail outlet) is also a manufacturer of gourmet bread, cakes and pastries. For FY2012, Daily bread recorded ~25% yoy growth in revenue to ~Rs25cr (~Rs19cr), however, the subsidiary is yet to break even. There has been a growing class of consumers who are willing to pay a premium for brown bread and multigrain bread as they are perceived to be more fibrous than the white bread or artisanal breads (breads sold loose by small bakeries). Being a market leader in the Rs4,000cr organized baked goods market (Industry sources) with 20-21% market share, BIL made efforts to cater to this growing consumer class by launching a slew of healthier variants of bread (Multigrain, Honey, Oats, 100% whole wheat and multifibre bread) and re-launching its packaged cakes with new packaging and new variants (including eggless variants). We estimate the product mix for BIL to augment the revenue growth for the company going forward. Increasing brand spends behind new launches (healthier variants in various SKUs to cater to consumer demand across spectrum) will be absorbed in the premium tag associated with the new launches, aiding profitability. For FY2015E, we expect the Cakes, Breads and Rusks to contribute ~17% to the consolidated revenue for BIL from the current ~15% contribution.

contribution from its Baked goods portfolio in its standalone financials. With increasing footprints of modern retail outlets and growing awareness of health and wellness (with consumers shifting preference to healthy variants of breads, and eggless packaged cakes), we believe, the revenue contribution from the baked goods portfolio will increase from current 1314% to ~17% in FY2015E

Exhibit 7: Revenue mix estimate of BIL

Source: RSec Research

International business on firmer footing

We expect international subsidiaries to contribute Rs30cr and Rs45cr in FY2014E and FY2015E to consolidated earnings aided by growing demand in the GCC countries (bread is the staple food item), increasing popularity of baking goods owing and to change rising in urbanization management

The international subsidiaries of BIL cater primarily to consumers in the Middle East countries. The international subsidiaries (along with BDPL) are profitable, contributing ~Rs26cr to the earnings in totality in FY2013. With the re-structuring of BILs top management and Ms. Vinita Bali taking control of the global operations, it is expected that the subsidiaries financials will reflect the change in business style under the new management (a change seen in BIL-standalone in the past after Ms. Vinita Bali took charge; discussed further in the report). While, we believe the complete turnaround in the subsidiaries will take 4-5 years to reflect in its financials, the earnings from subsidiaries is expected to grow exponentially on a low base. We expect subsidiaries to contribute Rs30cr and Rs45cr in FY2014E and FY2015E to consolidated earnings aided by growing demand in the GCC countries (bread is the staple food item), increasing popularity of baking goods owing to rising urbanization and change in management.

Emerged successfully from internal business turmoil

Vinita Bali joined BIL as its CEO in January 2005 and was promoted as an MD in May 2006. Her reign saw BIL struggling through numerous tough phases - vicious legal battle with Danone over violation of Intellectual Property rights in the Tiger brand, high raw material inflation and unpreparedness of the aggression displayed by ITC (entered FMCG category in 2003 and quickly became No.3 player with ~14% market share). It took BIL ~4years to settle under the new style of management under the helm of Ms. Bali and reinvent itself. The company consequently renewed investments towards brand innovation and launched slew of new products under its umbrella brands Good Day (premium variants launched with increased brand spends celebrating 25 years of existence), NutriChoice (brand extensions to finger snacks -Thins and namkeen Roasty), Tiger (brand extension to milk) and 50:50 (brand extension to finger snacks Snackuits). The constant innovation leading to launch of new products coupled with sustained brand spends aided BIL to de-throne the leader Parle Products in terms of brand recall according to media reports (refer Biscuit war: Britannia steals the march over Sunfeast, Parle, published in Economic Times on March 5, 2013) and is also reflected in the stock price movement (refer Exhibit 8).

Exhibit 8: Britannia stock price movement since FY2006

Source: NSE, RSec Research

Profit & Loss Statement (Consolidated)

Y/E March (Rs cr) Gross sales Less: Excise duty Net Sales Total operating income % chg Total Expenditure EBITDA % chg (% of Net Sales) Depre. & Amortization EBIT (% of Net Sales) Interest Other Income (% of PBT) PBT (reported) (% change) Tax Tax rate (%) PAT (recurring) Share of profit/(loss) in associates Minority interest PAT (reported) % chg (% of Net Sales) Basic EPS (Rs) Fully Diluted EPS (Rs) % chg FY2012 5,520 59 5,461 5,461 19.0 5,175 286 31.9 5.2 62 224 4.1 42 84 31.4 267 42.4 67 25.1 200 (0) (0) 200 48.8 3.7 16.7 16.7 48.5 FY2013 6,202 66 6,136 6,136 12.4 5,765 371 29.7 6.0 73 298 4.9 41 102 28.4 358 34.5 99 27.5 260 (0) (0) 260 30.0 4.2 21.7 21.7 29.9 FY2014E 7,036 78 6,959 6,959 13.4 6,505 454 22.2 6.5 82 371 5.3 41 111 25.2 442 23.2 124 28.0 318 (0) (0) 318 22.4 4.6 26.6 26.6 22.4 FY2015E 7,970 88 7,882 7,882 13.3 7,333 549 21.1 7.0 93 456 5.8 40 126 23.3 542 22.7 152 28.0 390 (0) (0) 390 22.7 4.9 32.6 32.6 22.7

Balance Sheet (Consolidated)

Y/E March (Rs cr) SOURCES OF FUNDS Equity Share Capital Share Capital pending allotment Reserves& Surplus Shareholders Funds Capital Subsidy Total Loans Deferred Tax Liability Minority Interest Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Total Assets 1,114 584 530 111 94 249 858 61 252 545 1,244 (386) 598 1,302 617 685 100 99 108 891 103 291 497 969 (78) 914 1,496 659 837 105 104 148 956 62 327 566 1,061 (105) 1,089 1,691 712 979 118 109 188 1,073 84 370 618 1,135 (62) 1,333 24 385 409 179 8 2 598 24 2 527 553 5 341 13 2 914 24 709 733 341 13 2 1,089 24 953 977 341 13 2 1,333 FY2012 FY2013 FY2014E FY2015E

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Cash Flow Statement
Y/E March (Rs cr) Profit before tax Depreciation Change in Working Capital Interest / Dividend (Net) Direct taxes paid Others Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Interest / Dividend (Net) Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2012 267 62 (20) 13 67 (10) 245 (251) 140 (111) (19) 118 13 (150) (16) 77 61 FY2013 358 73 (15) (5) 99 9 322 (177) 140 (36) 0 (130) 118 (5) (243) 42 61 103 FY2014E 442 82 (72) (3) 124 10 335 (200) (40) (240) 139 (3) (136) (40) 103 62 FY2015E 542 93 (43) (7) 152 (25) 409 (209) (40) (249) 146 (7) (138) 22 62 84

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (Rs) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Returns (%) RoCE RoE Turnover ratios (x) Asset Turnover Inventory / Sales (days) Receivables (days) Payables (days) WCC (days) 4.9 29 67 8 7 4.7 22 41 7 (0) 4.7 22 39 7 0 4.7 21 36 7 (1) 29.2 26.0 39.4 34.3 37.1 31.7 37.7 32.2 16.7 16.7 21.9 8.5 34.3 21.7 21.7 27.8 8.5 46.3 26.6 26.6 33.5 10.0 61.3 32.6 32.6 40.4 10.5 81.7 40.2 30.7 19.6 1.3 1.4 27.6 13.2 31.0 24.2 14.5 1.3 1.3 22.0 8.9 25.3 20.1 11.0 1.5 1.2 18.0 7.5 20.6 16.6 8.2 1.6 1.0 14.8 6.1 FY2012 FY2013 FY2014E FY2015E

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