Britannia Industries Ltd. Rating: Buy. Food Processing BIL STOCK IDEA

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1 Britannia Industries Ltd. Food Processing STOCK IDEA Rating: Buy Date October 1, 215 CMP (Rs.) 3,124 Target (Rs.) 3,64 Potential Upside 15% BSE Sensex 26,221 NSE Nifty 7,951 Scrip Code Bloomberg BRIT IN Reuters BRIT.BO BSE Group A BSE Code 5825 NSE Symbol BRITANNIA Market Data Market Cap.(Rs. Cr) 37,552 Equity Sh. Cap. (Rs Cr) Wk High/Low 3,435/1,31 Avg. Quarterly Volume 2,47,622 Face Value (Rs.) 2 Shareholding Pattern (As on 3 th June 215) FII 2.2 DII 8.98 Promoters 5.74 Public & Others 2.26 Total. Comparative Price Chart Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 BIL Sensex Ravikant Sangepag Research Analyst ravikants@systematixshares.com Arun Gopalan VP Research & Investments arungopalan@systematixshares.com With a 123 year history, Britannia Industries Ltd. (BIL) is the country s largest manufacturer and distributor of biscuits, along with bread, rusk, cakes and dairy products. The company operates in two business segments: Bakery Products and Dairy Products. The Bakery Products segment manufactures and markets biscuit, bread, cake and rusk. The Dairy Products segment processes and sells milk, butter, cheese, ghee, dahi, milk-based ready to drink beverages and dairy whitener. With launch new Tiger biscuits, BIL is expanding its footprint to Hindi belt (U.P, M.P, Rajasthan and Jharkhand) and Gujarat where the company has market share 1/5 th of its broad country level market share of 3-35%. The company is strategically shifting production to in-house facilities to achieve tighter quality control and cost effective operations. We believe the improved product mix and shift towards premium offerings, aided by well calculated price hikes, along with improvement in cost efficiencies, will reflect in sustainable margin expansion. We therefore believe the stock offers bright prospects for investors going forward. Expanding geographies and product portfolio to strengthen pan India footprint: BIL is sharpening its focus on rural presence as well as expanding its food and snacks portfolio to drive long-term growth. BIL s Rural market share is 2/3rd of its urban market share. Notably, rural markets have remained fairly stable as compared to urban markets during this slowdown. BIL s market share is just 1/5th (of around 3-35% at pan India level) in the Hindi belt (U.P, M.P, Rajasthan and Jharkhand) and Gujarat. Its market share in each of these states has been slightly below %. BIL is setting up units and increasing distribution, as its products are not well marketed in these states. BIL has launched new Tiger biscuits at premium over Parle G and similar other products. We believe that this segment can make an important role in increasing the reach and gaining scale in these states.bil has ~% market share in Glucose segment and value segment accounts for less than 2% of portfolio. We believe these efforts would drive 14% revenue CAGR over FY Shift to in-house production to provide more control over manufacturing costs and leverage new technologies: Nearly 66% of Britannia s production was outsourced to contract manufacturers in FY11, the company in a bid to have more control over manufacturing costs and leverage new technologies began investing in its own manufacturing facilities. The company plans to invest Rs 4 crore over the next 18 months in 12 new lines across the country for increasing its capacity by 2, tonnes of per month by the end of March 217. Over the next 2 months, management expects ~6% of its manufacturing to be done in-house (~5% in FY15). Margin expansion story far from over, future looks crispier than FY15: In the last couple of years, BIL reduced its trend spends & stock returns and improved manufacturing efficiencies through implementation of strategies like Kaizen & TQM. The company moved towards zero wastage through recipe optimization and tighter operating norms. BIL use energy efficient ovens with biomass as fuel and has reduced fuel costs significantly. Through reshuffling of manufacturing locations, BIL reduced average distance travelled for finished products from 65km in to 45km thereby reducing freight cost significantly. Management believes that these initiatives far from over providing further room for expansion in margins in the years to come. Improving product mix and robust pricing actions to lift realizations and margins further: The company has expanded its premium product base by launching new premium products viz Nutrichoice Heavens, Pure Magic Chocolush, Good Day Chunkies and Nut & Raisin Romance cake. These products come with higher realizations and better margins. To build innovation further, BIL is setting up an R&D facility in Bangalore which is expected to be operational in 2H FY16. We believe that continual efforts in innovation in premium segment will drive margins further. Valuation & Outlook: At the current market price of Rs 3,124, the stock trades at 39x FY17E EPS of Rs 8. With multiple levers in place for growth and significant scope for margin expansion we expect BIL to continue its uptrend. We value the company at 45x its FY17E EPS and recommend buy with a target of Rs. 3,64, an upside of 15% in 12 months. Sales EBITDA EBITDAM PAT PATM EPS BVPS P/E P/BV EV/EBITDA Particulars (Rs. Cr) (Rs. Cr) (%) (Rs. Cr) (%) (Rs.) (Rs.) (x) (x) (x) FY14 6, FY15 7, FY16E 8,959 1, FY17E,213 1,

2 Story in charts Trend in revenue Revenue expected to grow with a CAGR of 14% 12,5,5 8,5 6,5 4,5 2, ,959,213 7,858 6,185 6, Revenue (Rs Cr) Growth (%) Trend in EBITDA EBITDAM is expected to reach 13% in FY17 1,55 1, ,328 1, EBITDA (Rs Cr) EBITDAM (%) Trend in PAT PATM is expected to reach 9.4% in FY17 1, PAT (Rs Cr) PATM (%) Total reserves is expected to grow at CAGR of 3% through FY17 Trend in total reserves 2, , ,5 1, 1,221 1,589 2, Reserves (Rs Cr) Growth (%) Trend in FCFF (Rs Cr) On the back of higher growth with minimal CAPEX, FCFF is expected to grow at CAGR of 29% through FY17 1, FY13 FY 14 FY 15 FY 16E FY 17E

3 Biscuits and cookies industry in India is expected to grow at a CAGR of 14% over FY15-FY19 Industry Overview India is considered to be the third largest producer of biscuits in the world, after the US and China. While the country is the largest biscuit consuming nation, per capita consumption is low at 2.1kg - compared to Ireland, which is the highest at 21.76kg. The market for biscuits and cookies in India has come a long way accounting for ~72% of the sales in the bakery industry. Increasing consumption of packaged and convenience food, the availability of a variety of biscuits and an increase in disposable incomes have provided a major boost to the industry. India s biscuits and cookies industry was valued at INR 145 billion (~USD 2.41 billion) in FY214. It is expected to grow at a CAGR of 14% to reach INR 279 billion (~USD 4.65 billion) by 219. Manufacturing giants Britannia and Parle dominated the industry with nearly 61% market share in FY214. Most of the manufacturers in the industry find it hard to match the distribution and retail networks of these companies. Until recently, biscuits and cookies were considered to be a product of mass consumption. However, with changing tastes and preferences, and increasing affluence, this no longer seems to be the case. Increasing indulgence, health concerns and familiarity with luxurious taste which has developed among Indian consumers has led Indian manufacturers experiment with a variety of biscuits and cookies. This has also led to higher growth in the premium segment compared to the economical and mid segments of the industry. In the last few years, the majority of the new product launches in the industry have been in the premium segment. High margins, the proliferation of modern supermarket chains and increasing affluence amongst consumers have encouraged manufacturers to introduce different kinds of premium biscuits and cookies. The glucose segment, one of the most economical segments of the industry, is expected to decline and account for only 15% of the industry by FY 219, compared to 25% in 214. On the other hand, the premium segment - like cream, health and sweet biscuits and cookies - is seen to have a better growth potential. Manufacturers are now offering their premium products in smaller packs, making them affordable to all strata of society. Company Background Britannia Industries Limited (BIL) is a leading food company in India with over Rs. 7,8 Cr. in revenues, delivering products in various categories through 3.5 million retail outlets to more than half the Indian population. BIL engages in the manufacturing, marketing and distribution of biscuits, bread, rusk, cakes and dairy products. The company operates through two business segment: Bakery Products and Dairy Products. The Bakery Products segment manufactures and markets biscuit, bread, cake and rusk. The Dairy Products segment processes and sells milk, butter, cheese, ghee, dahi, milk-based ready to drink beverages and dairy whitener. The company was incorporated 123 years ago in a small house in central Calcutta (now Kolkata) an intrepid baker made a batch of delicious, golden brown biscuits. These were meant for officers of the British Raj and their families, people used to the exacting standards of English tea-time snacking. Over the last century and a quarter, Britannia has been serving the Indian consumer with a range of fresh, nutritious and flavour-rich products. Britannia Dairy had its beginnings in Britannia was one of the first companies in India to pioneer category defining innovations like Cream Cheese and introducing a host of international flavors for its cubes & spreads in India. Today Britannia Dairy products contribute less than 5% of the company s revenue. Britannia markets its dairy portfolio on the back of a well integrated cold chain logistics network and reaches 3 million outlets across the length & breadth of this country. Key Management Personnel : Key Management personnel Mr. Nusli N Wadia Mr. Varun Berry Mr. Ness N Wadia Mr. A. K. Hirjee Designation Chairman Managing Director Director Promoter, Non Executive Director

4 Key Risks: Adverse movements in prices of key raw materials like Wheat, Palm oil and Sugar with limited ability to increase prices in commensurate may suppress margins. Slower than expected growth in underlying industry due to weak consumption sentiment may dampen growth. Increase in competitive intensity in the industry may impact overall profitability. Failing to launch innovative products may dent market share. Comparison with peers CMP M-Cap Revenue EBITDA PAT EBITDAM PATM P/E P/B ROE FY 15 (Rs) (Rs Cr) (Rs Cr) (Rs Cr) (Rs Cr) (%) (%) (x) (x) (%) BIL 3,124 37,552 7, Nestle India 6,45 61,82 9,575 1, GSK Consumer 6,22 25,325 4, Jubilant Food 1,641,787 2,

5 FINANCIAL PERFORMANCE PROFIT & LOSS (Rs Cr) CASH FLOW (Rs Cr) Particulars FY13 FY14 FY15 FY16E FY17E Particulars FY13 FY14 FY15 FY16E FY17E Revenue 6,185 6,913 7,858 8,959,213 Cash from operating act ,136 Raw material cost 3,861 4,171 4,692 5,349 6,97 Cash from investing act Employee cost Cash from financing act. (119) (298) (233) (366) (477) Other operating expenses 1,677 1,852 2,22 2,198 2,43 Net Change in Cash EBITDA ,75 1,328 Depreciation RATIO ANALYSIS Other Income Particulars FY13 FY14 FY15 FY16E FY17E EBIT ,2 1,33 General Interest Expenses EPS Profit Before Tax ,16 1,325 BVPS Tax ROE 53.7% 58.4% 67.4% 51.5% 51.8% PAT WC as % of Sales -4.2% -3.4% -4.6% -4.4% -4.3% Growth BALANCE SHEET (Rs Cr) Revenue 12.8% 11.8% 13.7% 14.% 14.% Particulars FY13 FY14 FY15 FY16E FY17E EBITDA 35.3% 49.1% 35.5% 26.5% 23.5% Share Capital PAT 3.1% 52.3% 74.% 7.% 3.4% Reserves & Surplus ,221 1,589 2,7 Profitability Total Shareholder funds ,245 1,613 2,94 EBITDA Margin 6.8% 9.1%.8% 12.% 13.% Non Current Liabilities EBIT Margin 6.5% 8.4% 12.1% 11.4% 13.% Longterm Borrowings PAT Margin 4.2% 5.7% 8.8% 8.2% 9.4% Deferred Tax Liabilities Stability Other LT Liabilities Debt/Equity Current Liabilities Current Ratio Trade Payables Interest Coverage Other Current Liabilities ST Borrowings ST Provisions TOTAL LIABILITIES 1,883 2,7 2,793 3,239 3,94 Non Current Assets Net Block CWIP NC Investments Current Assets Inventories Sundry Debtors Cash and Bank ,26 ST Loans and Advances TOTAL ASSETS 1,883 2,7 2,793 3,239 3,94

6 DISCLOSURES/ APPENDIX I. ANALYST CERTIFICATION We, Ravikant Sangepag & Arun Gopalan, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report, (2) No part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report by Systematix Shares & Stocks (I) Limited or its Group/associates companies. (3) have taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. Disclosure of Interest Statement Response Analysts holding in the stock No Served as an officer, director or employee No II. ISSUER SPECIFIC REGULATORY DISCLOSURES, UNLESS SPECIFICALLY MENTIONED IN POINT NO. 9 BELOW: 1. 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