Sustains momentum; Input cost gains peaked out November 09, 2015 Amnish Aggarwal amnishaggarwal@plindia.com +91 22 66322233 Gaurav Jogani gauravjogani@plindia.com +91 22 66322238 Rating Accumulate Price Rs3,130 Target Price Rs3,233 Implied Upside 3.3% Sensex 26,265 Nifty 7,954 (Prices as on November 06, 2015) Trading data Market Cap. (Rs bn) 374.3 Shares o/s (m) 119.6 3M Avg. Daily value (Rs m) 717.8 Major shareholders Promoters 50.74% Foreign 19.79% Domestic Inst. 8.83% Public & Other 20.64% Stock Performance (%) 1M 6M 12M Absolute (3.3) 4 105.9 Relative (0.8) 41.7 111.8 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2016 65.6 68.5 4.2 2017 77.9 84.1 7.4 Price Performance (RIC: BRIT.BO, BB: BRIT IN) (Rs) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Nov 14 Jan 15 Source: Bloomberg Sep 15 Nov 15 BRIT s Q2 results are in line with sales growth of 11.9% and Adj. PAT of Rs2.03bn. Volume growth of ~11% looks impressive given slowdown in demand and shift of Diwali to 3QFY16. Strategic initiatives in distribution expansion, new mfg units and product restaging continued and should enable above industry average growth. We believe that input costs gains have peaked out as sugar prices are up 12% and Wheat 7% since 2QFY16. We estimate 320bps margin expansion and 31% PAT CAGR in standalone operations over FY15 18. We value the stock at 35xSept 17EPS given 41% ROE, 65% ROCE and 40% dividend payout. Maintain Accumulate. Gross margin at 41.7%; Adj. PAT up 28.9%: BRIT reported 11.9% increase in sales to Rs20.3bn; we estimate 11% (12% in Q1) volume growth, despite demand slowdown. Gross margins expanded 290bps to 42.2%. EBITDA margin expanded by 400bps to 14.9% as 100bps increase in advertising expenses (up 28%) and 30bps in staff cost (up 26%) were more than compensated by 130bps and 100bps savings in conversion cost and overheads. EBITDA increased 52.6%; PBT increased 63% aided by 62% higher other income and 18% lower depreciation. Adj PAT was up by 57.7% to Rs 2.03bn. Subsidiaries reported 12% higher sales but 14% decline in profit on higher spends on advertising, competition in dairy and economic turmoil in Middle East. Strategic initiatives in right direction: 1) Britannia sustained double digit volume growth despite slowdown in demand 2) New unit in Tamilnadu started production during the quarer 3) Britannia made reasonable inroads in northen region which aided growth 4) Britannia offred more valued to consumers in benign input cost environment by sales promotions 5) power brands of Goodday and Milk Bikis were restged. Input cost benefits have peaked: Input cost benefits have peaked as sugar prices are up 12% since 2Q and are up 21% from bottom. Wheat prices are up 7% since 2Q end and are likely to remain firm till new crop in march. Palmoil and SMP prices are down 21% and 43% on YoY basis. Key financials (Y/e March) 2014 2015 2016E 2017E Revenues (Rs m) 63,074 71,760 81,617 96,232 Growth (%) 12.3 13.8 13.7 17.9 EBITDA (Rs m) 5,966 7,715 11,463 13,629 PAT (Rs m) 3,898 5,097 7,863 9,347 EPS (Rs) 32.5 42.5 65.6 77.9 Growth (%) 66.1 30.8 54.3 18.9 Net DPS (Rs) 12.0 16.0 21.0 27.0 Profitability & Valuation 2014 2015 2016E 2017E EBITDA margin (%) 9.5 10.8 14.2 RoE (%) 51.9 48.6 53.2 47.0 RoCE (%) 44.1 48.2 52.7 46.7 EV / sales (x) 5.9 5.1 4.5 3.7 EV / EBITDA (x) 62.4 47.4 31.8 26.4 PE (x) 96.3 73.7 47.7 40.2 P / BV (x) 43.8 30.3 21.8 16.6 Net dividend yield (%) 0.4 0.5 0.7 0.9 Source: Company Data; PL Research Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Result Overview (Rs m); 57.7% Adj. PAT growth as EBITDA margins expands 400bps Y/e March YoY gr. (%) H1FY16 HFY15 YoY gr. (%) Net Sales 20,329 18,174 11.9 18,471 38,800 34,516 12.4 Gross Profit 8,585 7,147 20.1 7,729 16,315 13,456 21.2 Margins (%) 42.2 39.3 41.8 42.0 39.0 Other Exp 5,562 5,165 7.7 5,135 10,696 9,897 8.1 % of Sales 27.4 28.4 27.8 27.6 28.7 EBITDA 3,024 1,982 52.6 2,595 5,619 3,560 57.8 Margins (%) 14.9 10.9 14.5 10.3 Depreciation 206 251 (17.9) 209 415 497 (16.5) Interest 3 4 (14.3) 3 6 6 (4.8) Other Income 300 185 62.0 183 483 381 26.7 PBT 3,115 1,913 62.9 2,566 5,681 3,438 65.2 Tax 1,078 621 73.6 888 1,966 1,068 84.1 Tax Rate (%) 34.6 32.5 34.6 34.6 31.1 Adjusted PAT 2,037 1,292 57.7 1,678 3,715 2,370 56.7 Extraordinary (Income) 1,239 1,239 Reported PAT 2,037 2,530 (19.5) 1,678 3,715 3,609 2.9 Exhibit 2: Volume growth sustained in double digit at 11% Exhibit 3: Sales impacted by 100bps excise phase out impact 12.0 8.0 6.0 4.0 2.0 6.0 6.0 4.5 3.0 7.5 9.0 9.0 12.0 11.0 16.0 15.0 13.0 12.0 11.0 9.0 8.0 13.7 11.1 9.0 15.3 13.0 13.6 13.0 11.9 1QFY14 2QFY14 3QFY14 4QFY14 Q2FY14 Q3FY14 Q4FY14 November 09, 2015 2
Exhibit 4: Gross margins expanded 290bps due to benign input costs Gross Margins have expanded by 290bps, while EBITDA margins have expanded 400bps 45.0 4 35.0 3 25.0 Gross Margins (%) Overheads (%) EBIDTA Margins (%) 4 39.3 9.5 30.4 Q2FY14 Q3FY14 Q4FY14 10.8 42.2 14.9 28.5 27.4 16.0 12.0 8.0 6.0 4.0 2.0 Conversion cost and overheads enable higher margin expansion despite 28% higher adspend and 26% higher staff costs Exhibit 5: Adspend up 100bps, overheads and conversion cost down 100bps and 130bps Ad Spend Conversion Cost Other expenses 3 25.0 2 15.0 5.0 10.8 10.5 11.1 10.8 10.6 10.4 10.4 9.8 9.6 8.9 9.0 8.2 8.2 8.7 8.7 7.9 7.9 7.5 8.2 8.1 6.8 7.2 6.8 7.6 9.1 7.3 7.8 Q2FY14 Q3FY14 Q4FY14 Exhibit 6: Growth in Bread, Cakes and Rusk higher than biscuits Biscuits Bread, cake and Rusk 35.0 3 25.0 2 15.0 5.0 22.6 23.1 26.2 29.8 6.9 16.3 11.5 19.8 13.7 6.1 13.9 17.8 12.7 20.4 17.2 21.5 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E November 09, 2015 3
Exhibit 7: Palm Oil Prices down 21% YoY and 12.8% QoQ Palm Oil Prices (17% of the total raw material cost) are quoting at 6 year lows 60,000 55,000 54,243 50,000 45,000 40,000 35,000 30,000 46,905 37,000 39,745 34,719 32,518 25,000 28,230 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Sep 15 Nov 15 (Rs/MT) Source: Bloomberg, PL Research Wheat (27% of raw materials) prices are up Exhibit 8: Wheat Prices up 0.4% YoY and 4.1% QoQ in 7% since 2Q, unlikely to decline before March 2016s 1,800 1,700 1,661 1,670 1,690 (Rs / Quintal) 1,600 1,500 1,400 1,510 1,542 1,300 1,200 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Apr 15 Jun 15 Aug 15 Sep 15 Oct 15 Source: Bloomberg, PL Research Sugar prices are up 21% from the lows of Rs 2360/MT and 12% since 2Q Exhibit 9: Sugar Prices down 23.2% YoY & 3.4% QoQ in (Rs / MT) 3,600 3,415 3,400 3,370 3,200 3,000 2,865 2,870 2,975 2,800 2,745 2,600 2,400 2,360 2,200 Mar 13 Apr 13 Jun 13 Aug 13 Sep 13 Nov 13 Jan 14 Feb 14 Apr 14 Jun 14 Jul 14 Sep 14 Oct 14 Dec 14 Feb 15 Aug 15 Oct 15 Source: Bloomberg, PL Research November 09, 2015 4
Income Statement (Rs m) Net Revenue 63,074 71,760 81,617 96,232 Raw Material Expenses 43,523 49,187 53,994 64,011 Gross Profit 19,551 22,573 27,622 32,221 Employee Cost 1,725 1,768 2,020 2,336 Other Expenses 11,861 13,090 14,140 16,256 EBITDA 5,966 7,715 11,463 13,629 Depr. & Amortization 634 1,173 916 1,194 Net Interest (294) (863) (1,190) (1,411) Other Income 348 875 1,202 1,424 Profit before Tax 5,626 7,405 11,736 13,847 Total Tax 1,728 2,309 3,873 4,500 Profit after Tax 3,898 5,097 7,863 9,347 Ex Od items / Min. Int. (400) 2,254 Adj. PAT 3,898 5,097 7,863 9,347 Avg. Shares O/S (m) 12 12 12 12 EPS (Rs.) 32.5 42.5 65.6 77.9 Cash Flow Abstract (Rs m) C/F from Operations 7,172 8,322 9,167 11,578 C/F from Investing 2,491 8,131 5,935 7,671 C/F from Financing (4,687) (481) (3,078) (19,244) Inc. / Dec. in Cash 4,976 15,972 12,024 5 Opening Cash 645 640 349 503 Closing Cash 639 349 503 508 FCFF 5,666 7,963 4,651 9,175 FCFE 2,957 8,046 4,645 9,175 Key Financial Metrics Growth Revenue (%) 12.3 13.8 13.7 17.9 EBITDA (%) 60.6 29.3 48.6 18.9 PAT (%) 66.7 30.8 54.3 18.9 EPS (%) 66.1 30.8 54.3 18.9 Profitability EBITDA Margin (%) 9.5 10.8 14.2 PAT Margin (%) 6.2 7.1 9.6 9.7 RoCE (%) 44.1 48.2 52.7 46.7 RoE (%) 51.9 48.6 53.2 47.0 Balance Sheet Net Debt : Equity (0.3) (0.8) (0.6) (0.7) Net Wrkng Cap. (days) (7) (16) (14) (14) Valuation PER (x) 96.3 73.7 47.7 40.2 P / B (x) 43.8 30.3 21.8 16.6 EV / EBITDA (x) 62.4 47.4 31.8 26.4 EV / Sales (x) 5.9 5.1 4.5 3.7 Earnings Quality Eff. Tax Rate 30.7 31.2 33.0 32.5 Other Inc / PBT 6.2 11.8 10.2 10.3 Eff. Depr. Rate (%) 6.7 11.7 6.2 6.8 FCFE / PAT 75.9 157.9 59.1 98.2. Balance Sheet Abstract (Rs m) Shareholder's Funds 8,577 12,392 17,184 22,628 Total Debt 56 139 133 133 Other Liabilities Total Liabilities 8,633 12,531 17,317 22,761 Net Fixed Assets 6,429 5,742 9,543 11,149 Goodwill Investments 1,845 1,904 1,904 1,904 Net Current Assets 451 4,675 5,424 8,916 Cash & Equivalents 3,043 9,573 10,945 15,820 Other Current Assets 7,128 7,190 8,421 9,882 Current Liabilities 9,720 12,089 13,942 16,787 Other Assets (92) 211 446 792 Total Assets 8,633 12,531 17,317 22,761 Quarterly Financials (Rs m) Y/e March Net Revenue 18,523 18,720 18,471 20,329 EBITDA 1,942 2,212 2,595 3,024 % of revenue 10.5 11.8 14.9 Depr. & Amortization 255 421 209 206 Net Interest 3 3 3 3 Other Income 205 290 183 300 Profit before Tax 1,889 2,079 2,566 3,115 Total Tax 599 641 888 1,078 Profit after Tax 1,205 1,410 1,678 2,037 Adj. PAT 1,290 1,437 1,678 2,037. November 09, 2015 5
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