Britannia Industries Ltd

Britannia Industries Ltd BUY CMP: Rs.1660.00 Date: December 11, 2009 Key Ratios: Particulars FY09 FY10E FY11E OPM (%) 8.88 8.89 8.94 NPM (%) 5.77 6.27 6.31 ROE (%) 21.88 20.42 18.44 ROCE (%) 28.74 24.65 22.33 P/BV(x) 4.81 3.83 3.12 P/E(x) 21.98 18.74 16.93 EV/EBDITA(x) 14.28 13.20 11.93 Debt Equity Ratio 0.03 0.03 0.02 Key Data: Sector Food Processing Sector Face Value Rs.10.00 52 wk. High/Low 1890.00/1175.00 V.S.R. Sastry Vice President Equity Research Desk 91-22-25276077 vsrsastry@firstcallindiaequity.com Target Price: Rs.1860.00 Market Cap.: Rs 39657.40mn. SYNOPSIS Britannia Industries Limited manufactures, sells, and exports bakery and dairy products in India and internationally. Forbes Global rated Britannia amongst the Top 200 small companies of the world, and the Economic Times pegged Britannia has India`s 2nd most trusted brand in India. The company plans to focus on strengthening its international business and expand its brand presence. Britannia Industries is seeking shareholders permission for a proposal to up its borrowing limit to Rs.20 billion to chase inorganic growth opportunities. Net sales and PAT of the company is expected to grow at a CAGR of 13% and 7% over 2008 to 2011E respectively. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com 1

Table of Content Investment Highlights...3 Peer Group comparison...6 Keyconcern. 6 Financials.7 Charts....9 Outlook and conclusions...10 Industry Overview........11 2

Investment Highlights Q2 FY10 Results Update Britannia reported a steady growth in standalone net profit for the quarter ended Sep 2009. During the quarter, the profit of the company rose 10.38% to Rs 590.70 million from Rs 533.00 million in the same quarter previous year. Net sales for the quarter marginally rose 1.87% to Rs 8627.40 million over same quarter previous year. It posted earnings of Rs 24.73 a share during the quarter, registering 10.83% growth over previous year period. Britannia Industries is the market leader in the organized biscuit and bakery products market in India. In the environment of high commodity inflation and increasing competitiveness, company have maintained operating margin and generated Rs 2500 million of operational cash flow. The focus is on commercializing consumption opportunities both in the bakery and diary business. 3

Quarterly Results - Standalone (Rs in mn) As at Sep - 09 Sep - 08 %Change Net Sales 8627.40 8469.40 1.87 Net Profit 590.70 533.00 10.83 Basic EPS 24.73 22.31 10.83 Net Sales & PAT Growth EPS Growth 4

Strengthen its global business Britannia Industries plans to focus on strengthening its international business and expand its brand presence in the consequences of its settlement with Danone on the intellectual property rights (IPR) issue over the `Tiger` brand. The company also expects its dairy business to drive growth for the company. It s challenging for the industry due to the slowdown in GDP growth and failed monsoons in several areas and food shortages. Raising of borrowing limit Britannia Industries is seeking shareholders permission for a proposal to increase its borrowing limit to Rs.20 billion to chase inorganic growth opportunities. The company might need to raise funds if it plans to acquire any large setup. It had an adequate liquidity to maintain and grow its business operations. 5

The need to expand its borrowing limit comes as a result of the company`s proposed issue of bonus debentures, which is deemed to be borrowing. Pegged at Rs 4.75 billion (including Rs 690 million dividend distribution tax to be paid by the company), the bonus debenture will carry an 8.5% interest and will be redeemable at the end of the third year. Danone witnesses Rs 3.8 bn capital gain in Britannia divestment Groupe Danone, the global dairy products major based in France, netted a capital gain of Rs 3.8 billion when it recently divested its indirect 25.5% holding in the Bangalore-based biscuit major Britannia Industries. Danone and the Mumbai-based Wadia Group agreed to end their 13-year-old joint venture for running Britannia Industries for around Rs 9 billion. Peer Group Comparison Name of the company CMP(Rs. ) (As on Dec 11, 2009) Market Cap.(Rs. mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend(%) Britannia Industries 1660.00 39,657.40 80.89 20.52 4.81 400.00 Nestle India 2614.50 252,078.90 68.78 38.01 53.26 425.00 Marico Ltd 103.65 63,149.70 2.82 36.76 17.16 65.50 6

Colgate Palmolive 677.95 92,196.30 25.54 26.54 42.64 1500.00 Key Concerns High competition Economy slowdown High initial launch of cost Limited mass media option. Financials Results 12 Months Ended Profit & Loss Account (Standalone) Value(Rs.in.mn) FY08 FY09 FY10E FY11E Description 12m 12m 12m 12m Net Sales 25848.00 31271.10 33772.79 37150.07 Other Income 502.00 245.30 318.89 350.78 7

Total Income 26350.00 31516.40 34091.68 37500.85 Expenditure -23672.00-28739.70-31087.85-34178.06 Operating Profit 2678.00 2776.70 3003.83 3322.78 Interest -64.00-117.00-38.40-42.24 Gross profit 2614.00 2659.70 2965.43 3280.54 Deprecation -291.00-334.60-384.79-423.27 Profit Before Tax 2323.00 2325.10 2580.64 2857.28 Tax -413.00-521.10-464.51-514.31 Profit After Tax 1910.00 1804.00 2116.12 2342.97 Equity capital 239.00 238.90 238.90 238.90 Reserves 7819.00 8006.50 10122.62 12465.59 Face value 10.00 10.00 10.00 10.00 EPS 79.92 75.51 88.58 98.07 Quarterly Ended Profit & Loss Account (Standalone) Value(Rs.in.mn) 31-Mar-09 30-Jun-09 30-Sep-09 31-Dec- 09E Description 3m 3m 3m 3m Net sales 7667.30 7338.60 8627.40 8972.50 Other income 28.30 126.50 84.10 60.28 8

Total Income 7695.60 7465.10 8711.50 9032.78 Expenditure -6958.60-6782.80-7917.40-8254.70 Operating profit 737.00 682.30 794.10 778.08 Interest -7.80-8.20-8.80-9.24 Gross profit 729.20 674.10 785.30 768.84 Deprecation -88.10-91.20-93.50-96.31 Profit Before Tax 641.10 582.90 691.80 672.53 Tax -234.60-109.20-101.10-107.61 Profit After Tax 406.50 473.70 590.70 564.93 Equity capital 238.90 238.90 238.90 238.90 Face value 10.00 10.00 10.00 10.00 EPS 17.02 19.83 24.73 23.65 Charts 9

1 Year Comparative Graph 10

Britannia BSE SENSEX Outlook and Conclusion At the current market price of Rs.1660.00, the stock is trading at 18.74 x FY10E and 16.93 x FY11E respectively. Price to Book Value of the stock is expected to be at 3.83 x and 3.12 x respectively for FY10E and FY11E. Earning per share (EPS) of the company for the earnings for FY10E and FY11E is seen at Rs.88.58 and Rs.98.07 respectively. Net Sales and PAT of the company is expected to grow at a CAGR of 13% and 7% over 2008 to 2011E respectively. On the basis of EV/EBITDA, the stock trades at 13.20 x for FY10E and 11.93 x for FY11E. Britannia Industries plans to focus on strengthening its international business and expand its brand presence. Britannia Industries is the market leader in the organized biscuit and bakery products market in India. In the environment of high commodity inflation and increasing competitiveness, company have maintained operating margin and generated Rs 2500 million of operational cash flow. 11

The company is focusing on commercializing consumption opportunities both in the bakery and diary business. We recommend BUY in this particular scrip with a target price of Rs.1860.00 for Long term investment. Industry Overview The Indian food market is estimated at over US$ 182 billion, and accounts for about two thirds of the total Indian retail market. Further, according to consultancy firm McKinsey & Co, the retail food sector in India is likely to grow from around US$ 70 billion in 2008 to US$ 150 billion by 2025, accounting for a large chunk of the world food industry, which would grow to US$ 400 billion from US$ 175 billion by 2025. Spices Despite a global slowdown, Indian spice exports are growing. India exported 470,520 tonnes of spices valued at US$ 11.68 billion an all-time high in 2008-09. During the previous financial year, 444,250 tonnes valued at US$ 11.01 billion were exported. The spice exports were at an all-time high both in terms of volume and value. Compared with last year, the export had shown an increase of 19 per cent in rupee value and six per cent in dollar terms. Food Processing The food processing industry is presently growing at 14 per cent against 6-7 per cent growth in 2003-04. The industry received foreign direct investments (FDI) totaling US$ 143.80 million in 2007-08 against US$ 5.70 million in the previous fiscal. The cumulative FDI received by the industry from April 2000-January 2009 stood at US$ 760.32 million. 12

However, India s share in exports of processed food in global trade is only 1.5 per cent; whereas the size of the global processed-food market is estimated at US$ 3.2 trillion and nearly 80 per cent of agricultural products in the developed countries get processed and packaged. In order to further grow the food processing industry, the government has formulated a Vision-2015 action plan under which specific targets have been set. This includes tripling the size of the food processing industry from around US$ 70 billion to about US$ 210 billion, raising the level of processing of perishables from 6 per cent to 20 per cent, increasing value addition from 20 per cent to 35per cent, and enhancing India s share in global food trade from 1.5 per cent to 3 per cent. This would require an investment of US$ 20.6 billion. The ministry of food processing is also planning to set up 350 new food processing units by mid- October. Snacks and Confectionery The Indian market holds enormous growth potential for snack food, which is estimated to be worth US$ 3 billion, with the branded snack market estimated to be around US$ 1.34 billion, growing at 15-20 per cent a year. While the growth rate of the US$ 1.56 billion unorganised sector is 7-8 per cent. Dairy According to Dairy India 2007 estimates, the current size of the Indian dairy sector is US$ 62.67 billion and has been growing at a rate of 5 per cent a year. The dairy exports in 2007 08 rose to US$ 210.5 million against US$ 113.57 last fiscal, whereas the domestic dairy sector is slated to cross US$ 108 billion in revenues by 2011. Retail Landscape: Food Chains and Restaurants 13

The food and grocery market in India is the sixth largest in the world. Food and grocery retail contributes to 70 per cent of the total retail sales. According to industry estimates, the segment is growing at a rate of 104 per cent and is expected to grow to US$ 482 billion by 2020. According to a BMI forecast, India is likely to see a huge 443 per cent increase in mass grocery retail (MGR) sales during the 2007-2012 period. Ninety nine per cent of this segment is unorganised, and therefore, there is immense scope for growth for the organised sector. The organised food retail sector is largely dominated by restaurants, fast food outlets, coffee joints and the like. McDonald s is planning to open 40 new outlets across the country in FY10 mostly in Mumbai, Chennai and Hyderabad with an investment of US$ 25.64 million. At present, it has 160 outlets. Major investments Private investment has been one of the key drivers for growth of the Indian food industry. The 'India Food Report 2008', reveals that the total amount of investments in the food processing sector in the pipeline for the next three years is about US$ 23 billion. The government has received around 40 expressions of interest (EoI) for the setting up of 10 MFPs with an investment of US$ 514.37 million. Reliance Industries Ltd has invested US$ 1.25 billion in a dairy project. Parle Bisleri is planning to set up 25 new bottling plants across the country in FY10 as a part of its growth strategy at an investment of US$ 10.43 million. Gujarat Co-operative Milk Marketing Federation (GCMMF), which owns and markets Amul brand, has come up with a long term plan, which envisages increasing the turnover of all its member dairy co-operatives to 14

US$ 5.72 billion by 2020 from current level of US$ 2.12 billion. GCMMF plans to pump in around US$ 550.6 million to achieve its mission. PepsiCo is doubling its investment in its Indian beverage business for calendar 2009. The company will invest over US$ 220 million to increase the capacity of the business. Himachal Pradesh-based frozen food manufacturer Himalya International plans to invest US$ 27.1 million in a new plant in Gujarat. Government Initiatives The new trade policy places increased focus on agro-based industries. Food processing industries have been put in the list of priority sectors for bank lending. The government has also started work on 10 Mega Food Parks, and is planning to increase the number to 30 by 2015. Fruit and vegetable processing units have been completely exempted from paying excise duty. Automatic approval for foreign equity up to 100 per cent is permitted for most of the processed food items. Items like fruits and vegetables products, condensed milk, ice cream, meat production have been completely exempted from Central Excise Duty. Excise duty on ready to eat packaged foods and instant food mixes has been brought down to 8 per cent from 16 per cent. Excise duty on aerated drinks has been reduced to 16 per cent from 24 per cent. 15

Looking ahead According to the India Food and Drink Report Q3 2008 by research analysis firm Research and Markets, by 2012, India s processed food output is likely to grow by 44.2 per cent to touch US$ 90.1 billion, while packaged food sales will increase by 67.5 per cent to reach US$ 21.7 billion. On a per capita basis, per capita packaged food spending is expected to grow by 56.5 per cent to US$ 18.06 by 2012. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of its affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Firstcall India Equity Research: Email info@firstcallindia.com B. Harikrishna Banking B. Prathap IT A. Rajesh Babu FMCG C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods E. Swethalatha Oil & Gas D. Ashakirankumar Auto Rachna Tiwari Diversified Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Tarang Pawar Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s,takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds First call Management India Equity Debt Advisors & Equity, Pvt. Working Ltd Capital Limits, Equity & Debt Syndications and Structured Deals. 16 Corporate Advisory Offerings include Mergers & Acquisitions(domestic and cross-border), divestitures, spin-offs, valuation of business, corporate