Volumes impacted by slowdown; Margin expands May 27, 2014 Amnish Aggarwal amnishaggarwal@plindia.com +91 22 66322233 Gaurav Jogani gauravjogani@plindia.com +91 22 66322238 Rating BUY Price Rs870 Target Price Rs1,148 Implied Upside 32.0% Sensex 24,717 Nifty 7,359 (Prices as on May 26, 2014) Trading data Market Cap. (Rs bn) 104.0 Shares o/s (m) 119.6 3M Avg. Daily value (Rs m) 178 Major shareholders Promoters 50.75% Foreign 20.10% Domestic Inst. 8.77% Public & Other 20.38% Stock Performance (%) 1M 6M 12M Absolute (2.3) (2.1) 51.3 Relative (11.2) (23.2) 25.9 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2015 38.8 32.4 19.7 2016 47.7 38.3 24.6 Price Performance (RIC: BRIT.BO, BB: BRIT IN) BRIT s Q4 results are in line with Adj. PAT of Rs1.1bn (PLe: Rs1bn), even as sales growth of 10% was lower then our estimates. Volume growth of 3% has been disappointing, although wheat prices were up 8.8% YoY and Palmoil prices are up 23.3% YoY, neutralise to some extent by 8% lower sugar prices YoY, BRIT continued to gain from strict cost control in a tough operating environment. Q4FY14 margin expansion continued despite Q4FY13 being a high base quarter. We expect margins expansion to moderate from the current levels, going forward. We estimate PAT CAGR of 23% for FY14 16.We value the stock at 23xMar 16 EPS and assign a value of Rs50 per share to subsidiaries (0.6xEV/Sales) and arrive at target price of Rs1,148. Maintain BUY. EBITDA margin at 10%; Adj. PAT up 27%: BRIT reported 10% increase in sales to Rs16.5bn; we estimate 3% (4.5% in Q3) volume growth, showing impact of demand slowdown. Gross margins expanded 110bps to 38.5%. EBITDA margin expanded by 120bps to 10% aided by 140bps decline in advertising expenses even as staff cost and other expenses were up by 50bps each. EBITDA increased 25%; PBT increased by 25% to Rs1.59bn as gain of 96% decline in interest cost was neutralised by 46% decline in other income. Adj. PAT was up by 27% to Rs 1.1bn as Tax rate declined by 120bps while PAT is up by 4% to Rs915m. Demand slowdown impacts volume; selective price increase to cost pressure: Volumes for BRIT remains impacted by demand slowdown, BRIT has effected selective price increase in Milk Bikis, Nutrichoice Ragi and Oats as wheat and milk prices were at an all time high in Q4, also palmoil prices and sugar prices touched year high levels putting pressure on costs, however in Q1FY15 we have seen prices of Wheat and palm oil correcting sharply, while milk and sugar have retraced from their highs. While we expect competitive environment to sustain due to pressure from players like Parle, ITC and UNIBIC to gain market share, sustained margin expansion in standalone operations will continue led by gains from improved sales mix, benefits of new manufacturing units, cost cutting in distribution and marketing and help from correcting raw material prices. Key financials (Y/e March) 2013 2014 2015E 2016E Revenues (Rs m) 56,155 63,074 72,955 84,190 Growth (%) 12.9 12.3 15.7 15.4 EBITDA (Rs m) 3,716 5,961 7,217 8,648 PAT (Rs m) 2,339 3,698 4,641 5,705 EPS (Rs) 19.6 30.8 38.8 47.7 Growth (%) 25.1 57.6 25.9 22.9 Net DPS (Rs) 8.5 13.8 16.3 19.1 Q4FY14 Result Update (Rs) 800 700 600 500 400 300 200 100 0 Profitability & Valuation 2013 2014 2015E 2016E EBITDA margin (%) 6.6 9.5 9.9 10.3 RoE (%) 40.2 49.4 48.6 47.2 RoCE (%) 27.7 41.6 46.8 45.2 EV / sales (x) 1.9 1.6 1.4 1.2 EV / EBITDA (x) 28.3 17.4 13.9 11.3 PE (x) 44.5 28.2 22.4 18.2 P / BV (x) 16.2 12.2 9.8 7.6 Net dividend yield (%) 1.0 1.6 1.9 2.2 Source: Bloomberg Source: Company Data; PL Research 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: Q4FY14 Result Overview (Rs m); 27% Adj. PAT growth as EBITDA margins expands 120bps Y/e March Q4FY14 Q4FY13 YoY gr. (%) Q3FY14 FY14 FY13 YoY gr. (%) Net Sales 16,531 15,024 16,280 63,074 56,155 12.3 Gross Profit 6,359 5,655 12.4 6,395 24,977 20,971 19.1 Margins (%) 38.5 37.6 39.3 39.6 37.3 Other Exp 4,712 4,337 8.7 4,909 19,015 17,260 10.2 % of Sales 28.5 28.9 30.2 30.1 30.7 EBITDA 1,646 1,319 24.9 1,486 5,961 3,710 60.7 Margins (%) 8.8 9.1 9.5 6.6 Depreciation 164 149 10.1 160 634 571 11.0 Interest 4 104 (96.3 ) 6 54 377 (85.6 ) Other Income 114 211 (45.9 ) 56 353 560 (36.9 ) PBT 1,593 1,277 24.7 1,377 5,626 3,322 69.4 Tax 478 399 19.7 414 1,728 983 75.8 Rate (%) 3 31.2 3 30.7 29.6 Adjusted PAT 1,115 879 27.0 963 3,898 2,339 66.7 Extraordinary Income 200 200 Reported PAT 915 879 4.2 963 3,698 2,339 58.1 Exhibit 2: Volume growth remains benign at 3% Exhibit 3: Sales growth impacted by demand slowdown 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 7.0 5.5 3.5 2.0 5.5 3.0 6.0 6.0 4.5 3.0 17.0 16.0 15.0 14.0 13.0 12.0 11.0 8.0 15.5 16.1 10.4 16.5 13.5 14.9 13.7 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 May 27, 2014 2
Exhibit 4: Gross margins expands despite inflation in commodity cost in Q4FY14 Gross Margins have expanded by 80bps, while EBITDA margins have expanded 120bps 43.0 41.0 3 37.0 35.0 33.0 31.0 2 27.0 25.0 Gross Margins (%) Overheads (%) EBIDTA Margins (%) (RHS) 12.0 8.8 37.6 38.5 8.0 6.0 28.5 4.0 28.9 2.0 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Lower ad spends helps in EBITDA margin expansion even as other expenses are conversion costs are up Exhibit 5: Ad spends down 140bps, overheads up 50bps and conversion cost is flat Ad Spend Conversion Cost Other expenses 35.0 3 25.0 2 15.0 5.0 11.7 12.4 12.2 10.9 10.6 10.8 10.5 8.7 9.1 8.8 8.1 8.2 8.9 8.2 7.0 8.0 8.3 8.3 8.9 8.2 8.1 6.8 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Exhibit 6: Margin improvement to be aided by rise in value added biscuits % Glucose Value added Biscuits 100% 80% 20% 67% 71% 77% 81% 83% 33% 29% 23% 19% 17% 0% 2007 2009 2010 2011 2012 2013 May 27, 2014 3
Exhibit 7: Growth in Bread, Cakes and Rusk higher than biscuits Biscuits Bread, cake and Rusk 45.0 4 35.0 3 25.0 2 15.0 5.0 17.5 41.0 6.9 22.6 23.1 26.2 16.3 29.8 19.8 19.4 11.5 11.9 14.2 18.8 14.7 18.8 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E Exhibit 8: Bread, Cakes and Rusk share to increase in future Biscuits Bread, Cakes and Rusk 100% 80% 12.9% 14.5% 14.8% 16.2% 17.2% 18.2% 18.8% 19.3% 87.1% 85.5% 85.2% 83.8% 82.8% 81.8% 81.2% 80.7% 20% 0% FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E Palm Oil Prices (17% of the total raw Exhibit 9: Q4FY14 Palm Oil Prices up 23.3% YoY and 3.8% QoQ material cost) are down 14.8% in Q1FY15 from high of Rs 54243/ton 65,000 60,000 55,000 50,000 45,000 40,000 60,478 50,103 41,042 54,243 46,233 35,000 30,000 36,114 36,144 25,000 Dec 11 Feb 12 Apr 12 Jun 12 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 (Rs/MT) Source: Bloomberg, PL Research May 27, 2014 4
Exhibit 10: Wheat Prices up 8.7% YoY and 3.4% QoQ in Q4FY14 Wheat (27% of raw materials) prices are down 12.4% in Q1FY15 (Rs / Quintal) 1,900 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 1,520 1,450 1,538 1,520 1,538 Jun 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Source: Bloomberg, PL Research Sugar prices are firmer by % from Exhibit 11: Sugar Prices down 8% YoY in Q4FY14 Q4FY14 averages 4,100 3,900 3,895 3,700 3,500 3,300 3,100 3,195 3,418 3,245 2,900 2,700 2,895 2,950 2,500 Dec 11 Feb 12 Apr 12 Jun 12 Oct 13 Dec 13 Feb 14 Apr 14 (Rs / MT) Source: Bloomberg, PL Research May 27, 2014 5
Income Statement (Rs m) Net Revenue 56,155 63,074 72,955 84,190 Raw Material Expenses 40,104 38,097 49,535 56,838 Gross Profit 16,051 24,977 23,420 27,352 Employee Cost 1,435 1,725 1,989 2,296 Other Expenses 10,901 17,291 14,214 16,408 EBITDA 3,716 5,961 7,217 8,648 Depr. & Amortization 571 634 791 866 Net Interest (177) (299) (251) (486) Other Income 555 353 347 554 Profit before Tax 3,322 5,626 6,678 8,268 Total Tax 983 1,728 2,037 2,563 Profit after Tax 2,339 3,898 4,641 5,705 Ex Od items / Min. Int. (200) (2) Adj. PAT 2,339 3,698 4,641 5,705 Avg. Shares O/S (m) 119.6 12 119.6 119.6 EPS (Rs.) 19.6 30.8 38.8 47.7 Cash Flow Abstract (Rs m) C/F from Operations 2,711 5,792 5,716 6,885 C/F from Investing (538) 1,098 3,584 3,593 C/F from Financing (2,913) (3,999) (2,194) (3,212) Inc. / Dec. in Cash (740) 2,891 7,106 7,266 Opening Cash 309 645 840 787 Closing Cash 645 1,340 777 867 FCFF 1,588 3,967 4,031 5,761 FCFE 7 1,437 4,547 5,511 Key Financial Metrics Growth Revenue (%) 12.9 12.3 15.7 15.4 EBITDA (%) 33.1 60.4 21.1 19.8 PAT (%) 25.3 58.1 25.5 22.9 EPS (%) 25.1 57.6 25.9 22.9 Profitability EBITDA Margin (%) 6.6 9.5 9.9 10.3 PAT Margin (%) 4.2 5.9 6.4 6.8 RoCE (%) 27.7 41.6 46.8 45.2 RoE (%) 40.2 49.4 48.6 47.2 Balance Sheet Net Debt : Equity 0.2 (0.3) (0.5) Net Wrkng Cap. (days) 5 (8) 4 4 Valuation PER (x) 44.5 28.2 22.4 18.2 P / B (x) 16.2 12.2 9.8 7.6 EV / EBITDA (x) 28.3 17.4 13.9 11.3 EV / Sales (x) 1.9 1.6 1.4 1.2 Earnings Quality Eff. Tax Rate 29.6 30.7 30.5 31.0 Other Inc / PBT 16.7 6.3 5.2 6.7 Eff. Depr. Rate (%) 7.3 6.2 7.2 7.2 FCFE / PAT 0.3 38.9 98.0 96.6. Balance Sheet Abstract (Rs m) Shareholder's Funds 6,435 8,535 10,579 13,614 Total Debt 2,764 234 750 500 Other Liabilities Total Liabilities 9,199 8,769 11,329 14,114 Net Fixed Assets 5,801 6,429 6,448 6,608 Goodwill Investments 1,896 3,730 1,896 1,896 Net Current Assets 1,638 (1,299) 2,938 5,439 Cash & Equivalents 1,545 658 4,279 6,970 Other Current Assets 7,588 7,628 9,379 10,801 Current Liabilities 7,495 9,584 10,720 12,332 Other Assets (136) (92) 46 170 Total Assets 9,199 8,769 11,329 14,114 Quarterly Financials (Rs m) Y/e March Q1FY14 Q2FY14 Q3FY14 Q4FY14 Net Revenue 14,163 16,100 16,280 16,531 EBITDA 1,297 1,532 1,486 1,646 % of revenue 9.2 9.5 9.1 Depr. & Amortization 153 157 160 164 Net Interest 34 11 6 4 Other Income 139 44 56 114 Profit before Tax 1,249 1,408 1,377 1,593 Total Tax 386 451 414 478 Profit after Tax 863 957 963 915 Adj. PAT 863 957 963 1,115. May 27, 2014 6
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage % of Total Coverage 50% 30% 20% 10% 0% 52.9% 26.0% 21.2% % BUY Accumulate Reduce Sell PL s Recommendation Nomenclature BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document. May 27, 2014 7