2 September 2013
Update | Sector: Consumer
Britannia Industries
BSE Sensex
18,620
S&P CNX
5,472
CMP: INR703
TP: INR865
Buy
Profitability focus reiterated in a slowing category
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Margin uptick not just commodity led; reiterate Buy
BRIT IN
119.8
775/400
4/42/33
84.4
1.3
Financial Snapshot (INR Billion)
Y/E March
2013 2014E 2015E
Sales
EBITDA
Adj. PAT
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
55.6
3.2
2.3
19.6
39.3
52.2
37.5
60.4
35.9
13.5
64.7
4.7
3.3
27.2
39.1
63.6
42.8
62.8
25.8
11.0
75.5
5.5
3.8
31.9
17.1
77.0
41.4
57.4
22.0
9.1
Shareholding pattern % (Jun-13)
Jun-13 Mar-13 Jun-12
Promoter
Domestic Inst
Foreign
Others
50.9
9.9
19.5
19.8
50.9
11.3
17.9
19.9
51.0
14.9
15.1
19.1
We attended Britannia Industries’ (BRIT) analyst meet. Our key takeaways:
Indexed growth in the Biscuits category has come off from 100 in 1QFY13 to 35 in
1QFY14. BRIT has, however, delivered ~5% volume growth during the quarter,
which is similar to its FY13 performance.
Raw material costs have remained largely stable for BRIT, helping it to deliver
substantial margin expansion in FY13 and 1QFY14. Stable commodity prices aside,
its steps to control overhead costs and enhance manufacturing efficiencies have
helped. Its operating margin expanded 260bp in 4QFY13 and 300bp in 1QFY14.
The management enunciated its strategy to rationalize some of the less relevant
SKUs in a phased manner. The impact will be minimal, if any, as these SKUs are
not critical and mostly have regional presence. As BRIT has already begun
implementing the strategy on the ground, margins should expand further.
BRIT is scaling up its rural presence by augmenting its distribution network, with
6-7% growth in outlet coverage per annum. We like this strategy; companies that
have expanded their rural distribution have remained relatively insulated from
the slowdown, as rural markets have outperformed urban markets by 400-500bp.
The company’s multiple initiatives on cost and revenue management are yielding
benefits now, and it intends to sharpen focus on these, going ahead. Its
investments in technology and energy saving initiatives at plants are helping to
expand margins.
BRIT intends to build its Foods and Snacks business gradually, as it believes there
is ample scope for these categories. However, it will not compromise margins to
achieve revenue growth. We note that BRIT’s Dairy profits more than doubled in
FY13 to INR350m.
There is status quo on its land sale at Chennai (8.6 acres) and Bengaluru (5 acres);
BRIT is looking to monetize its land assets.
Stock Performance (1-year)
Valuation and view
We like BRIT’s focus on profitable growth and see scope for structural margin
expansion ahead. Margins had collapsed from 12.3% in FY05 to 5.3% in FY12
before improving to 5.8% in FY13. Premiumization coupled with improved
traction in Dairy and International businesses should support medium-term
profitability. Commodity price volatility has impacted margins in the past and a
repeat cannot be ruled out. However, we believe BRIT’s efforts at cost
containment in the back-end and overheads would cushion the volatility.
In the short term, we note that the base for 2QFY14 and 3QFY14 is low,
providing a platform for strong earnings growth. We expect gross margin to
expand 220bp over FY13-15, led by favorable base and premiumization
benefits. We build in 160bp operating margin expansion over FY13-15 to 7.4%
and estimate 27.4% EPS CAGR over FY13-15. The stock trades at 25.8x FY14E
and 22x FY15E EPS. We reiterate
Buy,
with a target price of INR865 (SOTP: 26x
FY15E standalone EPS + 13x FY15E subsidiary EPS).
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Investors are advised to refer through disclosures made at the end of the Research Report.

Britannia Industries
Category growth slowing down; indexed growth off two-thirds in a year
The management pointed out that Biscuits category growth has slowed down
substantially. Indexed category growth has come off by nearly two-thirds since
1QFY13.
The weak macroeconomic scenario coupled with high inflation has impacted
consumption demand across staples categories. We note that volume growth
has moderated for our universe in 1QFY14 and channel checks indicate
continued sluggishness in 2QFY14 as well.
BRIT’s volumes grew ~5% in 1QFY14 as well as in FY13.
Competitive intensity continues to be high, given the relatively stable raw
material cost environment. According to the management, a total of 433 players
operate in the Biscuits market, and have a cumulative 24-27% share of the
segment.
Moderate inflation in raw material prices would prove beneficial for large
organized players like Britannia, ITC and Parle.
Britannia’s volume growth in mid single digits (%)
Volume growth
16.0
12
7.9
51
35
0.2
10
7
5.5
3.5
5.5
2
4.5
5
Sharp moderation in category growth (%)
Indexed market growth
112
100
96
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
Source: MOSL, Company
Source: MOSL, Company
Reiterates focus on profitable growth; SKU rationalization on the anvil
BRIT will focus on rural markets, where consumption still remains healthy. In the
urban markets, demand has been impacted due to weak macros and pressure
on discretionary consumption. Currently, rural markets contribute ~40% of
BRIT’s revenues.
1QFY14 commentary from FMCG companies reaffirmed the outperformance of
rural regions. Hindustan Unilever, Dabur, Marico, Emami, Colgate and Asian
Paints witnessed 400-500bp higher growth in rural markets than in urban
markets.
BRIT plans to expand its rural reach by 6-7% per annum and extend its existing
portfolio to prevent volume growth erosion. However, it does not intend to
introduce any new brand.
The management also enunciated its strategy of rationalizing several marginal
SKUs, which will help improve profitability without impacting volume growth.
The intent is to concentrate on optimal SKUs and drive profitability.
It is also experimenting with more sales personnel in the metros via portfolio
splitting to drive higher throughput per store.
2 September 2013
2

Britannia Industries
We like BRIT’s strategy to capitalize on rural markets, as good monsoons and
ensuing pre-election government spending should provide catalysts for rural
consumption. In the last three years, various FMCG players have enhanced their
rural reach and managed to beat the impact of macroeconomic slowdown
(Hindustan Unilever, Dabur, Marico, Emami, GSK Consumer, etc).
The management refrained from commenting on any positives surrounding the
Food Security Bill. It does not, however, see the Food Security Bill as a threat of
raw material inflation.
In the medium term, the management aspires to grow its share, with underlying
margin improvement, facilitating profitable growth.
Gradually building non-Biscuits presence; Dairy and International
businesses earnings accretive
BRIT’s Dairy business did well in FY13, more than doubling profits to INR350m.
According to the management, this was driven by stable commodity costs,
improved scale and operating leverage.
With Mr Varun Berry (a Pepsi veteran with specialization in Snacks) joining the
leadership team in January 2013, building the Snacks and non-Biscuits portfolio
seems to be a priority area.
BRIT believes that the opportunity in Dairy is large and there is ample room for
multiple players to co-exist without indulging in price battles. However, the
management mentioned that it will grow its Dairy business cautiously, as the
supply chain is complex. It will not sacrifice margins to achieve revenue growth.
BRIT’s International business (Al Sallan, 66% subsidiary) has seen good
improvement in profitability owing to its exit from several unprofitable markets.
…with improving profitability
6,904
Subsidiary PAT (INR m)
81
276
Subsidiaries gaining scale…
Subsidiary revenue (INR m)
6,132
4,090
4,237
4,617
-213
-82
-621
FY09
FY10
FY11
FY12
FY13
FY09
FY10
FY11
FY12
FY13
Source: MOSL, Company
Source: MOSL, Company
Consistently improving profitability of subsidiaries
INR m
Britannia Dairy Products
Daily Bread
Strategic Food Int
Al-Sallan
Total
Stake
100%
100%
100%
66%
Sales
3,095
233
2,323
1,254
6,904
FY13
Net Profit
350
-27
-49
1
276
Sales
2,935
241
1,884
1,073
6,132
FY12
Net Profit
155
-15
-43
-16
81
FY11
Sales Net Profit
2,188
42
195
-12
1,361
-131
873
18
4,617
-82
Sales
1,888
145
1,280
924
4,237
FY10
FY09
Net Profit Sales Net Profit
101
1,619
-35
-46
163
-248
-185
1,578
-269
-83
730
-69
-213
4,090
-621
Source: Company, MOSL
2 September 2013
3

Britannia Industries
Raw material prices stable; INR deprecation not a material threat for raw
material costs
BRIT’s gross margin improved 110bp in FY13 and 230bp in 1QFY14, driven by
stable commodity costs. However, underlying premiumization trend coupled
with steps taken to drive buying efficiencies (reverse auctioning, etc), also
played its part, according to the management.
Concerns regarding vulnerability of operating margins to commodity costs and
lack of pricing power in the industry are valid. However, BRIT’s efforts to drive
efficiencies in the supply chain and back-end are bearing fruits. While the
management did not give any guidance on future margins, we believe some of
the benefits pertaining to cost control are sustainable and should help drive
medium-term margins. BRIT has undertaken several hundred projects in
manufacturing and back-end improvement (TQM, Kaizen, Six Sigma, reducing
distance to market, owned manufacturing, etc).
Recent INR depreciation is a concern, but will not impact BRIT materially, as only
palm oil has an import component. Sugar, flour, butter, etc are procured locally.
In our view, less than 10% of BRIT’s raw materials are exposed to currency
fluctuations.
Long way to go to recoup lost margins
EBITDA (INR b)
8.3
40.3
37.0
32.0
5.8
29.2
1.9
2.0
1.3
2.3
2.6
1.7
2.4
2.6
12.3
11.7
8.9
8.4
4.9
5.6
5.2 5.8
3.2
7.2
4.7
7.4
5.5
EBITDA Margins (%)
7.8
EBITDA margin at 15-quarter high in 1QFY14
Gross Margins (%)
EBIDTA Margins (%)
6.3
35.5
29.2
29.1
5.7
38.0
32.7
5.3
Overheads (%)
4.3
35.5
31.2
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14EFY15E
Source: MOSL, Company
Source: MOSL, Company
Indexed raw material trends:
Flour price elevated
Flour price
132
123
131
126
Sugar showing deflationary trend
Sugar
122
121
113
100
105
111
100
98
FY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
FY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
Source: MOSL, Company
Source: MOSL, Company
2 September 2013
4

Britannia Industries
Butter prices have shown uptick in 1QFY14
Butter
100
93
93
93
98
91
100
110
104
105
Manufacturing fuel trending upwards
MFG Fuel
108
116
FY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
FY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
Source: MOSL, Company
Source: MOSL, Company
Strategic focus unchanged – revenue management coupled with innovation
and cost containment
BRIT’s strategic focus areas remain unchanged: (a) revenue management, (b)
restructuring cost base, and (c) innovation.
It is experimenting with various initiatives including SKU rationalization
(“simplification”) and portfolio splitting via more sales personnel. These should
lead to better shelf availability, higher revenue/person, and therefore, higher
value per transaction. It is also restructuring its cost base, and working on faster
settlement and reducing inventory to bring down working capital.
In addition to the above, BRIT has taken several steps in the past to control costs
– TQM, Kaizen, Six Sigma, reducing distance to markets, increasing salience of
owned manufacturing to drive better value capture. These will continue to drive
profitability and restrict margin vulnerability to commodity price movement.
Valuation and view – expect structural margin expansion; reiterate Buy
We like BRIT’s focus on profitable growth and see scope for structural margin
expansion ahead. Margins had collapsed from 12.3% in FY05 to 5.3% in FY12
before improving to 5.8% in FY13.
Premiumization coupled with improved traction in Dairy and International
businesses should support medium-term profitability.
Enhancement in rural reach could provide cushion in an uncertain urban
consumption environment.
Unlike some sections of the street, we view ITC’s potential entry into Dairy as a
key catalyst, which can accelerate category growth and benefit organized
players.
In the short term, we note that the base for 2QFY14 and 3QFY14 is low,
providing a platform for strong earnings growth. We expect gross margin to
expand 220bp over FY13-15, led by favorable base and premiumization benefits.
We build in 160bp operating margin expansion over FY13-15 to 7.4% and
estimate 27.4% EPS CAGR over FY13-15.
The stock trades at 25.8x FY14E and 22x FY15E EPS. We reiterate Buy, with a
target price of INR865 (SOTP: 26x FY15E standalone EPS + 13x FY15E subsidiary
EPS).
2 September 2013
5

Britannia Industries
SOTP valuation
Stand-alone
Subsidiary
Total
TP (INR)
CMP (INR)
Upside
FY15 PAT
3,810
334
4,144
FY15 EPS
32
3
35
Multiple
26
13
Value/Share
828
36
865
865
703
23%
Source: Company, MOSL
2 September 2013
6

Britannia Industries
Financials and valuation
2 September 2013
7

Britannia Industries
Financials and valuation
2 September 2013
8

Britannia Industries
NOTES
2 September 2013
9

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Britannia Industries
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BRITANNIA INDUSTRIES
No
No
No
No
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