Britannia Industries: Volume growth bottoms out

24 April 2013

Update |Sector: Consumer

Britannia Industries

Neutral

‐

Volume growth has bottomed out and should benefit from a favorable base

ahead.

‐

Benefits of premiumization are reflecting in the margins despite higher input

costs.

‐

See scope for re‐rating as volume improves and margins expand 80bp over

FY13E‐15E.

‐ Upgrade to Neutral with a target price of INR605, a potential upside of 11%.

Biscuits volume growth has likely bottomed out

We believe Britannia's (BRIT) volume growth in its core biscuits category has

bottomed out and will benefit from the favorable base effect, going forward.

Though the processed foods segment is undergoing a slowdown, BRIT's consistent

investments in the category should stand it in good stead, in our view. We expect it

to post 8% volume growth in biscuits in FY14E, driven by premium portfolio.

Premiumization strategy yields dividend; Glucose salience declines

BRIT has focused to drive the premiumization strategy, given the business' low

margin nature and inflationary trend in its RM basket. Company consistently

innovated its portfolio and expanded the offerings in Health, Cookies and Creams

segment, where the realization is 2‐4x base variants. Thus, it managed to expand the

gross margin by 150bp in 9MFY13, despite sharp input cost inflation. We expect

BRIT to continue to expand its premium portfolio, in line with the broader category

trend where contribution of Glucose is declining. We note the Glucose category has

declined 4.5%, while Creams and Cookies segment has grown 21.8% and 5.5%

respectively over CY10‐12, as per industry data.

Non‐biscuits portfolio gains strength; Subsidiaries turning profitable

BRIT's non‐biscuits portfolio (Bread, Cake, Rusk, Dairy and International) is gaining

size and is now an INR15b business on an annualized basis. Pertinently, profitability

of international subsidiary and dairy subsidiary has been improving consistently

since FY09. As these businesses gain size, operating leverage can provide margin

upside, in our view.

Underperformance discounts negatives; Worst is over; Upgrade to Neutral

BRIT has underperformed the BSE FMCG index by 32%/20% in last 12/24 months

due to deceleration in Biscuits volume and subdued profit growth. Going forward,

we expect a volume recovery; with higher input costs in the base, margins should

expand given the premiumization led by mix improvement. We estimate 21%

earnings CAGR for FY13E‐15E led by 16.5% sales growth and 80bp operating margin

expansion to 5.8%. Given our expected improvement in operational performance,

we believe valuations at 24.5x FY14E and 20.6x FY15E have a scope for re‐rating,

albeit modest. We value BRIT at 24x FY15E, peg the target price at INR605, an

BRITANNIA INDUSTRIES: Volume growth bottoms out;

Premiumization strategy yielding benefits; non‐Biscuits margins

improving; Upgrade to Neutral

Britannia Inds

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Britannia Inds

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24 April 2013