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Britannia Industries

Crunchiest EverCrunchiest Ever

Britannia Industries

Tin Tin

Tiding

Sector: FMCG

Sector view: Positive

Sensex: 25,696

52 Week h/l (Rs): 3,435 / 1,237

Market cap (Rscr) : 35,053

6m Avg vol (‘000Nos): 1,049

Bloomberg code: BRIT IN

BSE code: 500825

NSE code: BRITANNIA

FV (Rs): 2

Price as on September 1, 2015

Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

40

90

140

190

240

290

Aug‐14 Feb‐15 Aug‐15

Britannia Sensex

Share holding pattern % Dec‐14 Mar‐15 Jun‐15

Promoters 50.75 50.75 50.74

Insti 19.46 19.10 20.02

Others 29.79 30.15 29.24

Rating: BUYTarget: Rs3,956

CMP: Rs2,922

Upside: 35.4%

Company Report

Research Analyst Ruchita Maheshwari

[email protected]

Britannia Industries Ltd

This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc. The views and opinions expressed in this document may at times be contrary in terms of rating, target prices, estimates and views on sectors and markets.

September 01, 2015

Initiating Coverage

Crunchiest Ever!!!

Under the leadership of Mr. Varun Berry, BRIT has focused on product innovation especially in premium categories, resolved distributor issues like supply chain inefficiencies, increased in‐house manufacturing and turned aggressive on branding and advertising, while improving cost efficiencies. Between FY12‐15, these measures resulted in sales/EBITDA/PAT CAGR of 12.7%/40.6%/51%, respectively with an EBITDA margin expansion of 533bps to 11% in FY15. We believe that, Britannia or BRIT appears to have hit a sweet spot in its strategy of using price hikes and a richer product mix (new and premium products) to drive margin expansion. BRIT is well‐placed to sustain its rich valuation and continue its upward trajectory on the back of higher volume growth in biscuits (led by distribution expansion, stronger growth in Hindi belt regions (Rajasthan, UP, Bihar, MP, Gujarat) and innovations+premium products), management’s renewed focus in high margin segments like cakes, rusks and value added dairy business, strong growth in international business, and increase focus in branding and cost efficiency. We expect BRIT to report revenue/EBITDA/PAT CAGR of 16.7%/30%/23%, respectively over FY15‐FY18E. We recommend BUY rating with a TP of Rs3,956 based on 37x PE and 23.7x EV/EBITDA FY18E, providing an upside of 35.4%.

Achieved 14.3% EBITDA margin in Q1FY16; But party is not over yet: a) Multiple levers in core biscuit segment to drive future growth led by 1)

increased rural focus which forms 2/3rd of the total urban market share

(national market share is 32%). 2) Scope to strengthen its position in the value segment. 3) Stepping up innovations like Nutrichoice Heavens, Goodday Chunkies, Chocolush, etc will drive premiumisation and margins. 4) Improved its sales distribution reach (80,000 direct coverage added and 7,300 rural distributors in Q1FY16). 5) Infuse operational efficiencies across its supply chain. 6) Increase in‐house production capabilities.

b) BRIT’s long term aspirations is to become a Total Foods Company by filling up 1) product portfolio gap with renewed focus in high margin segments like cake, rusks and value added dairy. BRIT is also exploring the macro snacking category of Rs130bn market size and is planning to launch two‐three products in the near term. And, 2) geographic gap as BRIT is witnessing solid growth in international business (double digit growth in recent quarters). BRIT is scouting new geographies for future growth.

Financial summary Y/E Mar (Rs cr) FY15 FY16E FY17E FY18E

Revenues 7,858 9,100 10,657 12,480

EBITDA 864 1,292 1,599 1,897

EBITDA (%) 11.0 14.2 15.0 15.2

PAT 689 858 1,072 1,283

EPS (Rs) 57.4 71.5 89.3 106.9

ROE (%) 67.7 57.5 52.0 46.3

ROCE (%) 69.4 76.9 71.0 64.3

PE (x) 50.9 40.9 32.7 27.3

EV/EBITDA (x) 40.5 26.9 21.2 17.4 Source: Company, India Infoline Research


2

Investment Rationale

Multiple levers in core biscuit segment to drive future growth BRIT is gearing up to get a strong foothold in the super premium biscuits where the competition is minimal. Since Q3FY15, the company has become aggressive in the launch of innovative super premium segment biscuits and since then has launched Nutrichoice Heavens, Chocolush, Pure Magic, Good Day Chunkies and Britannia Nut and Raisin Romance cake. As per management, the product innovation will be the key focus area for the next two years especially in the premium segment so as to gain lost market share. In addition, the company will not increase its focus in the value segment (15% of total sales as against 48% for ITC and 85%‐90% for Parle) as pricing plays a key role and as of now the company does not want to initiate price war as it will not instigate any market share gain and in fact can reduce the overall gross margin for the company. For the past ten years, BRIT has lagged its peers in terms of product innovation due to which, the company had lost dominant market share position to ITC and the likes, who launched innovative premium cream biscuits and made strong in‐roads in the cream segment. Parle continues to dominate in the value segment

(in FY06, BRIT had a 6% point lead over Parle in market share in value terms but Parle had beaten the company in the volumes game with its mass‐market glucose biscuit Parle‐G. BY 2010, Parle had a 6%‐7% points lead over BRIT in market share in value terms). As of now, BRIT focuses on five power brands named Good Day, Nutrichoice, 50:50, Tiger and Marie Gold, resulting in significant improvement in visibility, off‐take and market share.

Off‐late, BRIT has become aggressive in the launch of super premium products and has launched host of products at a price not seen before in the biscuits category. For e.g. BRIT has launched “Nutri Choice Heavens” (Rs50/100gm), which the company has positioned as super premium cookies to take on already existing ITC’s “Delishus” cookie (25% premium) in the market and also to stave off competition from ITC’s “Sunfeast Farmlite” (20% premium) and “Parle Simply Good” (100% premium). Further, the company also launched super premium Good Day Chunkies (Rs50/100gm), 50.2%/25%, premium to Parle Milano Cookies and Parle Milano Hide & Seek Cookies.

Britannia launched host of premium biscuits at higher price points to its competitors:

Brand Price (Rs)

Grams Launch Date Competitor Price (Rs)

Grams % Premium / (discount)

Good Day Chunkies 50 100 November 2014

Parle Milano CookiesParle Milano Hide & Seek Cookies

33.3 40

100 100

50.2%25%

Nutri Choice Heavens 50 100 November 2014

ITC Delishus 40 100 25%

Pure Magic Chocolush

30 75 June 2015 Parle Golden ArcsParle Milano Centre Filled ITC Dark Fantasy Unibic Cookies‐Choco Kiss

25 30 30 30

75 75 75 75

20%‐ ‐ ‐

Source: Company, India Infoline Research


3

We are very positive on the company’s stance to grow super premium products in the health and indulgence range because: A. The company wants to have a first mover advantage in the super premium

category where the competition is minimal and the company does not want to stir up the value chain segment by trade discount or pricing as enough players are already operating in this segment.

B. The target audience is 1) the customers who buy imported products available at high price point in the market and 2) the customer who already consumes premium products like ITC’s Sunfeast Delishus Gourmet Cookies, etc and are ready to shift to the super premium category.

C. The company is leveraging its two of existing brands “Good Day” and “Nutri Choice” to launch super premium categories rather than introducing new brand altogether. We believe it’s a strategic move to leverage on its two strongest brands to premiumise consumers.

We believe the efforts to improve its share of premium products will drive revenue growth, profitability and continue to drive margin gains over the next few quarters. Strong Distribution network to support the growth Being a daily consuming food in households, biscuits are needed in huge lots in retailing. A strong distribution network becomes pivotal in expanding its reach in the households of remotest area. Hence, for the past couple of years; BRIT has increased its focus on expanding its distribution network. In addition, the company has also increased the efficiency of its distributors and also infuses operational efficiencies across its supply chain. As far as channel powers are concerned it's undoubtedly the Product power or the Backend power of Britannia that is in the market place of distribution which leaves little scope for distributors not to keep Britannia products. But to have a healthy relationship with the channel members is very essential. Britannia has effectively created a healthy relationship with its channel members by a) setting‐up new system and processes like IT infrastructure (MIS) for distributors for tracking and forecasting demand. B) Split salesman approach to push a wider product portfolio. For instance, the two salesmen visit the same retailer, resulting into more sales of product lines. C) More decision making power at the junior level. In addition, the company has off‐late become committed to resolve issues by A) improving the supply chain to reduce the damage goods. The company has successfully reduced the limit of damage claims to 1.5% from 2.5% earlier. B) Driving sales efficiency through hand held devices, which will improve servicing, case fill rate and the structure of its channel program. C) Offering level playing field to both modern trade and general trade. D) Reworking the incentive structure for achieving sales goals.


4

Increased distribution network in rural area As per management, the company is increasing its rural focus which forms just

2/3rd of the total urban market share (national market share is 32%), hence providing immense growth potential. For this, the company is targeting the Hindi belt region MP, Gujarat and Rajasthan, where its market share is 1/5th of total national share. The company have less than 10% market share in MP, Gujarat and Rajasthan whereas UP have just over 10%. BRIT has just over 20% market share of its nearest competitor, providing enough scope to garner market share with right approach. BRIT will use value segment products like Tiger biscuits to target small towns and villages and which will act as a wheel to launch other premium products. The company has formulated a key market strategy: a) Go‐to‐Market Strategy: BRIT continues to focus on expanding its distribution

network and has added 80,000 outlets in Q1FY16 and 7,300 rural distributions. Further, the company has doubled its direct reach from 0.55mn outlets to 1mn outlets in FY15. In addition, the management has guided to expand its direct reach by 25% every year.

b) Total Numeric Distribution (It is defined as the percentage of stores that stock a given brand or SKU, within the universe of stores in the relevant

market) stands at 3.5mn outlets, which is 2/3rd of its nearest competitor’s reach. As per management, this provides a significant opportunity to increase its bandwidth which will help in strengthen its position not only in urban but also in rural market.

c) Expansion of route to market strategy: BRIT is expanding its route to market strategy in 13 cities in Q1FY16 taking the total count to 73 cities, with coverage reaching to 558 towns and 20% contribution to revenues. The model helped in boosting the lines per bill by 10%‐15% in markets where it was already been implemented.

d) Driving Sales Efficacy through hand held devices: This will help in improving servicing, case fill rate and structure of channel programs.

e) Loyalty program to motivate channel partners to drive rural and urban extraction.

Driving focus in value segment (creams, cookies and glucose) to double its market share The value segment forms 45% of the biscuit market, of which BRIT has 7%‐8% market share, giving enough scope for the company to grow in this segment. The

share from the value segment contributes 20% to the total revenue compared

to 90%/48% for Parle and ITC, respectively. The company is focusing to double its market share in this segment without going for any price war with the leader.

BRIT will use value products to penetrate rural area which will act as a wheel in launch of other products. Under this, the company has re‐launched “Tiger Glucose” (5%‐15% premium to Parle’s SKUs) with differentiated packaging and design which will be a carrier for other brands in the rural area.


5

Cost efficiency, benign commodity costs, better product mix continues to support EBITDA margin expansion BRIT has reduced its truck loads by 34% and trade returns by 31% over the last three years. The company has also improved it’s a) manufacturing efficiencies through TQM, Kaizen, Lean etc, b) energy optimization (just 20% of its plants are operating at optimum efficiency level), c) moving towards zero wastage through recipe optimization & tighter operating norms, d) to cut costs further, the company has set up energy efficient ovens in new units using patented technology and is also using biomass as an alternate fuel (power & fuel) thereby reducing energy costs. Hence, power & fuel as a % of sales reduced from 1.8% in FY14 to 1.5% in FY15, e) reduced average distance travelled for finished products from 650km in FY13 to 450km in Q1FY16. The company is planning to reduce 10% distance travelled in FY16, and f) increase in contribution of in‐house manufacturing as against it’s outsource model to reduce the conversion charges. The conversion charges reduced 20bps YoY to 8.4% in FY15. The company plans to increase the share of in‐house manufacturing to 60% by FY17 from 46% in FY15. Further, the company had enjoyed the dream run of benign commodity costs where sugar, wheat, milk, etc witnessed a southward movement (softened by more than 10%). This resulted into a lower input costs which translated into a healthy improvement in gross margin from 39.8% in FY14 to 40.8%/42.6% in FY15/Q1FY16, respectively. However, to remain competitive, the company has passed on the benefit to its customers through extra grammage/promotional discounts, etc. There has also been significant contribution from product mix improvement with the launches in the past few years aimed at the premium end of the category. Since Q3FY15, the company has upped its premium quotient by launching four new premium products viz Good Day Chunkies, Nutrichoice Heavens, Pure Magic Chocolush and Britannia Nut & Raisin Romance cake. For example Good Day Chunkies costs Rs500/kg compared to Rs167/kg for Bourbon and Rs200/kg for Britannia Pure Magic biscuits. This is roughly 3x‐4x pricing difference between two categories. These products with a high margin have also upped the gross margin to 40%/42.4% in Q3FY15/Q4FY15 as against 39.3%/38.4% in Q3FY14/Q4FY14, respectively and 42.6% in Q1FY16 as against 38.8% in Q1FY15. On the back of cost rationalization, benign input costs and better product mix, the company has been able to expand its EBITDA margin exponentially by 668bps to 11% in FY15 from 4.3% in FY10 and has touched its best ever EBITDA margin of 14.3% in Q1FY16. We believe, the cost rationalization will continue for the time being. However, the premiumization of newer products, renewed focus in the non‐biscuit category and aggressive roll‐out in the higher margin of dairy and snacking business will be the next key driver for the margin expansion. We expect BRIT to report an EBITDA margin of 14.2%/15%/15.2% in FY16E/FY17E/FY18E, respectively as against 6.8%/9.1%/11% in FY13/FY14/FY15, respectively.


6

Operating leverage enables 421bps EBITDA margin expansion over FY15‐FY18E

26.0

26.5

27.4

25.3

26.1

27.1

26.8

25.7

24.5

24.5

24.5

39.0

38.1

36.5

34.8

36.0

37.9

39.9

40.9

43.2

44.0

44.2

8.5

7.0

4.3

5.1 5.7 6.8 9.1

11.0

14.2

15.0

15.2

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Overheads margin Gross margin EBITDA Margin (%)%


Benign input cost to improve gross margin Cost rationalization (break‐up of expenses) 61.0

61.9

63.5

65.2

64.0

62.1

60.1

59.1

56.8

56.0

55.8

39.0

38.1

36.5

34.8

36.0

37.9

39.9

40.9

43.2

44.0

44.2

0.0

20.0

40.0

60.0

80.0

100.0

120.0

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Raw‐material cost Gross margin%

6.6 6.9 8.0

7.3 7.6 8.6

8.7

8.3

8.0

8.0

8.0

6.4 6.6 6.6

6.2 6.5 6.8

6.6

6.2

6.0

6.0

6.0

4.5 4.6 4.4

3.9 3.8 3.7

3.8

3.6

3.6

3.6

3.6

13.0

13.0

12.8

11.8

12.0

11.7

11.5

11.2

10.5

10.5

10.5

0

5

10

15

20

25

30

35

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Ad Spend (%) Conversion Cost

Employee cost Other Expenses%


Sugar prices are expected to remain stable Wheat prices have fallen signficantly in the last couple of quarters

1800

2000

2200

2400

2600

2800

3000

3200

3400

3600

3800

Jan‐12

Mar‐12

Jun‐12

Sep‐12

Nov‐12

Feb‐13

May‐13

Jul‐13

Oct‐13

Jan‐14

Apr‐14

Jun‐14

Sep‐14

Dec‐14

Feb‐15

May‐15

Aug‐15

Rs/100kg

1000

1100

1200

1300

1400

1500

1600

1700

1800

Jan‐12

Mar‐12

Jun‐12

Sep‐12

Nov‐12

Feb‐13

May‐13

Jul‐13

Oct‐13

Jan‐14

Apr‐14

Jun‐14

Sep‐14

Dec‐14

Feb‐15

May‐15

Aug‐15

Rs/quintal

Source: Bloomberg, India Infoline Research


7

Milk Prices to stabilize on the account of oversuplly in market

0

5

10

15

20

25

30

Jan‐12

Mar‐12

May‐12

Jul‐12

Sep‐12

Nov‐12

Feb‐13

Apr‐13

Jun‐13

Aug

‐13

Oct‐13

Dec‐13

Mar‐14

May‐14

Jul‐14

Sep‐14

Nov‐14

Jan‐15

Apr‐15

Jun‐15

Aug

‐15

With over supply of milk in the market, industry players expect prices to remain stable for few months

US$/cwt

Source: Bloomberg, India Infoline Research Aspires to become a Total Foods Company BRIT aspires to become a “Total Foods Company” by filling up gaps in a) product portfolio and b) geographic presence. As such, the company is increasing its business in other segments than biscuits like cakes, rusk, bread and value added dairy which offers high margin business. The company is also evaluating a snack market and is looking for an option to launch 2‐3 new products in the near term. Further, the company is also planning to create separate teams for different geographies (international market), which will identify 2‐3 new geographies or key market for the company to foray.

Non‐biscuit sales to grow at 19.1% CAGR over FY15‐FY18E; to lead the future growth Non‐biscuit bakery products comprises of Bread, Rusk & cake. We believe this segment provides huge opportunity for the company as non‐biscuit bakery products market is currently large and unorganized in India. Sales of these segments have grown at 14.6%/10.7% CAGR in the past four/six years, respectively as against sales CAGR of 13.2%/13.4% in the biscuits segment during the same period. Revenue contribution from non‐biscuit category to Britannia’s standalone revenue has increased from 11% in FY08 to 16.7% in FY15. We expect the contribution from the segment to improve going forward on the back of renewed focus in this high margin business and the company has integrated its domestic bakery and dairy distribution and sales teams plus business manager which in our view, will increase the customer reach of Britannia’s dairy & bakery products.

Bread: Britannia claims to have 50% market share in India’s ~Rs33bn bread market in 2015 and is expected to report a CAGR of 10% over the next five years

and will reach Rs53bn by 2020. Britannia competes with national players like Modern and regional players like Harvest Gold in Delhi, Wibbs and Kwality in Mumbai. Britannia has extended its product line from plain maida bread to value added products like Multigrain, oats, 100% wheat, etc. The idea behind launch of value added products is to increase the margin of this segment as the value added product commands higher realization of 50%‐100% compared to the plain maida bread. This has lead Britannia ahead of the players in terms of innovation.


8

Cake and Rusk: Britannia is the only national players selling rusk and fruit/chocolate cake in India. Though, there are lot of local players like Monginis, Celejor, Toasty (rusk) in Mumbai and several other brands available in the other cities. Britannia has developed the rusk segment by launching Rs. 4 price point pack as an out‐of‐home consumption and a great snacking option. Britannia has been able to develop rusk as a branded product in the already unorganized segment market.

Dairy: Branded dairy products also provide good growth opportunity as this category is growing fast and provides scope for differentiation. According to the National Dairy Development Board, demand for milk is expected to increase at a CAGR of 5% from 138MT in 2014 to 200MT in 2022. Additionally, data from National Sample Survey Organization shows that between 2001‐02 and 2011‐12, the per capita monthly expenditure on milk and milk products has more than doubled from Rs41.9 to Rs115 in rural India and from Rs75.8 to Rs184 in urban India. The processed dairy industry in India was estimated to be Rs3,650‐Rs3,700bn, out of which milk products accounted for Rs1,490‐Rs1,530bn. While demand for processed milk grew by 5.3% CAGR over FY10‐FY14, realisations rose by about 9%‐10% CAGR in the same period. The processed milk and milk products segment is expected to record about 12%‐13% CAGR over FY14‐FY17E. Sensing higher demand for processed milk and milk products, several domestic and global players forayed into different value added segments (leading to higher margins) to gain a higher market share. Britannia dairy operates at the premium end of the dairy segment with presence in UHT Milk, Butter, Cheese slices, Cheese, Curd, Ghee and Tiger Zor and Actimind Milk. The business is operating at the premium end, with products like Slimz Milk, Gourmet cheese and value‐added cheese slices. We note that Britannia Dairy products enjoy a price premium of 8%‐15% across product segments. As of now, BRIT is doing due diligence to expand its operations in the dairy industry. With higher disposable income, a greater array of choices and an increasing health and nutrition consciousness, the dairy industry will continue to benefit from the migration to branded and value added milk and milk based products. This has also increased industry competitiveness with local and regional players going national and international players extending their presence and business portfolio. BRIT is formulating a blue print for expansion (as the company is not satisfied with the current growth rates) and will take 12‐18 months to roll‐out as it needs to validate the expansion strategy. We further believe that these segments offer huge growth potential which can be en‐cashed by value‐added variants, product availability and awareness.


9

Macro snacking: The snack food market is pegged at Rs130bn, while traditional namkeen (salted Indian snacks) is around Rs52bn. The snack foods business in India consists of three categories‐western snacks (all potato chips, puff snacks etc), traditional snacks (mixture, chivda, masala peanuts, bhujia) and bridge snacks (where the product format is Western and the taste is Indian). As of now BRIT is evaluating its strategy in the snacking industry and is expected to roll‐out 2‐3 new products in the near term. Further Britannia’s presence in biscuits, which is a highly elastic, price sensitive and low margin business. However, it should be noted that Britannia has gradually been reducing its dependence on the biscuits business over the last

two to three years. Earlier, the category contributed 90% to the total revenues in FY08, which has now reduced to 83% in FY15.

Increase in contribution of breads, cakes and rusks

89.0

87.0

85.5

84.9

83.8

82.8

83.7

83.3

83.1

82.8

82.5

11.0

13.0

14.5

15.1

16.2

16.2

16.3

16.7

16.9

17.2

17.5

0.0

20.0

40.0

60.0

80.0

100.0

120.0


Biscuits Bread, cakes and rusk%


Our Analysis on Brand Portfolio Strength Brand Portfolio Findings/Analysis Portfolio Strength

Biscuits At present BRIT is the market leader with maximum brands under the category. The company is facing heat from the entry of new/existing players like ITC, Parle, Kraft, etc.

Strong

Cakes Cakes is highly fragmented market with BRIT leading the pack in the national market. BRIT is present under only one brand name. The company faces competition from the local bakeries. However, Parle has launched cake in 2013 and Priyagold cakes. BRIT cakes are premium by 15.4% (mid‐market) and 56.3% (premium).

Strong

Rusk BRIT is present under one brand and competes with the likes of Parle and local players. BRIT

rusk is available at 10% premium to Parle.

Medium

Dairy Products BRIT is present in this segment through milk and value added products like cheese, curd, etc. As the company is not perceived an association with dairy products, the market share is minimal. Opportunity to grow here the maximum due to its robust distribution network and preference for healthy and refreshing nutrients for the consumer. The management is laying out a blue‐print in the next few months to grow this segment aggressively.

Medium

Bread BRIT is present under one brand with variants and competes with the regional players.

Weak

Ready to Cook/Macro Snacking

BRIT is relatively new in the market and faces high competition from HUL, Nestle, Frito‐Lay, Haldirams, etc. The opportunity for the company is immense to grow.

Weak



10

International business BRIT has 19 subsidiaries in total (direct & indirect) of which 13 are Indian subsidiaries and 6 are overseas subsidiaries. In March 2007, Britannia Industries Limited formed a Joint Venture with the Khimji Ramdas Group, one of the largest and the most respected business conglomerates in the Middle East. Britannia and its Associates have acquired a significant stake in Dubai based Strategic Food International Co. LLC and Oman based Al Sallan Food Industries Co SAOG. The two companies are key regional players in the biscuits, wafers and cookies segment in the GCC markets and export their products across the world. The key subsidiaries had reported a loss of Rs62.1cr/Rs21.3cr/Rs8.3cr in FY09/FY10/FY11, respectively; however, they have reported a sharp turnaround with PAT of Rs8.1cr/Rs27.5cr/Rs8.8cr/Rs58.6cr in FY12/FY13/FY14/FY15, respectively. The subsidiaries have grown at a CAGR of 12.7% over FY09‐FY15. There has been a marked turnaround over the last four years (losses till FY11) on the back of cost control measures, improvement in product mix and launch of innovative products. In FY15, the total revenue grew 16.4% to Rs838.1cr and the total PAT of subsidiaries stood at Rs58.6cr up 6.7x (YoY). Subsidiaries have improved profitability further and are accretive to EPS. The company is witnessing double digit growth in recent few quarters and is showing strong margin traction. To fill the geographic gap, the company first intends to saturate big markets in Phase I and later on will set‐up manufacturing facilities in Phase II. As per management, the company is 18 months away from Phase II. Earlier the company used to have one team for Middle East and another for the rest of world. To improve its operating structure, the company has created separate teams for different geographies which will identify 2‐3 new key markets for the company to foray.

Improvement in performance of subsidiaries since FY12

Stake

FY09 FY10 FY11 FY12 FY13 FY14 FY15

Rs. Cr Sales Net Profit Sales

Net Profit Sales

Net Profit Sales

Net Profit Sales

Net Profit Sales

Net Profit Sales

Net Profit

Britannia Dairy Pvt 100% 161.9 (3.5) 188.8 10.1 218.8 4.2 293.1 15.5 309.2 35.0 299.3 10.7 329.5 29.5

Daily Bread 100% 16.3 (24.8) 14.5 (4.6) 19.5 (1.2) 23.7 (1.5) 23.1 (2.7) 19.9 (3.3) 15.8 (3.5)

Strategic Food Int 100% 157.8 (26.9) 128.0 (18.5) 136.1 (13.1) 186.3 (4.3) 229.9 (4.9) 265.7 4.7 330.7 32.3

Al Sallan 65.4% 73 (6.9) 92.4 (8.3) 87.3 1.8 107.0 (1.6) 125.2 0.1 135.3 (3.3) 162.2 0.3

Total 409 (62.1) 423.7 (21.3) 461.7 (8.3) 610.0 8.1 687.3 27.5 720.3 8.8 838.1 58.6



11

Improvising manufacturing and sales effectiveness Britannia has defined its manufacturing strategy where it’s increasing its reach to the consumption markets through in‐house manufacturing especially for its premium products. Under this strategy, the company plans to set up Greenfield manufacturing plants as well as buy equity stakes in companies promoted by its contract manufacturers. The company hopes to enhance its own manufacturing

capacities by approximately 10% every year (or 7,000tns a year). The company has an annual capacity of 74,000tns a month, of which 46% is in‐house manufacturing and, the remaining 54% is outsourced. BRIT is targeting in‐house manufacturing for 60% of its products by FY17E. The company has 12 new lines coming up across the country, which will help it reduce the role of contract manufacturing and improve margins. The company wants to reduce the number of contract packers, though it does not want to stop outsourcing. Bread manufacturing is fully with contract manufacturers and the company plans to keep it that way.

Apart from the Tamil Nadu and Gujarat plants, Britannia will open three lines at its upcoming Bengaluru plant near Bidadi, which will also house its new R&D centre. The Bengaluru and Tamil Nadu plants are greenfield projects and a new line will come up in the three‐year‐old Odisha plant. It will also enable Britannia to further cut costs by further reducing the distance to markets and improve profitability. The company plans to invest Rs400cr in FY16E in 12 new lines across the country.

With a strategy to move closer to consumption markets and control the distribution cost, Britannia has planned to increase its in‐house manufacturing. The focus of the company continues to be on reducing complexity, improving stock replenishment at depots and distributors and reducing total cost to deliver.

Increase in branding and visibility to drive revenue growth Britannia is one of the biggest FMCG companies in India with products available across various categories. Still general population associates the ‘Ting Ting Tiding’ with Good Day and other biscuit varieties. With more than 10 brands available in the biscuit category itself and a strong foothold in the market, Britannia is looking for options to grow in other categories as well and in TOMA (top of mind awareness) awareness of its customers for other offerings as well. Competitors like ITC, Priyagold, Parle are aggressively building the market. Earlier, BRIT used to advertise 16 brands with negligible spends behind each other with minimal effects. Hence, to improve its brand visibility, off‐take and market share, BRIT has increased its focus in five power brands. As per management, all the brand extensions will take place under these brands.

Further, BRIT has increased its advertisement and promotional activities by not limiting in the television and print ads. Meaning, the company is partnering strong customer engagement platforms that have high brand recall in India like movies, cricket match, award functions, etc. Recently, the company was the title sponsor for a leading film awards function (Filmfare) in 2015 and, through its biscuit brands Good Day and 50:50, it has associated itself with the Indian Premier League in February and March this year. In addition, the company also ran a promotional offer on 50:50, giving away an iPhone 6 every day. These types of activities increase the brand recall, visibility, awareness and are far more effective in the consumers’ mind.


12

The advertisement cost for BRIT is in the range of 7.5%‐8.5% and is expected to remain at the same level going forward.

Despite high advertisement exp, EBITDA margin to improve 421bps to 15.3% over FY15‐FY18E

2,776

3,421

3,773

4,605

5,485

6,185

6,913

7,858

9,100

10,657

12,480

6.66.9

8.0

7.3

7.6

8.6

8.78.3

8.0

8.0

8.0

8.5

7

4.35.1

5.7

6.8

9.1

11.0

14.215.0 15.2

0

2

4

6

8

10

12

14

16

‐

2,000

4,000

6,000

8,000

10,000

12,000

14,000


Revenue (Rscr) Ad Spend (%)Rs cr %


Financial Analysis

Product renovation/premiumization to deliver revenue CAGR of 16.7% over FY15‐FY18E For the past couple of years, Britannia has been focusing on three key areas to drive operational excellence: (a) newness and innovations, (b) revenue management and (c) cost rationalization. In our view, renovation of existing products and introduction of premium or innovated products will drive consolidated revenue CAGR of 16.7% over FY15‐FY18E as against 12.7% over FY12‐FY15. In addition, the strong revenue growth will be supported by, a) Expansion of direct reach (urban + rural), higher throughput from existing outlets and maintaining fair level of balance between modern trade and general trade, b) Renewed focus in high margin product segments apart from Biscuits, like cakes, rusk, value added dairy, etc. c) Infuse operational efficiencies across its supply chain, and d) Increase in‐house production capabilities to lead faster roll‐out of renovation and innovation products


13

Revenue to grow at a CAGR of 16.7% over FY15‐FY18E

3,421

3,773

4,605

5,485

6,185

6,913

7,858

9,100

10,657

12,480

23.2%

10.3%

22.1%

19.1%

12.8%

11.8%

13.7%15.8%

17.1% 17.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

‐

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Revenue (Rscr) Growth (%)Rs cr %


Cost effectiveness + Premiumization + Adjacencies to boosts EBITDA margin BRIT used to report low single digit margin till FY12 (5.7%) led by low volume growth in the biscuit segment, low pricing power which could not insulate from the rising input costs, high wastage, supply chain in‐efficiencies and high other overheads. Since the joining of Mr. Varun Berry, the company has meticulously focused in a) cost rationalization, b) infuse supply chain efficiencies, c) strong distribution network and d) efficiency in commodity sourcing & waste minimization led a margin expansion of 533bps over FY12‐FY15 to 11% in FY15. And, BRIT reported its best ever operating margin of 14.3% in Q1FY16 driven by above mentioned factors in support with benign commodity costs.

However, we believe apart from above mentioned factors, the next leg of margin expansion will be driven by renovation and innovation of products and renewed focus in high margin business like dairy, cakes & rusk and macro snacking.

In addition, international business have seen a marked improvement in profitability since FY12 with margins now comparable to that of the standalone business will also drive the operating margins for the company going forward. Thus, premiumization coupled with improved traction in International businesses should support profitability; in our view.

One of the key concerns for investors was whether BRIT will be able to continue with its EBITDA margin expansion spree since FY13; and whether the company will insulate itself from the adverse commodity cycle. To everybody’s surprise, BRIT has been continuously expanding its margin over the past couple of years. Our conviction is based on the back of improved pricing power, change in portfolio mix with underlying premium products, focused investments in the innovation and continuous improvement in its subsidiary. Hence, we believe that BRIT has reached a position where its pricing power has strengthened and can withstand any adverse commodity cycle. As an example, Britannia NutriChoice biscuit has witnessed a 5.5% CAGR price increase and 50:50 has seen a 9% CAGR in the FY09‐15 period. Even in the case of Bourbon biscuits, in FY15 alone, the company has taken a price increase of 4%. We also believe that, given its strong portfolio and leadership position, the company has and will continue to take 3%‐4% steady price increases each year.


14

Further, despite players like ITC, Kraft (Oreo), Parle, Unibic, etc, where the competition has become more rational and none of the players will indulge in price war (mass and premium segment) to corner market share, in our view. Hence, BRIT will continue to dominate the leadership position in the premium segment.

We expect BRIT to report EBITDA margin of 14.2%/15%/15.2% in FY16E/FY17E/FY18E, respetively.

EBITDA margin to expand 421bps to 15.2% over FY15‐FY18E

235

238

163

235

311

421

627

864

1292

1599

1897

8.5

7

4.3

5.1

5.7

6.8

9.111.0

14.2 15.0 15.2

0

2

4

6

8

10

12

14

16

0

200

400

600

800

1000

1200

1400

1600

1800

2000


EBITDA EBITDA%Rscr

%


PAT to grow at a CAGR of 23% over FY15‐FY18E

177

152

103

134

200

259

395

689

858

1072

1283

6.4

4.4

2.7 2.93.6

4.2

5.7

8.89.4 10.1 10.3

‐1.0

1.0

3.0

5.0

7.0

9.0

11.0

0

200

400

600

800

1000

1200

1400


PAT PAT %Rs cr%


Benign inputs cost + cost rationalisation efforts led Gross margin and EBITDA margin expansion Break‐up of Heads FY12 FY13 1QFY14 2QFY14 3QFY14 4QFY14 FY14 1QFY15 2QFY15 3QFY15 4QFY15 FY15 Cost of raw‐material 64.1 62.2 59.0 59.9 60.7 61.6 60.3 61.2 60.3 60.0 57.6 59.7

Gross margin % 35.9 37.8 41.0 40.1 39.3 38.4 39.7 38.8 39.7 40.0 42.4 40.3

Conversion charges 6.5 6.8 6.3 6.9 6.9 6.1 6.6 6.2 6.5 6.4 5.7 6.2

A&P Expenses 7.6 8.6 9.5 8.8 8.7 8.1 8.7 7.7 7.3 8.2 9.8 8.3

Employee costs 3.8 3.7 4.5 3.8 3.7 3.3 3.8 3.7 3.3 3.5 3.7 3.6

Other expenses 17.9 18.7 11.8 11.5 11.1 11.6 11.5 11.6 11.3 11.1 10.9 11.2

EBITDA margin % 5.7 6.8 8.9 9.2 8.9 9.3 9.1 9.5 11.2 10.8 12.3 11.0

Source: Company, IIFL Research


15

Going Forward We witness a shift in the industry dynamics from plain biscuits to super premium value added biscuits. BRIT is playing very smartly by launching variants of super premium biscuits (limited competition) through its existing brand equity to leverage the opportunity present. Further, the company is also using its mass product to penetrate in the rural area which will act as a wheel to launch other products. Hence, we believe that the product mix improvement will be the key theme going forward in terms of margin expansion apart from cost rationalization.

We believe product mix improvement and price hike will contribute Gross margin expansion of 343bps over FY15‐FY18E to 44.2%. Moreover, we expect input prices to remain more or less stable going forward given low increase in minimum support price (MSP) for the past two years for wheat. Also, milk, sugar, palm oil are also expected to remain stable on the back of abundant supply in the market.

Peer Comparison & Valuations

Comparative analysis

Company Name

Mkt Cap Net Sales EBITDA % CAGR (FY15‐FY18E) % PE

(Rs Bn) FY15 FY15 FY16E FY17E FY18E Sales EBITDA PAT FY15 FY16E FY17E FY18E

Britannia* 357.2 77.8 11.0 13.3 14.1 14.3 16.7 27.4 23.0 52.3 42.0 33.6 28.1

Nestle 586.4 98.1 21.2 20.9 22.0 22.7 8.8 11.3 13.9 49.5 52.1 42.4 35.2

Dabur 500.7 78.1 17.1 18.1 18.4 18.5 14.5 17.6 18.6 46.9 38.5 32.5 27.6

ITC 2604.4 384.3 36.8 34.6 37.1 37.4 8.9 9.5 12.0 26.8 25.0 21.9 19.3

GSK Cons 260.2 43.1 22.5 17.8 18.3 17.5 12.8 3.8 18.0 44.6 37.1 31.4 27.2

HUL 1855.5 319.7 16.9 18.1 18.5 18.9 11.7 15.9 11.9 42.5 40.6 35.1 30.4

GCPL 432.2 82.8 16.6 17.7 18.0 18.3 15.0 19.0 22.2 47.6 37.6 31.0 25.9

Marico 263.7 57.3 15.5 16.5 16.8 17.1 13.6 17.5 20.5 46.0 36.7 30.8 26.2

Emami 279.4 22.2 24.4 26.9 27.4 28.0 23.7 29.5 23.0 57.5 49.2 39.2 31.3

Jubilant Foodworks 112.2 20.9 12.3 13.9 15.4 16.5 27.5 40.8 50.4 100.8 64.3 42.6 30.0

Asian Paints 824.1 140.1 16.1 18.2 18.6 18.4 15.9 21.0 23.5 59.1 44.2 36.5 31.3

Source: Bloomberg, India Infoline Research, *IIFL estimate, Price as on 28th August 2015

Company Name

EV/EBITDA P/B RoE %

FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

Britannia* 41.0 27.2 21.5 17.6 29.0 20.7 15.1 11.4 67.7 57.5 52.0 46.3

Nestle 27.2 29.3 23.7 20.1 21.7 19.6 17.5 15.6 45.5 37.9 43.2 48.7

Dabur 37.6 31.3 26.7 23.1 13.9 12.1 10.0 8.7 35.5 34.6 33.5 33.2

ITC 17.5 17.0 15.1 13.3 8.2 7.5 6.7 6.1 32.8 31.8 32.2 33.3

GSK Cons 24.5 28.5 23.9 22.0 12.5 10.5 8.9 7.6 29.7 30.5 30.6 30.5

HUL 33.3 28.7 25.0 21.4 47.0 40.4 34.9 32.4 115.4 106.4 107.1 114.9

GCPL 32.9 27.0 22.8 19.6 8.2 8.4 7.1 5.9 22.4 24.3 24.6 24.5

Marico 29.8 25.0 21.2 18.6 13.6 11.6 9.3 8.0 36.0 34.8 33.6 33.8

Emami 50.1 35.8 29.2 23.3 18.5 18.3 14.6 11.6 44.9 40.0 40.3 43.4

Jubilant Foodworks 43.3 30.1 21.0 15.4 15.0 13.6 10.5 8.0 18.6 23.3 27.7 30.6

Asian Paints 36.2 28.2 23.6 20.4 16.4 14.6 12.0 10.2 31.8 35.4 35.3 34.7 Source: Bloomberg, India Infoline Research *IIFL estimate, Price as on 28th August 2015


16

FY15‐FY18E EPS growth v/s P/E multiple FY18E

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

0.0 10.0 20.0 30.0 40.0 50.0 60.0

PE multiple FY18E

EPS growth FY15‐FY18E

Britannia

Nestle

Dabur

ITC

GSK ConsHUL

GCPLMarico

Emami Asian Paints

Jubilant Foodworks


FY15‐FY18E EBITDA growth v/s EV/EBITDA multiple FY18E

0.0

5.0

10.0

15.0

20.0

25.0

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0

EV/EBITDA mulitple FY18E

EBITDA growth FY15‐FY18E

Britannia

Nestle

Dabur

ITC

GSK Cons

GCPLMarico

HULEmami

JubilantFoodworks

Asian Paints

Source: Bloomberg, India Infoline Research FY15‐FY18E Sales growth v/s P/S multiple FY18E

0.0

20.0

40.0

60.0

80.0

100.0

120.0

0.0 5.0 10.0 15.0 20.0 25.0 30.0

P/S multiple FY18E

Sales Growth Over FY15‐FY18E

Britannia

Nestle

DaburITCHUL

GSK Cons

Emami

Asian Paints

Jubilant

Foodworks

Marico GCPL



17

Britannia’s profitability was continuously under pressure with lower EBITDA margin. Britannia operating margin were in the range of 5%‐7% from FY10‐FY13 though the sales growth were reasonable over 17.9% CAGR. However, since Q4FY13, BRIT has shown substantial margin expansion and has reported its best ever operating margin of 14.3% in Q1FY16 driven by company’s focused efforts to drive efficiencies in back‐end through cost management program, premiumization trend in market, improvement in the product mix towards high value‐added products and price increase. The company’s international business turned profitable in FY12 and reported double digit growth in recent quarters. The company is also vying 2‐3 new key geographies to foray. We expect new geographies to be the next growth driver. Following improvement in operating margin, return ratios and cash flow, the stock got rerated. Still, BRIT trades at a discount when compared with other consumer goods companies after adjusting for growth rate and better return ratios. We expect BRIT to post EPS CAGR of 23% over FY15‐FY18E as against, 12%/19.4%/11.6%/17.9%/11.9%/20.6%/22.5%/49.8%/23.6%/ in case of Nestle/Dabur/ITC/GSK Cons/HUL/Marico/Emami/Jubilant Foodworks/Asian Paints, respectively, and its stock trades at 28.1x FY18E P/E compared to 35.2x/27.6x/19.3x/27.2x/30.4x/26.2x/31.3x/30x/31.3x for these companies, respectively. Britannia is expected to post a healthy RoE of 46.3% in FY18E against 33.2%/33.3%/30.5%/24.5%/33.8%/43.4%/30.6%/34.7% in case of Dabur/ITC/GSK Cons./GCPL/Marico/Emami/Jubilant Foodworks/Asian Paints, respectively. However, at 28.1x FY18E P/E, BRIT trades at a discount to many of these players. BRIT’s recent premium product launches focusing on product differentiation, renovation and leveraging its strong brands and renewed focus in the high margin products like cakes, rusks, etc and cost rationalization are steps in the right direction; in our view. Moreover, the company is continuously resolving its distributor issues (like supply chain inefficiencies) and improving its channel distribution system, resulting into a high distributor satisfaction levels. Further, the company is also expanding its reach in urban and rural area (by targeting rural Hindi belt) and increased focus in international business. As GDP growth outlook improves over the next few quarters, we expect there to be a pick‐up in discretionary spends with packaged food as one of the key beneficiaries of this improvement. We expect urban consumer demand to pick up quicker than rural demand and as Britannia over‐indexes in the urban areas, particularly on its premium‐end cookies, we expect this to drive both top‐line growth as well as improvement in margins. Hence, we expect BRIT to report healthy revenue/EBITDA/PAT CAGR of 16.7%/30%/23%, respectively. EBITDA margin expansion of 421bps over FY15‐FY18E to 15.2%, consistent free cash flow generation and low debt balance sheet will continue to support its rich valuations. Given the strong growth visibility, strong cash flows, healthy return ratios and improving payouts, we recommend a BUY rating with a TP of Rs3,956 based on 37x PE and 23.7x EV/EBITDA FY18E.


18

One year forward P/E Band

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Apr‐09

Jun‐09

Sep‐09

Dec‐09

Feb‐10

May‐10

Aug‐10

Nov‐10

Jan‐11

Apr‐11

Jul‐11

Oct‐11

Dec‐11

Mar‐12

Jun‐12

Aug‐12

Nov‐12

Feb‐13

May‐13

Jul‐13

Oct‐13

Jan‐14

Apr‐14

Jun‐14

Sep‐14

Dec‐14

Feb‐15

May‐15

Aug‐15

(Rs cr)

30x

15x

20x

40x

25x

35x

Source: Company, India Infoline Research Key concerns

a) Adverse movement of commodity prices may play a party pooper: The company is highly dependent on raw‐materials like wheat, sugar, milk, etc. Any adverse movement of commodity prices can act as a party pooper for BRIT and can disrupt our assumptions.

b) Face competition from Parle in mass segment: The success in mass segment

is rooted through strong distribution network. BRIT with 3.5mn distribution

network is far behind in terms of 5.5mn strong distribution of Parle, which is well penetrated in rural and Tier II & Tier III cities due to its presence in the mass market. Any price war/new launch of mass products/addition of distributors by Parle can disrupt the BRIT’s well crafted layout of securing rural market share.

c) BRIT’s similar innovation by ITC can pose threat: We feel ITC has all the ingredients well in place to match the BRIT’s efficiency of catering super premium segment which is dependent on urban and modern trade. BRIT is utilizing its existing brand equity to launch super premium brands. ITC on the other hand had faired a strong success in the sub‐premium segment category and with strong distribution network the company has a confidence of meeting customer’s expectation this segment. However, we feel that by leveraging on its brand equity of its existing brands and first mover advantage in the super premium category, we feel that BRIT has all the right moves in place to win. However, ITC can pose a threat in long run.

d) Failure of super premium category: BRIT in its long history has tried and experimented with lots of products and ideas in its product range. Few of them have become mega brands but few of them were withdrawn and discontinued like Time pass, Nutro crackers, etc. Any failure in the super premium category could lead to pressure on profitability and will negate our assumptions.

e) Higher A&P spends to support new launches: BRIT has expanded its EBITDA margin since FY12 through several cost rationalization measures. With any aggressive advertising/marketing by competitor can force BRIT to counter it by increasing its advertisement expenses; which in turn may limit the margin expansion going forward. Though management has guided advertisement expense to remain in the range of 7.5%‐8% going forward.


19

Company Background Britannia Industries Limited (BIL) is a major player in the Indian Foods market with leadership position in Bakery category. It was humble beginning for Britannia Industries Ltd, which was set up in Kolkata in 1892, with an initial investment of Rs295. The company started its own distribution network in 1975, taking over from Parry’s, its erstwhile distributor. BIL listed on the stock exchanges in 1978. After being owned by Nabisco for most of the 1980s, BIL was acquired by Mr. Rajan Pillai towards the end of that decade. In 1993, the Nusli Wadia group and Danone became joint owners of the company. After a highly acrimonious ownership tussle in the interim, Danone sold its 25.5% holding to the Nusli Wadia group in 2009. BIL reaches ~3.5mn outlets across India, of which ~1mn outlets are served directly by the company. The company has power brands in the form of Good Day’, ‘Marie Gold’, ‘Tiger’, ‘50:50’ and ‘Nutrichoice. Britannia Offers both delightfully indulgent and healthy choices in biscuits, bread, cake, rusk and a range of dairy products that include cheese, curd and specially formulated functional beverages with a dairy base. BRIT has 19 subsidiaries in total (direct & indirect) of which 13 are Indian subsidiaries and 6 are overseas subsidiaries.


20

Financials

Income statement Y/E Mar (Rs cr) FY15 FY16E FY17E FY18E

Revenue incl OI 7,858 9,100 10,657 12,480

Operating profit 864 1,292 1,599 1,897

Depreciation (144) (150) (165) (172)

Interest expense (4) (3) (3) (3)

Other income 88 105 123 137

Extraordinary income 146 0 0 0

Profit before tax 950 1,243 1,553 1,859

Taxes (261) (385) (481) (576)

Minorities & Others 0 0 0 0

Net profit 689 858 1,072 1,283

Balance sheet Y/E Mar (Rs cr) FY15 FY16E FY17E FY18E

Equity capital 24 24 24 24

Reserves 1,218 1,715 2,355 3,134

Net worth 1,242 1,739 2,379 3,158

Share application money 0 0 0 0

Capital subsidy 4 4 4 4

Minority Intt 2 2 2 2

Debt 145 152 147 142

Def.tax liability (23) (23) (23) (23)

Total liabilities 1,369 1,874 2,508 3,282

Net Fixed assets 782 1,043 1,085 1,015

Investments 518 518 518 518

Goodwill 111 111 111 111

Net working capital (268) (305) (460) (538)

Inventories 404 434 503 588

Sundry debtors 136 152 178 208

Other current assets 593 688 805 943

Sundry creditors (703) (759) (881) (1,029)

Other curr lib & Prov (698) (819) (1,066) (1,248)

Cash 226 507 1,256 2,177

Total assets 1,369 1,874 2,508 3,282

Cash flow statement Y/E Mar (Rs cr) FY15 FY16E FY17E FY18E

Profit before tax 950 1,243 1,553 1,859

Depreciation 144 150 165 172

Tax paid (261) (385) (481) (576)

Working capital ∆ (35) 37 155 78

Operating cash flow 798 1,045 1,392 1,533

Capital expenditure (79) (412) (206) (103)

Free cash flow 719 633 1,186 1,430

Equity raised (10) ‐ ‐ ‐

Investments (320) ‐ ‐ ‐

Goodwill (4) ‐ ‐ ‐

Debt fin/disposal (5) 7 (5) (5)

Dividends paid (231) (360) (432) (504)

Other items (33) ‐ ‐ ‐

Net ∆ in cash 117 280 749 921 Source: Company, India Infoline Research

Key ratios Y/E Mar FY15 FY16E FY17E FY18E

Growth matrix (%)

Revenue growth 13.7 15.8 17.1 17.1

Op profit growth 37.7 49.5 23.8 18.7

EBIT growth 39.8 54.4 24.9 19.7

Net profit growth 74.2 24.5 25.0 19.7

Profitability ratios (%)

OPM 11.0 14.2 15.0 15.2

EBIT margin 10.3 13.7 14.6 14.9

Net profit margin 8.8 9.4 10.1 10.3

RoCE 69.4 76.9 71.0 64.3

RoE 67.7 57.5 52.0 46.3

RoA 29.6 28.6 27.9 26.2

Per share ratios

EPS 57.4 71.5 89.3 106.9

Dividend per share 16.0 25.0 30.0 35.0

Cash EPS 69.5 84.0 103.1 121.3

Book value per share 103.5 145.0 198.3 263.3

Valuation ratios (x)

P/E 50.9 40.9 32.7 27.3

P/CEPS 42.1 34.8 28.3 24.1

P/B 28.2 20.2 14.7 11.1

EV/EBIDTA 40.5 26.9 21.2 17.4

Payout (%)

Dividend payout 33.5 42.0 40.3 39.3

Tax payout 27.5 31.0 31.0 31.0

Liquidity ratios

Debtor days 6 6 6 6

Inventory days 21 20 20 20

Creditor days 37 35 35 35

Leverage ratios

Interest coverage 209.2 365.3 453.1 561.0

Net debt / equity (0.1) (0.2) (0.5) (0.6)

Net debt / op. profit (0.1) (0.3) (0.7) (1.1)

Du‐Pont Analysis Y/E Mar (Rs cr) FY15 FY16E FY17E FY18E

Tax burden (x) 0.73 0.69 0.69 0.69

Interest burden (x) 1.18 1.00 1.00 1.00

EBIT margin (x) 0.10 0.14 0.15 0.15

Asset turnover (x) 3.37 3.03 2.77 2.55

Financial leverage (x) 2.29 2.01 1.87 1.77

RoE (%) 67.7 57.5 52.0 46.3 Source: Company, India Infoline Research

‘Best Broker of the Year’ – by Zee Business for contribution to brokingNirmal Jain, Chairman, IIFL, received the award for The Best Broker of the Year (for contribution to broking in India) at India's Best Market Analyst Awards 2014 organised by the Zee Business in Mumbai. The award was presented by the guest of Honour Amit Shah, president of the Bharatiya Janata Party and Piyush Goel, Minister of state with independent charge for power, coal new and renewable energy.

'Best Equity Broker of the Year' – Bloomberg UTV, 2011IIFL was awarded the 'Best Equity Broker of the Year' at the recently held Bloomberg UTV Financial Leadership Award, 2011. The award presented by the Hon'ble Finance Minister of India, Shri Pranab Mukherjee. The Bloomberg UTV Financial Leadership Awards acknowledge the extraordinary contribution of India's financial leaders and visionaries from January 2010 to January 2011.

'Best Broker in India' – Finance Asia, 2011IIFL has been awarded the 'Best Broker in India' by Finance Asia. The award is the result of Finance Asia's annual quest for the best financial services firms across Asia, which culminated in the Country Awards 2011

Other awards

2012BEST BROKING HOUSE WITH

GLOBAL PRESENCE

2009, 2012 & 2013BEST MARKET

ANALYSTBEST BROKERAGE,

INDIAMOST IMPROVED,

INDIABEST BROKER,

INDIA

2009FASTEST GROWING

LARGE BROKING HOUSE

Recommendation parameters for fundamental reports:

Buy – Absolute return of over +15%

Accumulate – Absolute return between 0% to +15%

Reduce – Absolute return between 0% to ‐10%

Sell – Absolute return below ‐10%

Call Failure ‐ In case of a Buy report, if the stock falls 20% below the recommended price on a closing basis, unless otherwise specified by the analyst; or, in case of a Sell report, if the stock rises 20% above the recommended price on a closing basis, unless otherwise specified by the analyst

India Infoline Group (hereinafter referred as IIFL) is engaged in diversified financial services business including equity broking, DP services, merchant banking, portfolio management services, distribution of Mutual Fund, insurance products and other investment products and also loans and finance business. India Infoline Ltd (“hereinafter referred as IIL”) is a part of the IIFL and is a member of the National Stock Exchange of India Limited (“NSE”) and the BSE Limited (“BSE”). IIL is also a Depository Participant registered with NSDL & CDSL, a SEBI registered merchant banker and a SEBI registered portfolio manager. IIL is a large broking house catering to retail, HNI and institutional clients. It operates through its branches and authorised persons and sub‐brokers spread across the country and the clients are provided online trading through internet and offline trading through branches and Customer Care. Terms & Conditions and Other Disclosures:‐ a) This research report (“Report”) is for the personal information of the authorised recipient(s) and is not for public distribution and should not be

reproduced or redistributed to any other person or in any form without IIL’s prior permission. The information provided in the Report is from publicly available data, which we believe, are reliable. While reasonable endeavors have been made to present reliable data in the Report so far as it relates to current and historical information, but IIL does not guarantee the accuracy or completeness of the data in the Report. Accordingly, IIL or any of its connected persons including its directors or subsidiaries or associates or employees 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, views and opinions expressed in this publication.

b) Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is

made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment of its original date of publication by IIFL and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments.

c) The Report also includes analysis and views of our research team. The Report is purely for information purposes and does not construe to be

investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed in the Report are our current opinions as of the date of the Report and may be subject to change from time to time without notice. IIL or any persons connected with it do not accept any liability arising from the use of this document.

d) Investors should not solely rely on the information contained in this Report and must make investment decisions based on their own investment

objectives, judgment, risk profile and financial position. The recipients of this Report may take professional advice before acting on this information.

e) IIL has other business segments / divisions with independent research teams separated by 'chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets.

f) This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state,

country or other jurisdiction, where such distribution, publication, availability or use would be contrary to local law, regulation or which would subject IIL and its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this Report may come are required to inform themselves of and to observe such restrictions.

g) As IIL along with its associates, are engaged in various financial services business and so might have financial, business or other interests in other

entities including the subject company/ies mentioned in this Report. However, IIL encourages independence in preparation of research report and strives to minimize conflict in preparation of research report. IIL and its associates did not receive any compensation or other benefits from the subject company/ies mentioned in the Report or from a third party in connection with preparation of the Report. Accordingly, IIL and its associates do not have any material conflict of interest at the time of publication of this Report.

h) As IIL and its associates are engaged in various financial services business, it might have:‐

(a) received any compensation (except in connection with the preparation of this Report) from the subject company in the past twelve months; (b) managed or co‐managed public offering of securities for the subject company in the past twelve months; (c) received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (d) received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (e) engaged in market making activity for the subject company.

i) IIL and its associates collectively do not own (in their proprietary position) 1% or more of the equity securities of the subject company/ies mentioned in the report as of the last day of the month preceding the publication of the research report.

j) The Research Analyst/s engaged in preparation of this Report or his/her relative

(a) does not have any financial interests in the subject company/ies mentioned in this report; (b) does not own 1% or more of the equity securities of the subject company mentioned in the report as of the last day of the month preceding the publication of the research report; (c) does not have any other material conflict of interest at the time of publication of the research report.

k) The Research Analyst/s engaged in preparation of this Report:‐ (a) has not received any compensation from the subject company in the past twelve months; (b) has not managed or co‐managed public offering of securities for the subject company in the past twelve months; (c) has not received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (d) has not received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (e) has not received any compensation or other benefits from the subject company or third party in connection with the research report; (f) has not served as an officer, director or employee of the subject company; (g) is not engaged in market making activity for the subject company.

We submit that no material disciplinary action has been taken on IIL by any regulatory authority impacting Equity Research Analysis. A graph of daily closing prices of securities is available at http://www.nseindia.com/ChartApp/install/charts/mainpage.jsp, www.bseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock‐quotes. (Choose a company from the list on the browser and select the “three years” period in the price chart).

Published in 2015. © India Infoline Ltd 2015 India Infoline Limited (Formerly “India Infoline Distribution Company Limited”), CIN No.: U99999MH1996PLC132983, Corporate Office – IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 Tel: (91‐22) 4249 9000 .Fax: (91‐22) 40609049, Regd. Office – IIFL House, Sun Infotech Park, Road No. 16V, Plot No. B‐23, MIDC, Thane Industrial Area, Wagle Estate, Thane – 400604 Tel: (91‐22) 25806650. Fax: (91‐22) 25806654 E‐mail: [email protected] Website: www.indiainfoline.com, Refer www.indiainfoline.com for detail of Associates. National Stock Exchange of India Ltd. SEBI Regn. No. : INB231097537/ INF231097537/ INE231097537, Bombay Stock Exchange Ltd. SEBI Regn. No.:INB011097533/ INF011097533/ BSE‐Currency, MCX Stock Exchange Ltd. SEBI Regn. No.: INB261097530/ INF261097530/ INE261097537, United Stock Exchange Ltd. SEBI Regn. No.: INE271097532, PMS SEBI Regn. No. INP000002213, IA SEBI Regn. No. INA000000623, SEBI RA Regn.:‐ INH000000248.

For Research related queries, write to: Amar Ambani, Head of Research at [email protected] For Sales and Account related information, write to customer care: [email protected] or call on 91‐22 4007 1000

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