INSTITUTIONAL EQUITY RESEARCH Britannia Industries (BRIT ...backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Britannia_Q... · Biscuits Britannia launched “Whole Wheat

INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.

Britannia Industries (BRIT IN)

Priced to perfection

INDIA | FMCG | Quarterly Update

12 February 2019

Top takeaways from Q3FY19 Britannia 3QFY19 results were below our estimates due to single-digit volume growth in

its domestic business and start-up costs relating to new manufacturing facilities (Ranjangaon). Management said demand slowdown after Diwali was the key reason for lower volume growth. However, we believe the volume growth blip is a short-term aberration and it shall pick up from 4QFY19 onwards as the troika of a foray into new categories (wafer biscuits, Crossiants), increasing salience of premium products (recent launch of Rs 10 LUP in the cake segment will also aid demand), and strategy of increasing distribution network in traditionally weaker areas comes into play. Three-year volume CAGR of 7.1% (adjusting for demonetisation and GST implementation) is quite commendable.

Standalone gross margins expanded c.300bps yoy to 40.7%, as: (1) it is largely covered for any RM inflation till mid 4QFY19, (2) high salience of premium products, (3) increasing share of in-house manufacturing, and (4) for its bread business, it has shifted to contract manufacturing from direct procurement. Management stated such gross margin expansion is unsustainable and shall return to 40% levels since high-margin manufacturing activity, which was carried out in India (due to plant shutdown in the Middle east), will not be available in coming quarters. Britannia expects RM basket inflation of 4-5% (particularly in wheat flour and milk) in FY20 and plans to take a price hike of 3-4% to mitigate this.

International business grew in double-digits, despite plant shutdown in the Middle East, as Britannia forayed into newer countries within Africa and is well on track to start the Nepal plant in 4QFY19. It has zeroed in on 2-3 countries for setting up plants in FY20 and will finalize one country in the next two months (in line with its strategy of setting up a new plant per year in a new geography)

Adjacent categories continue to flourish: (1) Its recent foray into wafer cream has seen solid response and it plans to take this pan- India after foraying into south and west India, (2) has bridged portfolio gaps (priced at Rs 10/15) in the cake segment via the launch of new products, (3) cheese (on promotions) and UHT milk (Winkin brand on superior product proposition) continues to see solid growth within dairy portfolio, and (4) it plans to launch Crossiant in 4QFY19 as streamlining of its manufacturing facility has taken longer than expected

We like the narrative, but not the valuation: We remain overweight on the foods space over HPC, based on the following factors: (1) formalisation will be more visible in foods space, given higher share of the unorganized sector, (2) setting up more large/integrated manufacturing facilities will in turn help to derive benefits of economies of scale and reduce wastage, (3) distribution infrastructure will improve (availability of refrigerators / other ancillary infra), and (4) focus on LUP will drive penetration. We like the Britannia management’s narrative of driving topline and bottomline growth by strengthening power brands via innovation/re-launches and premiumization, enhancing direct distribution reach, increasing the share of in-housing manufacturing, and focussing on a cost-efficiencies programme (planning savings of Rs 2.25bn in FY19, and foraying into newer categories (croissants/wafer biscuits), but valuations remain very expensive (47x FY21 EPS), particularly in the context of 17% earnings CAGR over FY18-21.

We maintain NEUTRAL with a target of Rs 2,675 (40x FY21 EPS) vs. Rs 2,450 (40x Dec-20 EPS) earlier as elevated valuation do not leave room for even minor disappointments. Key risk: higher-than-expected RM inflation and increase in competitive intensity.

Neutral (Maintain) CMP RS 3,107 TARGET RS 2,675 (-14%) COMPANY DATA

O/S SHARES (MN) : 240

MARKET CAP (RSBN) : 761

MARKET CAP (USDBN) : 11

52 - WK HI/LO (RS) : 3472 / 2200

LIQUIDITY 3M (USDMN) : 1.9

PAR VALUE (RS) : 2

SHARE HOLDING PATTERN, %

Dec 18 Sep 18 Jun 18

PROMOTERS : 50.7 50.7 50.7

FII / NRI : 16.7 16.7 17.5

FI / MF : 12.5 12.6 12.0

NON PRO : 4.0 3.8 3.7

PUBLIC & OTHERS : 16.2 16.3 16.1

KEY FINANCIALS

Rs mn FY19E FY20E FY21E

Net Sales 1,10,200 1,24,432 1,41,556 EBIDTA 17,745 21,089 25,570 Net Profit 11,719 13,188 16,023 EPS, Rs 48.8 54.9 66.7 PER, x 63.7 56.6 46.6 EV/EBIDTA, x 41.4 34.7 28.4 P/BV, x 18.7 16.0 13.5 ROE, % 29.3 28.3 28.9 Debt/Equity (%) 4.5 3.8 3.2 Vishal Gutka Preeyam Tolia

(Rs mn) Q3FY19 Q3FY18 yoy Q2FY19 qoq vs. PC% Comments

Net Sales 28,274 25,583 10.5 28,548 -1.0 11.2

EBITDA 4,518 3,984 13.4 4,544 -0.6 18.7

EBITDA margin (%) 16.0 15.6 41bps 15.9 6bps 105bps

Adj. PAT 3,007 2,636 14.1 3,030 (0.8) 18.2

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

BRITANNIA INDUSTRIES QUARTERLY UPDATE

Financial snapshot

Consolidated (Rs m) 3QFY18 3QFY19 Comments

Volume 13.0 7.0 Volume growth impacted on account of slowed down post Diwali

Net sales from operations 25,583 28,274 Better product mix and price growth led 11% revenue growth

Other operating income 92 150

Operating Costs (21,691) (23,907)

EBITDA 3,984 4,518

EBITDA Margin (%) 15.6 16.0

Depreciation (329) (424) Capitalisation of assets relating to new units @ Guwahati, Mundra & Ranjangaon

Interest (26) (30)

Other Income 359 600

PBT 3,989 4,664

Provision for Tax (1,354) (1,658)

-Tax Rate (%) 33.9 35.5 Revenue shift to India business due to maintenance work in Middle East facility which does not

attract tax payment. Net profit before minority 2,635 3,007

Minority Interest (1) 6

Share of profit from associate 2 (6)

Adj PAT 2,636 3,007

Net Profit Margin 10.3 10.6

EO Items - -

Reported PAT 2,636 3,007

EPS 22.0 25.1

Gross Profit 9,838 11,586

Gross Margins 38.5 41.0

Cost Details 3QFY18 3QFY19

Raw Material Consumption 15,745 16,688 Raw material inflation 4%

As a % of sales 61.5 59.0

Employees cost 936 1,170 New plant (impact 9%) increments (impact 13%) and others (impact 3%)


Other expenditure 5,010 6,049 Contract packaging cost in bread (7%) which was shifted from COGS


Source: Company, PhillipCapital India



Volume growth slowed down post Diwali season

Better product mix led to gross-margin expansion

Source: PhillipCapital India Research

New launches and renovation in Q3FY19

7.0

1.5 2.0

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9

(14)

10

(12)

(20)

(15)

(10)

(5)

-

5

10

15

Flour Sugar RPO Milk

3Q - commodity inflation (%)



Two-year forward P/E band EV/EBITDA band

Source: PhillipCapital India Research Estimates

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Con-call takeaways Volume growth (up 7% yoy) slowed down in Q3 post Diwali season

Revenue growth (up 11%) break up – 7% volume, 2% price growth and 2% mix growth

Hindi belt continued to grow faster than the company average, while rural continues to see double-digit growth

MT and rural trade continued to grow strong, however wholesale and C&C saw continued pressure in Q3

Innovations over 24 months continued to see strong traction and contributed 3-3.5% of sales

Biscuits

Britannia launched “Whole Wheat Vita Marie Gold” and “Good Day Cashew Almond” in Q3, It also re-launched Britannia “Tiger Kreemz” and “50-50” variants with newer packaging.

Recently launched Treat Crème wafers in South and MT outlets. On track to be launched in west India and later PAN India. Management highlighted wafers biscuits category size stands at Rs 3-4bn in India

Britannia is set to launch its long awaited Britannia “Treat Croissant” in Q4 priced at Rs 15 and will focus on building the category as currently it is at a nascent stage

Cakes

Forayed into new cake formats in Q3 to bridge the current cake portfolio by launching Britannia “Layer Cake” (Rs 10), “Chocolate Brownie” (Rs 15) and “Swiss Roll” (Rs 10) and soon will be available pan India by the end of Q4FY19.

Britannia expects Rs 10 cakes to drive volume growth and expects cakes to grow 300-400bps higher than the company average in the future.

Others

Commodity inflation of 4% yoy in Q3 was primarily led by inflation in flour, up 9% yoy, and RPO up 10% yoy (because of increase in import duty to 48% from 30%). It expects 4-5% raw material inflation in FY20, but plans to take price increases in the range of 3-4% on a blended basis in FY20.

Its overall cost savings target in FY19 is Rs 2.25-2.30bn, led by cost efficiency in the factory (labour, power & fuel, material usage, etc.)

Increase in tax incidence in Q3 was on account of revenue shift to India business due to maintenance work in Middle East facility which does not attract tax payment.



Financials

Income Statement Y/E Mar, Rs mn FY18 FY19E FY20E FY21E

Net sales 99,056 1,10,200 1,24,432 1,41,556 Growth, % 7 11 13 14 Other operating income 845 760 851 954 Total income 99,901 1,10,960 1,25,283 1,42,509 Raw material expenses -61,832 -65,851 -73,753 -82,972 Employee expenses -4,016 -4,618 -5,173 -5,793 Other Operating expenses -19,036 -22,746 -25,268 -28,174 EBITDA (Core) 15,017 17,745 21,089 25,570 Growth, % 17.5 18.2 18.9 21.2 Margin, % 15.2 16.1 16.9 18.1 Depreciation -1,421 -1,611 -2,175 -2,511 EBIT 13,596 16,134 18,914 23,059 Growth, % 17.3 18.7 17.2 21.9 Margin, % 13.7 14.6 15.2 16.3 Interest paid -76 -239 -677 -683 Other Income 1,664 1,997 1,897 2,086 Pre-tax profit 15,182 17,892 20,134 24,463 Tax provided -5,142 -6,173 -6,946 -8,440 Profit after tax 10,040 11,719 13,188 16,023 Others (Minorities, Associates) 3 0 0 0 Net Profit 10,042 11,719 13,188 16,023 Growth, % 13.5 16.7 12.5 21.5 Net Profit (adjusted) 10,042 11,719 13,188 16,023 Unadj. shares (m) 240 240 240 240 Wtd avg shares (m) 240 240 240 240

Balance Sheet Y/E Mar, Rs mn FY18E FY19E FY20E FY21E

Cash & bank 1,864 4,450 8,358 14,724 Marketable securities at cost 8,568 8,568 8,568 8,568 Debtors 3,046 3,389 3,826 4,353 Inventory 6,528 7,262 8,200 9,329 Loans & advances 8,443 8,443 8,443 8,443 Other current assets 3,063 3,063 3,063 3,063 Total current assets 31,513 35,176 40,459 48,480 Investments 2,225 2,225 2,225 2,225 Gross fixed assets 16,828 21,828 26,828 31,828 Less: Depreciation -3,372 -4,982 -7,157 -9,668 Add: Capital WIP 2,028 2,028 2,028 2,028 Net fixed assets 15,484 18,874 21,698 24,188 Non-current assets 2,432 2,432 2,432 2,432 Total assets 51,879 58,932 67,040 77,550

Current liabilities 16,480 17,598 19,026 20,745 Provisions 89 89 89 89 Total current liabilities 16,568 17,687 19,115 20,833 Non-current liabilities 1,117 1,117 1,117 1,117 Total liabilities 17,686 18,804 20,232 21,951 Paid-up capital 240 240 240 240 Reserves & surplus 33,822 39,756 46,436 55,228 Shareholders’ equity 34,194 40,128 46,808 55,600 Total equity & liabilities 51,879 58,932 67,040 77,550

Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY18 FY19E FY20E FY21E

Pre-tax profit 15,182 17,892 20,134 24,463 Depreciation 1,421 1,611 2,175 2,511 Chg in working capital 2,424 41 53 63 Total tax paid -5,137 -6,173 -6,946 -8,440 Other operating activities -1,402 0 0 0 Cash flow from operating activities 12,488 13,371 15,416 18,597 Capital expenditure -5,004 -5,000 -5,000 -5,000 Chg in investments 895 0 0 0 Chg in marketable securities -6,820 0 0 0 Other investing activities 1,368 0 0 0 Cash flow from investing activities -9,563 -5,000 -5,000 -5,000 Free cash flow 2,925 8,371 10,416 13,597 Equity raised/(repaid) 1,239 7,200 0 0 Debt raised/(repaid) 532 0 0 0 Dividend (incl. tax) -3,179 -5,785 -6,508 -7,231 Other financing activities -1,017 131 0 0 Cash flow from financing activities -2,318 1,546 -6,508 -7,231 Net chg in cash 608 9,917 3,908 6,366

Valuation Ratios

FY18E FY19E FY20E FY21E

Per Share data EPS (INR) 41.8 48.8 54.9 66.7

Growth, % 13.5 16.7 12.5 21.5 Book NAV/share (INR) 141.7 166.4 194.2 230.8 FDEPS (INR) 41.8 48.8 54.9 66.7 CEPS (INR) 47.7 55.5 63.9 77.1 CFPS (INR) 50.4 47.3 56.3 68.7 DPS (INR) 11.0 20.0 22.5 25.0 Return ratios

Return on assets (%) 21.8 21.6 22.0 23.1 Return on equity (%) 29.5 29.3 28.3 28.9 Return on capital employed (%) 32.1 31.2 31.0 31.9 Turnover ratios

Asset turnover (x) 4.9 4.9 4.9 5.0 Sales/Total assets (x) 2.1 2.0 2.0 2.0 Sales/Net FA (x) 7.2 6.4 6.1 6.2 Receivable days 11.2 11.2 11.2 11.2 Inventory days 24.1 24.1 24.1 24.1 Payable days 42.7 43.3 43.7 44.3 Working capital days 17.0 15.1 13.2 11.5 Liquidity ratios Current ratio (x) 1.9 2.0 2.1 2.3 Quick ratio (x) 1.5 1.6 1.7 1.9 Interest cover (x) 179.1 67.5 28.0 33.8 Total debt/Equity (%) 5.2 4.5 3.8 3.2 Net debt/Equity (%) (0.2) (6.7) (14.1) (23.3) Valuation PER (x) 74.4 63.7 56.6 46.6 PEG (x) - y-o-y growth 5.5 3.8 4.5 2.2 Price/Book (x) 21.9 18.7 16.0 13.5 EV/Net sales (x) 7.5 6.7 5.9 5.1 EV/EBITDA (x) 49.1 41.4 34.7 28.4 EV/EBIT (x) 54.3 45.6 38.7 31.4



Stock Price, Price Target and Rating History

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year.

Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%

SELL <= -15% Target price is less than or equal to -15%.

Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

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This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

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B (TP 3450) B (TP 3050)

N (TP 3280) N (TP 3350) N (TP 3440) N (TP 3520)

N (TP 4080)

N (TP 4400) N (TP 4450)

N (TP 5540| N (TP 4790)

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A-17 J-17 J-17 S-17 O-17 D-17 J-18 F-18 A-18 M-18

J-18 A-18 O-18 N-18 J-19



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Sr. no. Particulars Yes/No

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