Initiating Coverage (Short Report)

BRITANNIA INDUSTRIES LTD.

December 17, 2012 HOLD MEDIUM RISK PRICE Rs.497 TARGET Rs.540
Britannia Industries Ltd (BIL) is one of the largest food companies in India with presence in bakery and dairy products. It also forayed into the breakfast cereals category in FY11.

FMCG
SHARE HOLDING (%)
Promoters FII FI/MF Body Corporate Public & Others 50.92 15.88 13.95 1.72 17.53

BIL One of the Key Players in the Branded Biscuits Category

BIL is one of the key players with ~1/3rd market share in Indias $2.2 bn branded biscuits category having 7 power brands in its kitty (Good Day, Marie, Tiger, Treat, 50-50, Milk Bikis & Nutri Choice). According to the management, BILs household penetration at the moment is ~50% which is more than half of the biscuit categorys overall household penetration in India (90%). Biscuits category contributed ~84% to BILs standalone revenue in FY12. BILs standalone biscuits sales volume and revenue has grown at a CAGR of 6.6% & 14.9% resp. during FY07-FY12. Considering branded food market is growing faster than overall food & nonfood market and biscuits being the largest category in the ~$21 bn branded foods market, we expect BILs standalone biscuits sales volume and revenue to grow at a CAGR of 3.5% & 11.5% resp. during FY12-FY14E.

Non-biscuit Bakery and Dairy Business Future Growth Vector for BIL
Non-biscuit bakery products (Bread, Rusk & cake) provide huge opportunity for the company as non-biscuit bakery products market is currently large and unorganized in India. In FY12, Indias bakery market grew at ~15-18% which management expects to grow at ~12-15% in FY13. BIL claims to have 50% market share in Indias ~Rs. 13 bn bread market. Branded dairy products also provide good growth opportunity as this category is growing fast and provides scope for differentiation. In India, dairy market size is ~Rs. 2346 bn, growing at 5% and majorly dominated by increasing consumption and sale of milk. The market that converts milk to value-added products like dahi, yoghurt, cheese & dairy based beverages is also growing rapidly, albeit from a small base of ~Rs. 110 bn. BILs dairy business has grown at a CAGR of ~25% during FY10-FY12 and contributed ~5.3% to its total sales in FY12. BILs standalone non-biscuit revenue has grown at a CAGR of 30.1% during FY07-FY12 which we expect it to grow at a CAGR of 20.3% during FY12-FY14E. Revenue contribution from non-biscuit category to BILs standalone revenue has more than doubled from 7.4% in FY06 to 15.3% in FY12 which we expect to improve further to 17.4% in FY14E as the company has integrated its domestic bakery and dairy distribution & sales teams in FY12 which will drive BILs go to market efficiencies and provide a higher width & depth of coverage and availability of BILs dairy & bakery products.

STOCK DATA
Reuters Code Bloomberg Code
BSE Code NSE Symbol Market Capitalization* Shares Outstanding* 52 Weeks (H/L) Avg. Daily Volume (6m) Price Performance (%) 1M 4 3M 6M (8) BRIT.BO BRIT IN 500825 BRITANNIA Rs. 59.4 bn US$ 1.09 bn 119.5 mn Rs.600 / 400 77,143 Shares

Focus on Brands and Continuous Product Innovation to drive Future Growth for BIL
BIL has been successfully introducing several new and renewed offerings across its entire portfolio. In FY12, new products generated 10% of revenue in Bakery and 14% in Dairy for BIL. In addition to its focus on national brands, BIL is concentrating on healthy/nutritious offerings and equally important regional portfolio of brands (Britannia Top & Nutrichoice Thin Arrowroot biscuits in West Bengal and Tiger Brita biscuits in Kerala). BIL has also collaborated with reputed academic institutions and other companies to complement its efforts and build strong platforms for sustained & significant product categories & businesses. We believe all this investments by BIL in the brands and new products development will make BILs brands more relevant & distinctive and thereby lead to BILs profitable growth with steady premiumisation of portfolio going ahead.

BILs Distributed Manufacturing Strategy Will Reduce Distance to Market

BIL plans to move even closer to its consumption markets through in-house manufacturing especially for its premium and significant IPR products. Under this, it plans to set up Greenfield manufacturing plants as well as buy equity stakes in companies promoted by its contract manufacturers. In FY12, BIL has commissioned 2 new Greenfield units in Hajipur, Bihar and Khurda, Orissa. It has also aligned its manufacturing and depot footprints to reduce distance to market which is in line with its new distributed manufacturing strategy. The management aims to push up the proportion of in-housed manufacturing from the current 45% to 65% in the next few years and also expects to commission one more new facility in Gujarat for its bakery products this year. We believe this new strategy will further improve BILs sales, margins and profitability going ahead.

200 Days EMA: Rs.493 *On fully diluted equity shares Part of Bonanza

BILs Key Subsidiaries Started Cash Generation from FY12

BILs key subsidiaries have started generating cash profits from FY12 and will not require any funding from its parent going ahead. BILs subsidiaries revenue has grown at a CAGR of 50.2% during FY07-FY12. In FY12 and H1FY13, BILs subsidiaries reported EPS of Rs. 1.1 & Rs. 1.4 resp. In the UAE market, BIL through its subsidiary SFIC is at No. 2 position and have increased its market share in the GCC region led by the UAE and Oman. We expect its subsidiaries revenue and profit to grow at a CAGR of 15.0% & 59.3% resp. during FY12-FY14E.

OUTLOOK AND VALUATION

Considering strong brand portfolio, ~1/3rd market share in the branded biscuits category, new distributed manufacturing strategy, sales mix improvement, cost cutting initiatives, negative working capital and cash generation from its subsidiaries, we expect BILs Revenues to grow by 12.1% & 14.0% and APAT to grow by 10.2% & 19.3% in FY13E and FY14E respectively. We also believe demand for branded packaged food to increase with a likely increase in discretionary spending going ahead. At the CMP of Rs.497, the stock trades at a valuation of 22.6x its FY14E EPS of Rs. 22. We initiate coverage with Hold rating and target price of Rs. 540 (24.5x its FY14E EPS and its 5 Years Avg 1-Year Forward PE is 26.2).
ANALYST Bhaveshkumar Jain | +91 22 4093 5098 bhaveshkumar.jain@sushilfinance.com SALES: Devang Shah | +91 22 4093 6060/61 devang.shah@sushilfinance.com

Y/E Mar.
FY11 FY12 FY13E FY14E

Revenue (Rs mn)

46093.8 54853.7 61489.9 70081.4

KEY FINANCIALS (Consolidated) APAT AEPS AEPS P/E (Rs mn) (Rs) (% Ch.) (x)
1343.5 1995.5 2200.0 2624.3 11.2 16.7 18.4 22.0 0.3 48.5 10.2 19.3 44.2 29.8 27.0 22.6

ROCE (%)
24.5 31.2 31.7 33.3

ROE (%)
44.1 54.3 46.1 41.3

P/BV (x)
18.2 14.5 10.9 8.2

Please refer to important disclosures at the end of the report

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Britannia Industries Ltd.

PROFIT & LOSS (Consolidated)

Y/E Mar. FY11 FY12 54854 35328 2112 4196 10110 51745 3109 618 416 591 2666 669 1997 (2) 1995 1995 FY13E 61490 39094 2339 4866 11613 57912 3578 709 433 547 2983 783 2200 2200 2200 Total Sales 46094 Total Raw materials 30276 Personnel Cost 1775 Ads & sales 3328 promotion Other Expenditure 8348 Total Expenditure 43727 EBITDA 2367 Depreciation 649 Int. & Finance charges 436 Other Income 590 EBT (as reported) 1872 Tax 529 PAT 1342 Minority Interest Share of Profit/Loss in 1 associates APAT 1344 Extraordinary adj. RPAT 1344

(Rs.mn)

BALANCE SHEET (Consolidated)

As on 31 Mar. Equity Share Capital Reserves Net worth Total Loans Minority Interest Capital Employed Fixed Assets Goodwill Investments Inventories Sundry Debtors Cash and Bank balance Loans and Advances Other Current Assets Total Current Assets Curr. Liabilities & Prov Net Current Assets Def. Tax Assets (Net) Total Assets
st

(Rs.mn)

FY14E 70081 44761 2603 5582 12955 65901 4180 807 401 582 3555 931 2624 2624 2624

FY11 239 3022 3260 6179 21 9461 4321 856 3885 3470 810 769 1957 121 7126 6670 456 (58) 9461

FY12 239 3853 4092 6040 22 10153 6412 944 2485 4318 1130 613 2397 121 8579 8191 388 (76) 10153

FY13E 239 5220 5459 5764 23 11245 7441 944 2485 4885 1348 600 2687 121 9641 9171 470 (95) 11245

FY14E 239 7011 7250 5009 24 12283 8504 944 2485 5376 1536 626 3062 121 10721 10261 460 (110) 12283

FINANCIAL RATIOS (Consolidated)

Y/E Mar. Growth (%) Total Sales EBITDA APAT Profitability (%) EBITDA Margin Adj. PAT Margin ROE ROCE Per Share Data (Rs.) Adj. EPS Adj. CEPS Adj. BVPS Valuation PER (x) PEG (x) P/BV (x) EV/EBITDA (x) EV/Total Sales (x) Dividend Yield (%) Gearing Ratio D/E (x) 1.9 1.5 1.1 0.7
Source: Company, Sushil Finance Research Estimates

CASH FLOW (Consolidated)

FY13E 12.1 15.1 10.2 5.8 3.6 46.1 31.7 18.4 24.4 45.7 27.0 2.6 10.9 18.0 1.0 1.2 FY14E 14.0 16.8 19.3 6.0 3.7 41.3 33.3 22.0 28.7 60.7 Chg in Debt (390) (9) (902) (1301) 341 427 769 (140) 16 (1180) (1304) (155) 769 613 (276) (833) (1109) (13) 613 600 Chg in Gross PPE & WIP Chg in Investments Chg in Other Assets CF from Investing 388 (221) (856) (689) (2505) 1400 (88) (1193) (1738) (1738) Y/E Mar. RPAT Depreciation Chg in Deferred Tax Chg in Working Capital Chg in Minority Interest CF from Operations FY11 1344 386 118 484 (1) 2332 FY12 1995 414 19 (87) 1 2341 FY13E 2200 709 19 (95) 1 2834

(Rs.mn)

FY11 22.2 45.3 0.3 5.1 2.9 44.1 24.5 11.2 17.7 27.3 44.2 137.2 18.2 27.4 1.4 1.3

FY12 19.0 31.3 48.5 5.7 3.6 54.3 31.2 16.7 22.0 34.3 29.8 0.6 14.5 20.8 1.2 1.7

FY14E 2624 807 15 35 1 3482 (1869) (1869) (755) (833) (1588) 26 600 626

22.6 1.2 8.2 15.2 0.9 1.2

Chg in Net Worth Dividend CF from Financing Chg in Cash Cash at Start Cash at End

December 17, 2012

Britannia Industries Ltd.

Rating Scale
This is a guide to the rating system used by our Institutional Research Team. Our rating system comprises of six rating categories, with a corresponding risk rating.

Risk Rating
Risk Description
Low Risk Medium Risk High Risk

Predictability of Earnings / Dividends; Price Volatility

High predictability / Low volatility Moderate predictability / volatility Low predictability / High volatility

Total Expected Return Matrix

Rating
Buy Accumulate Hold Sell Neutral Not Rated
Please Note Recommendations with Neutral Rating imply reversal of our earlier opinion (i.e. Book Profits / Losses). ** Indicates that the stock is illiquid With a view to combat the higher acquisition cost for illiquid stocks, we have enhanced our return criteria for such stocks by five percentage points. Stock Review Reports: These are Soft coverages on companies where Management access is difficult or Market capitalization is below Rs. 2000 mn. Views and recommendation on such companies may not necessarily be based on management meeting but may be based on the publicly available information and/or attending Company AGMs. Hence Stock Reviews may be just one-time coverages with an occasional Update, wherever possible.

Low Risk
Over 15 % 10 % to 15 % 0% to 10 % Negative Returns Not Applicable Not Applicable

Medium Risk
Over 20% 15% to 20% 0% to 15% Negative Returns Not Applicable Not Applicable

High Risk
Over 25% 20% to 25% 0% to 20% Negative Returns Not Applicable Not Applicable

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December 17, 2012