Britannia Industries Ltd.

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 Britannia Industries Ltd.
Industry LTP Base Case Fair Value Bull Case Fair Value Recommendation Time Horizon
FMCG Rs. 3572 Rs. 3586 Rs. 3912 Buy on dips to Rs 3341-3351 band and add more on dips to Rs.2930-2938 band 2 quarters
Our Take:
HDFC Scrip Code BRIIND
Britannia Industries, the market leader in biscuits in India - derives majority of its revenue from the sale of bakery products with a direct
BSE Code 500825
distribution reach of 22+ lakh outlets in India. The company has delivered a very good Q1FY21 results with a 26% rise in revenue and 91%
NSE Code BRITANNIA
Bloomberg BRIT:IN rise in operational profit on the back of operational efficiency and increased demand for biscuits in the absence of out of home food
CMP Oct 27, 2020 3572 consumption. However, as witnessed in Q2FY21, this growth moderated as non-essentials spends increased in Q2FY21. Going forward, as
Equity Capital (cr) 24 we deal with lower GDP forecasts, some downtrading can be expected across product lines which might cause some uncertainty on
Face Value (Rs) 1 margins. However, Britannia has one of the most efficient managements that has shown time and again its ability to control costs and
Eq- Share O/S(cr) 24 launch new innovative products. The company has also performed very well in hindi belt and market share seems to have grown in the
Market Cap (Rscr) 85906 rural regions where it has seen significant growth in the traditional trade channels. Britannia is diversifying its portfolio by entering new
Book Value (Rs) 185.4 categories and in Q4FY20 it has launched its own milk drinks (milk shakes and lassi). Also growth in high margin dairy products like cheese
Avg.52 Wk Volume 703085 and curd is encouraging. We believe, as growth in bakery products normalizes, the adjacencies and dairy business will pick up for the
52 Week High 4010 company. The company is planning 3 Greenfield plants (TN, UP, Bihar) and 2 Brownfield plans (Odisha, Ranjangaon) for expansion of the
52 Week Low 2100 capacities in various categories.

Share holding Pattern % (Sept 30, 2020)

Valuations & Recommendation:
Promoters 50.58
While a double digit revenue growth might not be sustainable for Britannia over a long term, Britannia seems to have gained market share
Institutions 27.5
Non Institutions 21.92
and is expected to have a better growth than the lower single digit growth of the company pre-covid. Traction in non bakery business will
Total 100.0 lead to better margins and the company has capex plans to augment its existing capacities in the next 1-2 years to cater to the increased
demand. Britannia has created enormous wealth over the last decade and rewarded its shareholders handsomely. Rise in ICD (Inter
Corporate Deposit) amounts and tapering of the revenue growth in second half are our recent concerns. While the price for Britannia has
Fundamental Research Analyst
already corrected 15% from its yearly highs, we believe the stock can correct bit more and can be bought on dips to Rs 3341-3351 band
Karan Shah
(41.0xFY22E EPS) and add more on dips to Rs.2930-2938 band (36.0xFY22E EPS) for a base case fair value of Rs 3586 valuing the company
[email protected]
at 44.0xFY22E EPS and a bull case fair value of Rs 3912 valuing the company 48.0xFY22E EPS.

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Britannia Industries Ltd.
Financial Summary (Rs Cr)
Particulars (Rs cr) Q2FY21 Q2FY20 YoY-% Q1FY21 QoQ-% FY19 FY20 FY21E FY22E
Net Revenues 3419 3049 12.15 3421 (0.05) 11055 11600 13319 14402
EBITDA 675 492 37.22 717 (5.79) 1732 1843 2524 2674
APAT 495 403 22.97 543 (8.75) 1156 1406 1845 1953
Diluted EPS (Rs) 20.60 16.80 22.62 22.60 (8.85) 48.10 58.50 76.80 81.40
P/E (x) 73.56 61.09 46.56 43.98
EV/EBITDA 47.30 44.45 32.11 29.88
RoE-% 30.36 32.68 39.22 34.62
(Source: Company, HDFC sec)

Long term Triggers

Strong Bakery Business: The bakery business includes biscuits, cakes, rusk and bread and constitutes over 90% to Britannia’s revenues.
Biscuit, as India’s largest food category, is considered as an essential, in practically every Indian family’s consumption basket. It is one of
the most deeply penetrated categories in the country, reaching over 90% of the households. The per capita consumption of biscuit in India
is comparatively low at 2 kgs versus 10 kgs in certain developed countries. Biscuit category has reasonable skew towards the value
segment. Britannia’s strategy has been to consistently drive upgrades through right products, packs and insightful communication and this
strategy is being continuously improved upon to gain market share. The company has launched premium and super premium biscuits in
the Rs 5 and Rs 10 packs as well to tap the lower income markets. As per the company’s strategy to win in “Many Indias”, each part of
India has a different consumer need and food choices vary by state. Large brands like Good Day, Milk Bikis and Mariegold have employed
localized strategies to meet the unique needs of different markets and fight local players. A focused and localized strategy adopted by
Britannia has allowed it to gain significant market share in the Hindi belt. Britannia also re-launches its brands regularly, with focus on
visual distinctiveness, product superiority and newness leading to an elevated brand proposition. During Q1FY21, Britannia witnessed
strong double digit growth, which was mainly driven by at-home consumption triggered by a national lockdown. This has also allowed the
company to gain market share from some smaller and regional players who were unable to operate/scale up in the period. While such
growth rate will not sustain, the stickiness of new customers can, which will help the company in the longer run.

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Britannia Industries Ltd.
Rusk is a traditional category with a reasonable level of unorganized play. The category has not witnessed any significant technology
changes or product innovation in India. This category, however, has multiple value-added product offerings in other countries. Being one
of the largest organized players, Britannia can gain significant market share in this category. Britannia’s strategy is to continue to invest in
technology and recipes to offer different varieties with superior taste and quality to consumers at affordable price points. The fragmented
and unorganized nature of the segment offers tremendous opportunities for growth. There is scope to expand the consumer base by
offering superior quality products at the right price points.

High Margin Dairy products to lead the way: India is the largest producer and consumer of dairy products and currently contributes ~20%
to the global production. This category is currently dominated largely by unorganized players. The organized segment of the Indian Dairy
Industry is growing and has a great role to play in the future development and growth of the industry. In the past few years, the processed
milk products market has witnessed sustained growth due to increasing urbanization, rising disposable income and proliferation of retail
outlets beyond Tier 1 cities. While packaged liquid milk will remain a key driver of the industry growth, value added dairy products are also
expected to witness healthy growth. Britannia is focusing on strengthening its core categories such as Cheese and Yoghurt, while
innovating in other categories such as Milk drinks. The company is planning to make significant investments in the back-end capabilities of
the dairy business. Britannia’s milk procurement in Maharashtra has been scaled up to 25,000 Liters/day from 1000 farmers in and around
Ranjangaon. The company saw significant growth in the dairy products in Q2FY21 and future sustained growth can be expected on the
back of new product launches, gaining market share from the unorganized segment, strengthening footprint in areas of low penetration
and better distribution. Britannia has also entered a new category with the launch of dairy drinks under Winkin Cow brand in Q4FY20. The
company is looking at additional Capex in the coming few years in the dairy business.

Adjacent Businesses diversify the portfolio: The adjacent businesses include cream wafers, centre filled croissants and salted snacks.
Wafers is a ~ Rs 700 Crores category growing at a healthy pace and Britannia is the first branded player with a large national presence to
enter this fragmented category. The fragmented and unorganized nature of the segment offers tremendous opportunities for growth.
Cream Wafers, as a category, is experiencing significant growth. The response from consumers to Britannia Treat Crème Wafers has been
very encouraging. As a category, wafers is growing at ~40% for Britannia however it is a very small and new business at this point of time.
The company is planning on investing in a wafer line in its Perundurai and Ranjangaon plants which indicates future growth potential for
this business.

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Britannia Industries Ltd.
Center Filled Croissants is practically a new category in India. However, it is a very large category in many developing countries in the
world. Britannia’s entry into this nascent category is based on the tremendous potential it holds, given the shifts in the lifestyle and
consumption habits of the youth. Britannia launched center filled Croissants under the brand ‘Treat’ in select geographies & trade
channels. However the company has not been able to scale it up to a Pan India level owing to slow market testing and research. A state-of-
the-art manufacturing facility for Croissants has been set up in Ranjangaon, Maharashtra, enabling Britannia’s aspirations to lead this
category.

Snacking is inherent to Indian food culture and is an important category of adjacent business. It has traditionally implied a variety of
sensorial experiences in terms of flavour, taste, shape, texture, ingredients, appearance & accompaniments. The category is very large and
highly competitive with more than 2000 players operating in it. Migration from unorganized or local to branded products will drive growth
for national players like Britannia.

Rural Distribution: Britannia has increased its direct reach of outlets to 22.3 lakh as of September 2020 from under 20 lakh in March 2020.
The company also has 22000 rural distributors as of September 2020. As a result of this the company has witnessed a double digit growth
in the hindi belt. Britannia has also seen very encouraging growth in the traditional trade channels of the company. In Q1FY21, the growth
through traditional trade was 30% higher than the total growth of the company. In comparison, the modern trade business (mostly
includes stores) has suffered for the company in H1FY21. This trend indicates that the growth has been significantly higher for the
company in rural regions with a comparatively higher share of traditional trade channels. Britannia currently has 37% of its revenue
coming from rural markets. Penetration into such markets is a very good sign for the company as modern trade business has now
recovered slightly in Q2FY21. Britannia has also seen a ~300% rise in e-commerce sales. While e-comm only contributes ~1% to sales, a
changing consumer trend and preference of online shopping can lead to additional growth in this channel.

Short term Triggers

Benign Commodity Costs: Britannia faced ~2-3% inflation in commodity costs in Q2FY21. There was a 5% deflation in flour prices, 21%
deflation in milk prices, 4% inflation in sugar and 25% inflation in RPO (red palm oil). However, the RPO prices did see moderation towards
the end of the quarter. With a good monsoon and harvest, commodity costs are expected to be benign in the foreseeable future which will
add to company margins in the short term.

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Britannia Industries Ltd.
Unsustainable growth might lead to some price correction: Britannia achieved a 26% growth in revenue in Q1FY21 followed by Q2FY21
growth of 11%. However, the company had an average of 4-4.5% quarterly growth prior in FY20 and only a 2% growth in Q4FY20. Part of
the reason for the high growth in H1FY21 has been the 20%+ volume growth seen by the company driven by at home consumption of food
items in the absence of restaurants and other eateries. However, this effect will fade away in H2FY21 with lot more out of home
consumption options available. At the same time, the growth of Britannia’s premium product sales might also slow down in light of the
poor economic growth. Hence, overall growth of the company can cool down in H2FY21 in comparison to H1FY21.

Management Pedigree seen in tough times: Britannia witnessed one of the best quarters in Q1FY21 with a 26% growth in revenue and
91% growth in operating profits. This was achieved mainly due to operational efficiency and cost reduction measures undertaken by the
management. The company was able to restart its factories much before its competitors following the nationwide lockdown. This allowed
it to ramp up the volumes and cater to the demand in the market. Plant capacities were increased by the management wherever required
and productivity was also increased. Factory efficiency improved by 5-10% in Q1FY21 for Britannia. The company also started direct sales
from its factories to make sure the transit time and costs were reduced. More focus was given to the high demand products, and smaller
packet products were introduced which led to more sales. The company focused on 20% of its brands that made up 80% of the total
revenue which gave way to increased productivity and better manufacturing capacities. A&P spends reduced significantly like most of the
industry. Reduced distributor stock, low attrition of distributors, and faster inventory turnover was achieved. At the same time, distance to
market was also reduced by ~50 kms due to direct sales and wastages also reduced. As a result of such measures, the company achieves
~2% of its net revenue every year as savings from efficiencies in operations.

Good distributor of profits to shareholders:

Britannia paid interim dividend of Rs83 per share in Aug 2020. Additionally, in Oct 2020, the board has approved issue of redeemable
bonus debentures of face value Rs29 per equity share (this is in addition to redeemable bonus debentures of Rs7.2 bn issues in H2FY20)
and second interim dividend of Rs12.5.

What could go wrong

Inter Corporate Debt/Loans: Britannia’s ICD stood at 700 crore as of Q2FY21 (up~70 cr QoQ). As of FY20 a sum of Rs.1247 cr were lent by
Britannia by way of ICDs (including Rs.630 cr to related parties). Further increases can be a cause of concern for the company.

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Britannia Industries Ltd.
Premium Products: With a significant drop in the GDP forecasts and the economic slowdown, certain premium category products of the
company can see a drop in growth which will in turn affect the margins.

Competition: While Britannia is a market leader in most of the categories it is present, it still faces a lot of competition from unorganized
players and some organized players which can be a cause of concern.

Failure of New Launches: Over 70% of Britannia’s revenues come from biscuit sales and over 90% from bakery business. Hence the
product portfolio is heavily skewed towards a particular food category. The company has invested significantly to diversify its portfolio;
however a failure to achieve success in new products is a risk.

Capital Allocation: The company borrows to pay dividends and distribute bonus debentures. All of this while a large chunk of money lies
invested by way of ICDs. This may not be the best way to allocate capital.

Raw Material Costs: Higher than expected raw material cost can lead to fall in margins in a competitive market unless all the players resort
to price hikes.

About Company
Britannia Industries is one of India’s leading food companies with a 100 year legacy and annual revenues in excess of Rs 9000 Cr. Britannia
is a part of the Wadia group (headed by Nusli Wadia) which comprises companies like Bombay Dyeing, Bombay Burmah Trading
Corporation, National Peroxide, Go Air etc. Britannia is among the most trusted food brands, and manufactures India’s favorite brands like
Good Day, Tiger, NutriChoice, Milk Bikis and Marie Gold which are household names in India. Britannia’s product portfolio includes
Biscuits, Bread, Cakes, Rusk, and Dairy products including Cheese, Beverages, Milk and Yoghurt. Britannia products are available across the
country in close to 5 million retail outlets and reach over 50% of Indian homes. The company’s Dairy business contributes close to 5% of
revenue and Britannia dairy products directly reach 100,000 outlets. Britannia Bread is the largest brand in the organized bread market
with an annual turnover of over 1 lac tons in volume and Rs 450 crores in value. The business operates with 13 factories and 4 franchisees
selling close to 1 mn loaves daily across more than 100 cities and towns of India. Britannia has a presence in more than 60 countries across
the globe. Britannia is a market leader in biscuits with ~one third market share.

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Britannia Industries Ltd.
EBITDA TREND ROE TREND
3000

2500 39.0
32.9 34.6
32.5
2000 30.4

1500

1000

500

0
FY18 FY19 FY20 FY21E FY22E FY18 FY19 FY20 FY21E FY22E

RURAL DISTRIBUTION (IN 000'S) DIRECT REACH (OUTLETS IN LACS)

22 22.3
21
19 19.7
18 18.4
15.5
14
12.6
10 10
7 8

Q4FY15 Q4FY16 Q4FY17 Q4FY18 Q4FY19 Q4FY20 Q2FY21 Q4FY15 Q4FY16 Q4FY17 Q4FY18 Q4FY19 Q4FY20 Q2FY21
(Source: Company, HDFC sec)

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 Britannia Industries Ltd.
Financials
Income Statement Balance Sheet
(Rs Cr) FY18 FY19 FY20 FY21E FY22E As at March FY18 FY19 FY20 FY21E FY22E
Net Revenues 9914 11055 11600 13319 14402 SOURCE OF FUNDS
Growth (%) 9.50 11.51 4.93 14.83 8.13 Share Capital 24 24 24 24 24
Operating Expenses 8413 9322 9756 10795 11728 Reserves 3386 4179 4379 4238 5506
EBITDA 1501 1732 1843 2524 2674 Shareholders' Funds 3410 4203 4403 4262 5530
Growth (%) 17.47 15.38 6.39 36.94 5.94 Long Term Debt 85 62 766 689 621
EBITDA Margin (%) 15.14 15.67 15.89 18.95 18.57 Short Term Debt 116 76 748 524 367
Depreciation 142 162 185 222 255 Net Deferred Taxes -23 -14 -7 -14 -12
EBIT 1359 1571 1658 2302 2419 Non Current Liabilities 34 39 75 75 75
Other Income 166 206 280 308 339 Minority Interest 13 33 36 36 36
Interest expenses 8 9 77 118 123 Total Source of Funds 3635 4399 6005 5535 6581
PBT 1518 1769 1861 2492 2634 APPLICATION OF FUNDS
Tax 514 613 448 633 669 Net Block 1217 1558 1739 1898 2043
APAT 1003 1156 1406 1845 1953 CWIP 242 101 40 40 40
Growth (%) 11.32 15.1 21.62 31.21 5.87 Goodwill 128 130 139 139 139
EPS 41.80 48.10 58.50 76.80 81.40 Other Non-Current Assets 174 85 234 234 234
Long Term Loans & Advances 29 101 111 81 138
Total Non Current Assets 1792 1975 2263 2392 2594
Inventories 653 781 741 858 927
Trade Receivables 305 394 320 383 406
Cash & Equivalents 1266 1532 3016 2539 3557
Other Current Assets 1151 1491 1482 1630 1524
Total Current Assets 3374 4199 5559 5410 6415
Trade Payables 1229 1506 1116 1307 1419
Other Current Liab & Provisions 301 269 701 959 1009
Total Current Liabilities 1531 1775 1817 2267 2428
Net Current Assets 1843 2424 3742 3143 3987
Total Application of Funds 3635 4399 6005 5535 6581
(Source: Company, HDFC sec)

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 Britannia Industries Ltd.
Cash Flow Statement Key Ratios
(Rs Cr) FY18 FY19 FY20 FY21E FY22E (Rs Cr) FY18 FY19 FY20 FY21E FY22E
Reported PBT 1518.2 1767.9 1861.2 2491.6 2634.1 EBITDA Margin 15.1 15.7 15.9 18.9 18.6
Non-operating & EO items -151.1 0.0 -25.0 307.8 338.6 EBIT Margin 13.7 14.2 14.3 17.3 16.8
Interest Expenses 7.6 9.1 76.9 118.0 123.0 APAT Margin 10.1 10.6 12.1 13.9 13.6
Depreciation 142.1 161.9 184.8 222.1 255.3 RoE 32.9 30.4 32.7 39.2 34.6
Working Capital Change 228.3 -336.2 -165.3 -121.6 -174.5 RoCE 31.2 28.9 28.1 26.1 25.9
Tax Paid -496.5 -612.5 -447.7 -632.9 -669.1 Solvency Ratio
OPERATING CASH FLOW ( a ) 1248.5 990.2 1485.0 2385.1 2507.4 Net Debt/EBITDA (x) (0.7) (0.8) (0.8) (0.5) (1.0)
Capex -421.2 -403.3 -304.4 -400.0 -400.0 Net D/E (0.3) (0.3) (0.3) (0.3) (0.5)
Free Cash Flow 827.3 586.9 1789.4 2785.1 2907.4 PER SHARE DATA
Investments -644.2 -395.9 -1326.6 -50.3 57.6 EPS 41.8 48.1 58.5 76.8 81.4
Non-operating income 109.1 90.4 -25.0 307.8 338.6 CEPS 52.0 41.2 61.7 99.2 104.3
INVESTING CASH FLOW ( b ) -956.3 -708.8 -1606.0 -758.1 -681.0 BV 142.0 174.9 183.1 177.2 229.9
Debt Issuance / (Repaid) 67.3 -40.2 234.4 420.0 -230.0 Dividend 12.5 15.0 35.0 82.6 28.5
Interest Expenses -7.5 -9.1 76.9 118.0 123.0 Cash Conversion (days) (27.3) (33.4) (10.7) (12.5) (12.7)
FCFE 352.0 232.1 749.1 3580.6 3196.6 Debtor days 8.9 11.5 11.2 10.5 10.3
Share Capital Issuance 15.1 0.0 0.0 0.0 0.0 Inventory days 24.2 23.7 24.0 23.5 23.5
Dividend -317.4 -361.8 432.5 1986.0 685.0 Creditors days 60.4 68.6 45.9 46.5 46.5
Others 10.8 0.0 0.0 0.0 0.0 VALUATION
FINANCING CASH FLOW ( c ) -231.7 -411.1 -509.4 -2104.0 -808.0 P/E 85.5 73.6 61.1 46.6 44.0
NET CASH FLOW (a+b+c) 60.5 -129.7 -630.4 -477.0 1018.4 P/BV 25.2 20.4 19.5 20.2 15.5
EV/EBITDA 55.4 47.3 44.5 32.1 29.9
EV / Revenues 8.4 7.4 7.1 6.1 5.6
Dividend Yield (%) 0.3 0.4 1.0 2.3 0.8
(Source: Company, HDFC sec)

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 Britannia Industries Ltd.
One Year Price Chart
4,500.00

4,000.00

3,500.00

3,000.00

2,500.00

2,000.00

1,500.00
27-Oct-19

27-Oct-20
27-Apr-20
27-May-20
27-Dec-19
27-Jan-20

27-Mar-20

27-Aug-20
27-Jun-20
27-Nov-19

27-Jul-20
27-Sep-19

27-Feb-20

27-Sep-20
(Source: Company, HDFC sec)

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 Britannia Industries Ltd.
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preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.

Any holding in stock –No

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