brit in equity 17sep21 cu

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KEY DATA

Rating BUY Sector relative Outperformer Price (INR) 4,073 12 month price target (INR) 4,670 Market cap (INR bn/USD bn) 981/13.3 Free float/Foreign ownership (%) 49.4/16.0

What’s Changed Target Price

Rating/Risk Rating ⚊

INVESTMENT METRICS

Strong demand ahead in H2FY22

We had brought back Britannia among our top picks six weeks ago (Link); the stock has since moved up 18% (outperforming FMCG index by 600bp). Even so, we argue any weakness in the stock due to likely QoQ weaker demand in Q2FY22 (off a strong base) can be an opportunity to add. We list out the key reasons behind our rationale.

We remain positive on Britannia as on-the-go categories recover due to rising mobility, market share gains from regional players, and expanding addressable markets, not to mention gradual price hikes and favourable base in H2FY22. ICDs at INR4.7bn are lower than Mar-21 level of INR7.9bn, which is a good development. Retain ‘BUY’ with a TP of INR4,670.

FINANCIALS (INR mn)

Year to March FY21A FY22E FY23E FY24E

Revenue 1,31,361 1,39,363 1,53,193 1,68,209

EBITDA 25,093 23,703 27,416 30,754

Adjusted profit 18,512 17,514 20,417 23,020

Diluted EPS (INR) 77.0 72.8 84.9 95.7

EPS growth (%) 31.1 (5.4) 16.6 12.8

RoAE (%) 46.6 43.0 39.2 35.3

P/E (x) 52.9 55.9 48.0 42.5

EV/EBITDA (x) 39.3 41.3 35.3 31.1

Dividend yield (%) 1.8 0.7 0.8 0.9

PRICE PERFORMANCE

Twelve reasons why we see more upside

1. Getting aggressive on WIMI (Win in Many India’s) strategy

2. Gains in market share to sustain

3. Huge room in e-commerce (targets 5% versus 2% currently)

4. Growth potential in adjacencies remains attractive

5. Rising mobility, reopening of malls will drive OOH products, sampling of new products and premiumisation

6. Most innovative company in our view due to unmatched R&D capability

7. Rural growth to revive in most states

8. Ramping up India capacity in Maharashtra, Tamil Nadu, UP

9. Commercialised partnership in Egypt and Uganda for manufacturing

10. Price hikes and improving mix to drive more balanced growth going ahead

11. Upping smartness and ESG quotient; first sustainability report launched

12. Go Airlines’ INR36bn IPO likely to get SEBI nod Key risks are inflation in cashew and palm oil. Q2 base for Britannia is high, so good

growth on a YoY basis is likely from H2FY22.

Explore:

Outlook and valuation: Improving; maintain ‘BUY’

Britannia is the value leader in the biscuit category (ahead of Parle) and has sustained

market share gains. We believe the company’s growth will continue to outstrip the

industry well. Its deepening distribution network, particularly in rural, with focus on

driving growth in states it has a weak standing in – Gujarat, Madhya Pradesh, Uttar

Pradesh and Rajasthan – will hold it in good stead. The company’s aggregate growth

has improved with the rise in its market share.

Britannia’s cost-saving initiatives (targeting ~2.1% of revenue per year) continue to

be robust, helping it sustain margin expansion. A gradual improvement in the

product mix will also aid gross and EBITDA margins. A key variable is Parle gaining

market share from other players and narrowing the market share gap. We maintain

‘BUY/SO’ with a TP of INR4,670.

-10

5

20

35

50

Sales Growth(%)

EPS Growth(%)

RoE(%)

PE(x)

Consumer Staples BRIT IN Equity

36,000

40,800

45,600

50,400

55,200

60,000

3,325

3,485

3,645

3,805

3,965

4,125

Sep-20 Dec-20 Mar-21 Jun-21 Sep-21

BRIT IN Equity Sensex

India Equity Research Consumer Staples September 17, 2021

BRITANNIA INDUSTRIES COMPANY UPDATE

Abneesh Roy Tushar Sundrani Amritasai Sista +91 (22) 6620 3141 +91 (22) 6620 3004 [email protected] [email protected] [email protected]

Corporate access

Financial model Podcast

Video

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BRITANNIA INDUSTRIES

Edelweiss Securities Limited

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Financial Statements

Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E

Total operating income 1,31,361 1,39,363 1,53,193 1,68,209

Gross profit 55,100 57,357 63,654 70,264

Employee costs 5,274 5,495 5,889 6,474

Other expenses 13,397 15,110 16,307 17,763

EBITDA 25,093 23,703 27,416 30,754

Depreciation 1,979 2,212 2,395 2,701

Less: Interest expense 1,109 1,256 1,120 1,040

Add: Other income 3,129 3,209 3,430 3,803

Profit before tax 25,142 23,447 27,332 30,817

Prov for tax 6,630 5,932 6,915 7,796

Less: Other adj 0 0 0 0

Reported profit 18,512 17,514 20,417 23,020

Less: Excp.item (net) 0 0 0 0

Adjusted profit 18,512 17,514 20,417 23,020

Diluted shares o/s 240 240 240 240

Adjusted diluted EPS 77.0 72.8 84.9 95.7

DPS (INR) 74.5 29.1 34.0 38.3

Tax rate (%) 26.4 25.3 25.3 25.3

Important Ratios (%) Year to March FY21A FY22E FY23E FY24E

Gross margin (%) 41.9 41.2 41.6 41.8

A&P (% of rev) 4.0 4.5 4.3 4.2

Other exp (% of rev) 6.2 6.5 6.4 6.3

EBITDA margin (%) 19.1 17.0 17.9 18.3

Net profit margin (%) 14.1 12.6 13.3 13.7

Revenue growth (% YoY) 12.6 6.6 9.9 9.9

EBITDA growth (% YoY) 36.1 (5.5) 15.7 12.2

Adj. profit growth (%) 31.2 (5.4) 16.6 12.8

Assumptions (%) Year to March FY21A FY22E FY23E FY24E

GDP (YoY %) (8.0) 9.0 7.0 7.0

Repo rate (%) 4.0 4.0 4.3 5.3

USD/INR (average) 75.0 73.0 72.0 71.0

Biscuits 11.5 6.5 10.0 10.0

Bread 15.5 7.5 8.5 8.5

Cake and rusk 15.5 7.5 7.5 7.5

Dairy 5.0 10.0 15.0 15.0

Int business 10.0 10.0 15.0 15.0

COGS % of sales 59.2 59.7 59.3 59.0

Valuation Metrics Year to March FY21A FY22E FY23E FY24E

Diluted P/E (x) 52.9 55.9 48.0 42.5

Price/BV (x) 27.6 21.3 16.8 13.6

EV/EBITDA (x) 39.3 41.3 35.3 31.1

Dividend yield (%) 1.8 0.7 0.8 0.9

Source: Company and Edelweiss estimates

Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E

Share capital 241 241 241 241

Reserves 35,236 45,744 57,994 71,806

Shareholders funds 35,477 45,985 58,235 72,047

Minority interest 363 361 359 357

Borrowings 20,872 15,000 13,000 13,000

Trade payables 13,148 13,031 14,228 15,564

Other liabs & prov 9,688 9,688 9,688 9,688

Total liabilities 80,088 84,606 96,051 1,11,197

Net block 16,571 22,063 24,168 25,966

Intangible assets 1,359 1,359 1,359 1,359

Capital WIP 1,165 500 500 500

Total fixed assets 19,095 23,922 26,027 27,825

Non current inv 13,874 13,874 13,874 13,874

Cash/cash equivalent 16,046 17,148 25,352 37,435

Sundry debtors 2,573 3,763 4,137 4,548

Loans & advances 12,291 12,291 12,291 12,291

Other assets 16,209 13,607 14,371 15,223

Total assets 80,088 84,606 96,051 1,11,197

Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E

Reported profit 25,128 17,512 20,415 23,018

Add: Depreciation 1,979 2,212 2,395 2,701

Interest (net of tax) (2,347) (1,954) (2,310) (2,763)

Others 0 0 0 0

Less: Changes in WC (562) (1,295) (60) (72)

Operating cash flow 18,511 19,066 20,560 23,029

Less: Capex 4,000 4,500 4,500 4,500

Free cash flow 14,511 14,566 16,060 18,529

Key Ratios Year to March FY21A FY22E FY23E FY24E

RoE (%) 46.6 43.0 39.2 35.3

RoCE (%) 45.2 41.8 42.8 40.6

Inventory days 44 43 35 35

Receivable days 8 8 9 9

Payable days 58 58 56 56

Working cap (% sales) 18.8 17.5 21.3 26.6

Gross debt/equity (x) 0.6 0.3 0.2 0.2

Net debt/equity (x) 0.1 0 (0.2) (0.3)

Interest coverage (x) 20.8 17.1 22.3 27.0

Valuation Drivers Year to March FY21A FY22E FY23E FY24E

EPS growth (%) 31.1 (5.4) 16.6 12.8

RoE (%) 46.6 43.0 39.2 35.3

EBITDA growth (%) 36.1 (5.5) 15.7 12.2

Payout ratio (%) 96.8 40.0 40.0 40.0



Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 3

We had brought back Britannia among our top picks six weeks ago; the stock is up

18% since. That said, any weakness in the stock due to likely QoQ weaker demand

in Q2FY22 (on a strong base) can present an opportunity to add. In this report, we

have listed out our reasons for the same.

Twelve reasons why we anticipate more upside

Britannia is getting aggressive on its WIMI (Win in Many Indias) strategy; HUL has

already seen lot of benefits due to this. BRIT recently launched Milk Bikis with

100% Atta in the Hindi-speaking states. Large brands such as Good Day and

MarieGold are also looking at localised strategies given the variations in

consumer needs, tastes and food choices among states. Focus states saw 1.33x

growth compared with rest of the country.

Gains in market share are likely to sustain. Top 3 brands in categories such as

biscuits have grown 13% versus 4% for smaller players.

Huge headroom to catch up in e-commerce (aims to increase to 5% from present

2%).

Growth potential in adjacencies remains attractive. The adjacencies business is

about INR25bn, Dairy business is about 5% of overall revenue. The company aims

to strengthen its consumer franchise in cheese and milk drinks through front-end

investments while innovating aggressively on emerging value-added categories

such as drinks & yogurts. Positive consumer response to Britannia Treat Crème

Wafers (launched Treat Wafers at INR 10 Pack) has enabled the company to

become a significant player in a very short time. Milk collection has been ramped

up to 2x of last year to gear up for backend. Flat wafers and rolls plant will be

operational in Q2FY22. Dairy facility at Ranjangaon will be ready by Q2FY23.

Rising mobility, reopening of malls will drive OOH products, sampling of new

products and pemiumisation.

Rural growth to revive in most states.

Ramping up India capacity in Maharashtra, Tamil Nadu, and UP. 110 percent of

investment in Ranjangaon qualifies for tax benefit. The Ranjangaon plant took an

investment of INR6.5bn and produces revenue of INR12bn. Once all lines are fully

utilized, turnover would increase to INR15–16bn turnover. State-of-the-art

manufacturing facility for croissants in Ranjangaon, Maharashtra. In FY21, the

company successfully commissioned three biscuit lines and one snack line, and

expanded its depot at the Integrated Food Park, Ranjangaon (Maharashtra).

International business: Company has commercialized partnership in Egypt and

Uganda. Manufacturing will start soon. The company is evaluating inorganic

growth opportunities in large biscuit markets wherein it would have advantages

over local players.

Britannia is presently the most Innovative biscuits company in our view due to

unmatched R&D capability. It relaunched GoodDay Chocochips with a surprise

campaign and launched 50-50 Potazos in the North East. Some of the upcoming

products include Wafer sticks, Milkbikis Classic (already rolled out) and variants

in Nutrichoice.

Price hikes and an improving mix would drive a more balanced growth going

ahead.

Improving ESG quotient: Britannia has launched its first sustainability report.




Go Airlines: Gets SEBI nod for INR36bn IPO. The airline plans to garner up to

INR36 bn through sale of shares, according to its draft red herring prospectus

(DRHP). Although there is no cross-holding between Britannia and Go Airlines,

there has been a concern around ICDs.

Gains in market share to sustain

Market share movement

Source: Company

Consumers move towards trusted brands

Top 3 brands in categories such as biscuits have grown 13% during the year ended-

May, while other brands in these categories grew 4%, according to a study by market

research firm Kantar. This indicates a rising preference for market leaders or trusted

brands amid the pandemic. The Top 3 brands across home, food and personal care

categories have been growing twice as fast as the rest of the product segment.

We attribute this to consumers shifting to trusted brands in these categories as they

prioritise safety and hygiene in the wake of the second covid wave.

Experimentation and addition of new brands in all these categories have dipped,

benefitting larger and well-penetrated brands.

Big brands have also done their part by learning from the first wave of covid and

ensuring that there is minimum disruption to the supply chain this time, which

allowed consumers the choice to choose their known brands, unlike the first wave

wherein local brands benefited from non-availability in certain cases. The large

brands have also been aggressive in increasing their direct reach since the pandemic

began. In 2020, top FMCGs have added ten distributors every day on an average.

Top brands to garner strong gains

Growth of top 3 brands

%

Growth of the

rest Top 3 brands

Bar soaps 14 7 Lifebuoy, Lux, Dettol

Malted drinks 15 9 Horlicks, Boost, Bournvnvita

Tea 13 6 Tazaa, Red label, Tata agni

Dish wash 21 10 Vim, Exo, Xpert

Edible oils 13 5 Fortune, Gold winner,

Mahakosh

Washing

powders 8 5 Surf, Wheel, Ghadi

Spices 30 12 Everest, Aachi, Goldiee

Biscuits 13 4 Parle, Britannia, Sunfeast

Salty snacks 23 15 Haldiram's, Balaji, Kurkure

Source: Kantar world panel

Figures represent numbers upto 12 months ended May21




Huge room to catch up in e-commerce

Britannia aims to increase ecommerce contribution to 5% from present 2% level. We

believe the company’s portfolio is among the most suited in Biscuits category to e-

commerce, not to mention its strong presence as an anchor tenant among all key e-

commerce channels. Other FMCG segments have higher salience, and we expect

biscuits to also inch closer to other categories.

E-commerce contribution

Company Approx. e-commerce channel contribution to sales (%)

Britannia 2.5

Marico 9

Amul 7

Dabur 6

HUL 7

GCPL 5

Nestle 4

Source: Company

Creating a strategy to win in “Many Indias”

HUL has already benefited greatly due to this strategy, and Britannia is getting

aggressive on this. The latter’s focus states logged 1.33x growth compared with rest

of the country.

It recently launched Britannia Milk Bikis with 100% Atta in Hindi-speaking states. This

new offering has the shakti of “Doodh Roti”, strong cultural ethos that consumers in

these states have grown up with. The company is evaluating similar plans for every

part of India given the variations in consumer needs, tastes and food choices among

states. The company’s large brands such as Good Day and MarieGold are also

looking at localized strategies.

Focused brands for north and south markets

Source: Company




Focus states grow faster

Source: Company

Biscuit growth rates have decent potential over long term

Per capita consumption of biscuits in India is relatively low: Per capita consumption

of biscuits in India is relatively low at 2kg versus 10kg in certain developed countries.

Even so, it is the largest category in the food business in India. It is present in the

consumption basket of virtually every Indian family as an essential product, and one

of the most deeply penetrated categories in the country, reaching over 90% of

households.

Engineer upgrades and tap into consumers moving up the economic ladder: The

The biscuit category has a reasonable skew towards the value segment even in

normal times and this has increased significantly during the pandemic on account of

diminishing purchasing power and value maximization by consumers. In view of this,

the company adapted its plans to address the requirements during the pandemic

while continuing to nourish its long-term strategy of driving upgrades through right

products, packs and insightful communication for gaining market share.

OOH segments to see strong recovery: OOH segments have faced strong headwinds

for the past few quarters due to confined living, which is now reversing. As

offices/travel resume, OOH consumption is likely to pick up.

Most innovative biscuits company due to unmatched R&D capability

Renovate to strengthen the core: In a category where little differentiation exists,

Britannia continues to stay ahead with its strategy of “continuous differentiation”

centered on ensuring visual and taste superiority.

Lead with new-to-market concepts and innovations: Britannia strives to lead the

segments it operates in with new-to-market innovations as per changing consumer

needs and preferences. The company’s innovation strategy derives inspiration from

adjacent categories (such as choco bakery, cheese bakery, cracker and snacking etc),

reimagining health, exploring newer flavours and leveraging current and new

technologies.

1x

1.33x

0

0.3

0.6

0.9

1.2

1.5

FY2

1 g

row

th v

s FY

18

Average Focus states




Recent innovations

Source: Company

Research and Development (R&D): Britannia established a world class R&D Centre

in 2016 and built up capabilities towards its goal of transforming into a ‘Total Foods

Company’. R&D continues to focus on consumer-centric and high-quality products

and developed a ‘Choco-Hazelnut crème’ filled biscuit variant under ‘Pure Magic’

brand, ‘MilkBikis Atta’ product, ‘Masala Mania’ variant under the ‘Timepass’ brand,

‘Layerz Cake’ of ` 5, ‘Lassi’ in two variants (‘Rose Classic’ and ‘Mango’ under the

‘Winkin Cow’ brand).

Britannia’s R&D team is also consistently working to increase positive nutrients and

reduce negative nutrients in its product portfolio. The company is committed to

reducing 3% sodium and sugar in select products in FY22. R&D has successfully built

capabilities to use alternative cereals, whole grains and millets in its product

portfolio, thereby overcoming significant taste barrier due to use of these

ingredients.

Growth potential in adjacent segments remains attractive

Cake: The company’s immediate strategic priorities are to strengthen and scale up

innovation, renovate and make the base cake segment more premium through

interventions aimed at providing superior taste experience and in new-to-market

formats with affordable prices. There are opportunities for growth through launch

of innovative products at different price points and expansion in rural markets.

Cake as a category is witnessing launch of newer product formats and variants at

competitive prices over the last few years. Category growth has slowed due to

sluggish economic conditions, and there has been a significant increase in the

competitive activity in this segment.

Rusk: The introduction of value-added offerings would open up enormous

opportunities in this category. Britannia’s strategy to grow in rusk is to invest in

technology, renovate existing portfolio and expand the category with new varieties

offering superior taste and quality to consumers at affordable price points. These

measures are intended to attain segment leadership by understanding consumer

preferences and meeting their expectations. 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. Necessary investment in technology and recipes is being made to enable the

company to increase market share in this segment.




Although a traditional category with a fair number of unorganized players, rusk has

now become more competitive. The category has multiple value-added product

offerings in other countries but has not witnessed any significant technology

changes or product innovation in India.

Bread: Being a breakfast staple in India, bread is central to the company’s aspirations

of becoming a total foods company. The company continues to grow and strengthen

its leadership in the health segment with superior and differentiated products such

as atta pizza, multigrain and cheese garlic bread, etc. With the entry of significant

competitors and signs of consolidation in this space, Britannia has renewed its focus

on further diversification of portfolio, strengthening manufacturing capability,

expansion into new markets and e-commerce as well as brand building through

launch of refreshed packaging and relevant products.

The company’s efforts at expanding its footprint to profitable markets continue as

per plan despite the pandemic. There are significant opportunities for growth

through portfolio diversification into healthy and value-added products.

Dairy business: The company’s milk procurement in Maharashtra has been scaled-

up to 36,500 liters/day from 1,450 farmers in and around Ranjangaon. The strategy

in the dairy business is to strengthen its consumer franchise in cheese and milk

drinks through front-end investments while innovating aggressively in emerging

value-added categories such as drinks & yogurts.

Britannia plans to make significant investments in scaling-up its back-end capability

through creation of a milk collection and manufacturing infrastructure. The

company foresees opportunities to scale up its dairy business by leveraging the

following:

Product Innovation accelerating the growth of value-added dairy products.

Expansion of distribution for the dairy portfolio.

Rapid growth of e-commerce & digital subscription platforms.

Culinary experimentation at home with categories such as cheese due to the

lockdown.

Quality milk procurement and infrastructure improvement, including cold chain, are

the primary growth challenges. To address these challenges, the company has been

continuously investing in farmer connect programs, scaling up milk procurement

capabilities, ensuring consistency in quality of raw material and strengthening cold

chain distribution. India is the largest producer and consumer of dairy products in

the world accounting for ~22% of the global production. The organized sector

contributes to just 20% of the category while 80% is still unorganized.

Cream Wafers: Wafers is an INR7bn category, which is showing good growth.

Britannia is the first brand with a national presence to enter this category. Since the

segment is highly fragmented and unorganized, it has significant potential for

growth. Positive consumer response to Britannia Treat Crème Wafers has enabled

the company to become a significant player in this category in a very short time.

By focusing on distribution leadership, innovation in products and enhancement of

manufacturing capabilities, the company intends to grow substantially in this

category. This category offers immense potential for growth due to its fragmented

nature, low category penetration and few large competitors.

Center-filled croissants: Britannia launched centre-filled croissants under the brand

‘Treat’ in select geographies and trade channels. Despite the effects of covid-19, the




response to the product from consumers has been encouraging. Croissant continues

to be a nascent category in India. However, it is a significant category in many

developing countries across the world. As consumers in India are getting exposed to

global food, this category has enormous potential for acceptance in the domestic

market. This presents an opportunity for Britannia to pioneer and actively drive

growth in this category. Its strategy is to build awareness of this category among

consumers through brand building before its national launch. A state-of-the-art

manufacturing facility for croissants in Ranjangaon, Maharashtra, supports effective

implementation of the company’s strategy to lead this category. The opportunity in

this segment continues to be one of pioneering an entirely new category within the

country by scaling up business and launching the products nationally. The key

challenge is persuading consumers to explore a new category and make croissant an

everyday choice.

Salted Snacks: The company intends to leverage the “Time Pass” brand and achieve

a strong position in this category by innovating differentiated products at

competitive prices. The company perceives significant opportunities for growth

through innovation and leveraging its established brands. Although the category is

very large, competition is equally intense with more than 2,000 players, both

unorganized and organized. It is expected that consumer migration from

unorganized or local to branded products will continue to drive growth for national

players such as Britannia.

New launch in adjacency business

Source: Company

Premiumisation to ramp up with malls reopening, spurring sampling

Britannia gets ~60% of its sales from urban areas, so any recovery thereof would

benefit disproportionately since it is a pan-India focused company. Urban FMCG

demand is beginning to improve, which we envisage would get better. Modern

trade, which had plunged over the past few quarters, is now growing. With malls




now functional in most states and cinemas permitted to operate (and big-budget

movies likely to hit screens), we expect footfalls to progressively improve. Modern

trade recovery bodes well for discretionary segments aided by activations at stores.

Leading the market with an edge in distribution

Britannia is actively working to increase the distribution footprint across channels

through use of technology. The scale and width of distribution has been one of the

critical differentiators, which fuelled the company’s growth in recent years,

especially during the covid-19 pandemic.

The strategy is centred on increasing both depth and quality of distribution by

harnessing existing and modern channels to ensure strong growth in the future. In

addition, strategies are being developed to tap into the organised retail channels,

which are growing exponentially in the wake of the pandemic.

FMCG sales trend

(%) Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22

Nominal value growth 13.4 10 7.5 6.5 3 -19 1.6 7.3 9.4 36.9

Value growth (Rural / urban) 1.2 1.1 0.6 0.7 0.2 NA NA 17.8 6.6 NA

Urban growth (%) 12.7 9.8 8.4 7.4 4.6 -22.2 -7.1 0.8 2.2 NA

Rural growth (%) 15.2 10.3 5.3 5.2 0.9 -13 10.6 14.2 14.6 NA

Source: Company

Britannia sustained direct reach despite pandemic

Source: Company

Rural growth to revive in key states

After a blip in May and June, rural growth is reviving in the entire staples sector. In our view,

there are five reasons that dissipate concerns around its impact on FMCG rural growth:

Rural per capita consumption of FMCG is about one–third of urban India.

Most of the high population states of India have seen decent rainfall till now, this

will be a key driver of sentiment for rural consumers. There could be some

impact on demand in Gujarat, Rajasthan, Odisha, Kerala and North-East India,

which have seen a deficit in rains, but some of them are not very rain dependent.

Also these are not the most populous states.

The companies are expanding direct reach in rural areas, apart from adding lower

unit packs at price points of INR1, INR2, INR5 and INR10.

0.7

1.0

1.3

1.6

1.8

2.12.0

2.4

2.1

0.0

0.5

1.0

1.5

2.0

2.5

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 Jun-21

No

. of

ou

tlet

s (i

n m

ns)




The government’s focus on infrastructure would lead to job creation (and thus

set in motion higher urban remittances) and higher GDP growth.

On a two-year basis, budgetary allocations for different rural programmes

remain healthy. Besides, higher outlay for infra programmes will spur urban

remittances and rural economic growth indirectly, which should drive volume

growth. State governments also play a major role in bankrolling rural support

schemes.

Strong rural distribution

Source: Company

Distribution reach (mn)

Companies Direct Total

Direct

distribution

as % of

overall

HUL 2.0 8.0 25.0

Dabur 1.3 6.9 18.8

ITC 2.5 6.3 39.7

GCPL 1.3 6.0 21.7

Colgate 1.2 5.0 24.0

Britannia 2.3 5.0 46.0

Emami 0.9 4.5 20.0

Marico 1.0 5.3 18.9

Nestle 1.4 3.3 42.4

Bajaj consumer care 0.8 4.2 19.0

Jyothy Labs 0.5 2.2 22.7

P&G 0.7 2.2 31.8

Tata consumer products 0.7 2.5 26.0

Prataap Snacks 0.3 1.7 17.6

Source: Edelweiss Research

International business shows good potential

The company has commercialized partnerships in Egypt and Uganda; local

manufacturing will start soon. Furthermore, Britannia is evaluating inorganic growth

opportunities in large biscuit markets, wherein it would have advantages over local

players.

810

14

1819

23 23

0

5

10

15

20

25

FY16 FY17 FY18 FY19 FY20 FY21 Jun-21

No

. o

f R

PD

s (i

n t

ho

usa

nd

s)




We expect a sharp increase in commodity prices in FY22 due to global inflation.

However, the company expects to grow faster by gaining share from competition

and being more efficient in managing end-to-end supply chain costs. Volatility in

commodity prices is being addressed through efficient procurement plans and

robust review mechanisms.

Lack of container availability could impact near-term export growth though.

Britannia has revamped its distribution system in the Middle East. It saw around 25%

YoY revenue growth in Q1FY22 in Nepal despite covid impact.

Capacity expansion

The Ranjangaon plant has eight lines fully operational. A few more lines are being

set up. 110 percent of investment here qualifies for tax benefit. The dairy facility will

be added at Ranjangaon; it will be ready by Q2FY23. The Ranjangaon plant came up

with investment of INR6.5bn and produces revenue of INR12bn. Once all lines are

fully utilized, the turnover would increase to INR15-16bn. The company has planned

a new plant each in Tamil Nadu and Uttar Pradesh, apart from Ranjangaon

expansion. Capex thus would total INR1.3bn for the year, some may spill over to

FY23.

Price hikes, improving mix to drive more balanced growth ahead

The biscuits industry has decent pricing power. But it was somewhat blunted over

the past few quarters due to down-trading, which we now expect to reverse. Overall,

basket of commodities saw steep inflation of 7–8%.

Inflationary environment exists for most part of the economy and is likely to

reverberate in most sectors. For most consumer companies too, prices of many key

raw materials have been inflationary for the past few quarters.

Raw material such as palm oil and packaging material costs have risen sharply. So

we expect all companies to pass through these higher costs since the entire sector

faces the issue. We believe, since price hikes have been limited over the past two

years, it gives BRIT the room to raise prices this year.

BRIT has been bit guarded in terms of price hikes, but we expect price hikes to now

gradually come back. Besides, sales recovery in higher-margin premium products

and higher operating leverage will cushion the impact.

Also, we expect BRIT to gain market share in its entire portfolio because higher

inflation will severely impact smaller/regional companies. Even so, BRIT has other

cost levers to cushion the inflationary impact at the EBITDA margin level.

Cashew prices have been inflationary recently: With trade resuming between

Afghanistan and India, prices of dry fruits, which had gone up 20% over the past one

month, could cool off. Britannia uses dry fruits such as cashew etc in biscuits.




Raw material tracker

Name of the Commodity YoY (%) QoQ (%)

Palm Oil 58.7 4.4

PFAD 67.2 4.7

Copra 9.5 5

Wheat 4 -

Brent 67.4 5.1

Mentha -2.7 -1.6

Soda Ash 14.8 15.6

Vinyl Acetate 124.6 -14.3

Gold -7.8 0

India WPI rectified spirit -0.5 0.2


Gross margin

Source: Company

EBITDA margin

Source: Company

30.0

33.0

36.0

39.0

42.0

45.0

Q1

FY1

9

Q2

FY1

9

Q3

FY1

9

Q4

FY1

9

Q1

FY2

0

Q2

FY2

0

Q3

FY2

0

Q4

FY2

0

Q1

FY2

1

Q2

FY2

1

Q3

FY2

1

Q4

FY2

1

Q1

FY2

2

(%)

0.0

6.0

12.0

18.0

24.0

30.0

Q1

FY1

9

Q2

FY1

9

Q3

FY1

9

Q4

FY1

9

Q1

FY2

0

Q2

FY2

0

Q3

FY2

0

Q4

FY2

0

Q1

FY2

1

Q2

FY2

1

Q3

FY2

1

Q4

FY2

1

Q1

FY2

2

(%)




Strong technology implementation in processes

Britannia has created a very large digital platform. It went live with S/4 HANA, dealer

management platform and vendor management platform. S/4 HANA is going to

generate huge efficiency in material resource planning and a lot of muscle in terms

of data analytics. The company has also got a Warehouse Management System

working, which would reduce warehouse, ordering and inventory expenses. S/4

HANA will also provide the company with plant management and project

management systems, which will improve day-to-day operational efficiency.

Arteria is the company’s dealer management system; it provides real time data. It is

an integrated system, and will include scheme management or discount

management, claim settlements with distributors, pricing and promotion controls.

The vendor management system, which today covers 500+ vendors, will kick in more

efficiencies through better sourcing, digital contracts and lifecycle management,

which would allow the company to cater to vendors better.

Good governance and sustainability policy in place

Strong focus on ESG

Source: Company

Britannia is targeting 60% renewable energy by FY24 and a 30% reduction in water

consumption by 30% by FY24 vis-a-vis FY20. Recently, Go Air received SEBI’s

approval for its INR36bn IPO. Although there is no cross-holding between Britannia

and Go, Air there have been ICDs, which were a cause for concern. Britannia ICDs

are down sharply QoQ in Q1FY22 though. It is now at INR4,700mn compared with

INR7,900mn at end-FY21. This has been a key investor concern due to exposure of

reality and aviation business of promoter group. We will continue to track

developments here.

Good incentive policy

The company has a good ESOP policy to encourage management and top-level

employees to contribute to shareholder wealth, by increasing their own interest in

the company. The company allotted 4,00,000 equity shares of INR1 each upon

exercise of options in FY21. The details of remuneration paid/payable to Mr. Varun

Berry, CEO, for financial year 2020–21 are as follows:




CEO remuneration (as of FY21)

Salary (INR

mn)

Performance linked incentive (INR

mn)

Total (INR

mn)

Number of stock options

granted

62 43 105 250000

Source: Company

Trends at a glance

Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22

Domestic volume growth (% YoY) 3 3 0.1 21.5 9 4 8 1

Consolidated sales growth (% YoY) 6.2 3.8 2.5 26.7 12.1 6.1 9.2 -0.5

Standalone sales growth (% YoY) 7.1 3.1 0.9 24.8 11.4 5.7 9.7 0.5

Consolidated EBITDA margin (%) 16.1 16.8 15.8 21 19.8 19.3 16.1 16.3

Standalone EBITDA margin (%) 16.2 17.1 15.9 20.9 19.2 19.2 16.5 16.2

Consolidated Gross margin (%) 39.7 39.9 38.4 41 41.4 42 38.7 37.8

Standalone Gross margin (%) 39.4 39.9 38.3 40.2 40.5 41.6 39.4 37.2

Source: Company

Outlook and valuation: Positive; maintain ‘BUY’

Britannia is the value leader in the biscuit category (ahead of Parle) and has

sustained market share gains. We believe the company’s growth will continue to

outstrip the industry well. Britannia’s deepening distribution network, particularly in

rural, with focus on driving growth in states it has a weak standing in – Gujarat,

Madhya Pradesh, Uttar Pradesh and Rajasthan – will hold it in good stead. The

company’s aggregate growth has improved with the rise in its market share.

Britannia is also plugging gaps in its portfolio. It is evolving into a total foods

company with the launch of wafer biscuits, croissants, salty snacks, etc. Meanwhile,

the company is focusing on expanding and deepening its product offerings and

tapping into adjacent categories such as cake, rusk and bread. Going ahead, watch

out for a strong innovation pipeline in these categories. It also has big plans in the

dairy business, poised for a leg-up once the new plant comes on stream. We remain

optimistic on Britannia’s execution capabilities and potential to scale up its dairy

portfolio.

The company’s cost-saving initiatives (targeting ~2.1% of revenue per year) continue

to be afoot, helping it sustain margin expansion. A gradual improvement in the

product mix will also aid gross and EBITDA margins. A key monitorable is Parle

gaining market share from other players and narrowing the market share gap.

Rolling forward, we maintain ‘BUY/SO’ with a TP of INR4,670.




One-year forward P/E chart


Consolidated sales growth

Source: Company

Standalone sales growth

Source: Company

0

1,000

2,000

3,000

4,000

5,000

Au

g-1

7

Feb

-18

Au

g-1

8

Feb

-19

Au

g-1

9

Feb

-20

Au

g-2

0

Feb

-21

Au

g-2

1

(IN

R)

40x45x

50x

3

55x

60x

35x

30x

-5.0

2.0

9.0

16.0

23.0

30.0

Q4

FY1

8

Q1

FY1

9

Q2

FY1

9

Q3

FY1

9

Q4

FY1

9

Q1

FY2

0

Q2

FY2

0

Q3

FY2

0

Q4

FY2

0

Q1

FY2

1

Q2

FY2

1

Q3

FY2

1

Q4

FY2

1

Q1

FY2

2

(%)

0.0

6.0

12.0

18.0

24.0

30.0

Q4

FY1

8

Q1

FY1

9

Q2

FY1

9

Q3

FY1

9

Q4

FY1

9

Q1

FY2

0

Q2

FY2

0

Q3

FY2

0

Q4

FY2

0

Q1

FY2

1

Q2

FY2

1

Q3

FY2

1

Q4

FY2

1

Q1

FY2

2

(%)




Volume growth

Source: Company

Commodity watch

Source: Company

0.0

6.0

12.0

18.0

24.0

30.0

Q1

FY1

9

Q2

FY1

9

Q3

FY1

9

Q4

FY1

9

Q1

FY2

0

Q2

FY2

0

Q3

FY2

0

Q4

FY2

0

Q1

FY2

1

Q2

FY2

1

Q3

FY2

1

Q4

FY2

1

Q1

FY2

2

(%)




Company Description

Britannia is the value leader in the biscuit category and one of the oldest brands in

India. Britannia has a presence in the biscuit, bread, cakes, rusk and dairy segment.

In biscuits the company has brands like Good Day, Crackers, Nutrichoice, Marie Gold,

Tiger, Milk Bikis, Jim Jam, Bourbon, Little Hearts, Pure Magic and Nice Time.

Britannia is focussed on driving growth through its 7 power brands – GoodDay, Tiger,

Marie, Milk Bikis, 50:50, Treat and Nutri Choice. Britannia is present in dairy with

value added products like cheese, yogurt, flavoured milk, butter etc and plans to go

for full integration of this business. Apart from this the company is also present in

cakes and rusks which remain a key focus area. On the international front Britannia

exports to many countries and has international subsidiary in Middle East.

Investment Theme

Britannia is expected to outperform the industry growth led by strong innovation

pipeline and distribution expansion. The company is focusing on reducing the gap

with Parle and is driving inroads in the market where it is weak i.e. the hinterland.

Britannia is not only launching new products but also relaunching its key brands (like

GoodDay, Milk BIkis and Tiger) which are yield good results. The company is soon

going to commission its R&D facility which will also give a boost to innovation.

Britannia is however targeting cost savings of INR2.3–2.7bn for FY20, which will

protect margins, while rising mix of premium products (versus the value segment)

will boost margins.

Key Risks

Increased competitive intensity: Rising competitive intensity (especially from players

like Patanjali) can potentially result in volume pressures. Also, it can result in

increased A&P spends and investments towards the brand resulting in margin

pressure. Maintaining market share becomes challenging in such a scenario.

Raw material prices: Rise in the raw material prices like wheat, flour, RPO, milk can

lead to pressure on the gross margins. Inability to pass on the pricing pressure to

consumers due to higher competition can result in further pressure.

Rural slowdown: Biscuit is a highly penetrated category and slowdown, particularly

in rural areas, will lead to slowing of the category growth rates.

Failure in new innovations and segments: Britannia has a strong pipeline of new

innovations and it also plans to solidify its hold in the dairy, cake, rusk and

international markets. However, failure of new launches and disappointing entry in

new segments cannot be ruled out completely.




Additional Data

Management

MD Varun Berry

CFO Mr. N Venkataraman

CS Mr. T.V. Thulsidass

Non Ex Chairman Mr. Nusli N Wadia

Auditor Walker Chandiok & Co LLP

Holdings – Top 10* % Holding % Holding

LIC 6.64 Sbi Arbitrage 1.07

Arisaig Partner 1.51 Sbi Funds 1.07

Arisaig India 1.50 Nomura Holdings 0.95

Blackrock Inc 1.18 Vanguard 0.90

Icici Pru AMC 1.11 Fundrock Manage 0.74

*Latest public data

Recent Company Research Date Title Price Reco

02-Aug-21 Turning tide; Result Update 3,423 Buy

20-May-21 ICDs ruffle investors; focus on GoAir IP; Edel Flash

3,534 Buy

27-Apr-21 Volumes strong; high costs dent margin ; Result Update

3,540 Buy

Recent Sector Research Date Name of Co./Sector Title

15-Sep-21 Marico Déjà vu: GST hike in coconut oil?; Edel Flash

09-Sep-21 Hindustan Unilever Our conviction reinforced; Company Update

08-Sep-21 Bajaj Consumer Care Raising its growth pitch; Company Update

Rating Interpretation

Source: Bloomberg, Edelweiss research

Daily Volume

Source: Bloomberg

Rating Distribution: Edelweiss Research Coverage

Buy Hold Reduce Total

Rating Distribution* 175 55 19 250

>50bn >10bn and <50bn <10bn Total

Market Cap (INR) 223 40 3 266

*1 stocks under review

Rating Rationale

Rating Expected absolute returns over 12 months

Buy: >15%

Hold: >15% and <-5%

Reduce: <-5%

TP3,261

TP3,588

TP4,140

2125

2530

2935

3340

3745

4150

Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21

(IN

R)

BRIT IN Equity Buy Hold Reduce0

2

4

6

8

10

Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21

(Mn

)




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In Singapore, this report is being distributed by Edelweiss Investment Advisors Private Limited ("EIAPL") (Co. Reg. No. 201016306H) which is a holder of a capital markets services license and an exempt financial adviser in Singapore and (ii) solely to persons who qualify as "institutional investors" or "accredited investors" as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore ("the SFA"). Pursuant to regulations 33, 34, 35 and 36 of the Financial Advisers Regulations ("FAR"), sections 25, 27 and 36 of the Financial Advisers Act, Chapter 110 of Singapore shall not apply to EIAPL when providing any financial advisory services to an accredited investor (as defined in regulation 36 of the FAR. Persons in Singapore should contact EIAPL in respect of any matter arising from, or in connection with this publication/communication. This report is not suitable for private investors.

Disclaimer for Hong Kong persons

This report is distributed in Hong Kong by Edelweiss Securities (Hong Kong) Private Limited (ESHK), a licensed corporation (BOM -874) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to Section 116(1) of the Securities and Futures Ordinance “SFO”. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The report also does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual recipients. The Indian Analyst(s) who compile this report is/are not located in Hong Kong and is/are not licensed to carry on regulated activities in Hong Kong and does not / do not hold themselves out as being able to do so. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved.

Aditya Narain

Head of Research

[email protected]

brit in equity 17sep21 cu

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