RESULTS REVIEW 1QFY20 11 AUG 2019 Britannia Industries - 1QFY20... · RESULTS REVIEW 1QFY20 11 AUG 2019 Britannia Industries NEUTRAL . Hits a speed bump! BRIT reported a dull show,

RESULTS REVIEW 1QFY20 11 AUG 2019

Britannia Industries NEUTRAL

Hits a speed bump!BRIT reported a dull show, mostly owing to weak macros. Modest volume growth and a sharp rise in costs led to negative oplev. EBITDA stagnated. BRIT’s plan to accelerate growth via new launches (~4% of rev.) has hit a speed bump. While management may keep a tight lid on costs hereon, 1HFY20 performance will be weak. 2H holds some hope. Our estimates fall ~5%; we have cut target P/E to 40x (vs 45x) on account of BRIT’s moderating trajectory. Our TP is Rs 2,674. Maintain NEUTRAL. HIGHLIGHTS OF THE QUARTER Cons. revenue/volume grew at 6/3.5% vs. exp. of 9/6%.

Impressive market share gains (+130/+150bps in 1QFY20/FY19) weren’t enough to deliver healthy volume growth. Biscuit category growth has tumbled to 1-2% (vs. 6-8% in FY19) owing to weak rural demand (now at par with urban). BRIT continues to expand share gap vs. Parle (>5% now vs. nil in FY16) driven by premiumisation (value segment is declining) and distribution expansion. Hindi belt (20% mix for BRIT vs. 40% industry mix) which has been a growth driver for BRIT, slowed to ~3% vol. growth. Management claims that demand has marginally improved in July. We expect a recovery in 2HFY20 led by normal monsoons.

New launches like milk shakes, cakes, cream wafers, salty snacks have received positive feedback from the trade

and consumers. Croissants remain a WIP. We believe BRIT will now hold back new launches and focus on scaling up recent launches.

GM expanded by 41bps to 40.4%, despite 4% cost inflation, owing to price hikes and richer mix. EBITDAM declined by 69bps to 14.6% (exp +19bps) owing to (1) Aggressive A&P spends during World Cup (+22% YoY), (2) Commissioned new lines at Ranjangaon plant and (3) Negative oplev. We moderate margin expansion in FY20 (40bps) and in FY21 (+90bps) driven by cost savings program, premiumisation in biscuits, GM accretive launches and some oplev.

STANCE BRIT has driven profitable growth in the last few years. However, weak macros and consumer sentiment pose challenges. Also, ICD exposures raise corporate governance concerns, even as they have declined in a quarter by ~30% to ~Rs 5bn (management guided for a capping at current levels). The stock has corrected ~20% since our downgrade (Jul-18). We are admirers of the brand equity, strategy and management execution and like its focus on expanding the addressable market (total snacks co.), but await concrete evidence for an upgrade.

Financial Summary YE March (Rs mn) Q1FY20 Q1FY19 YoY (%) Q4FY19 QoQ (%) FY18 FY19 FY20E FY21E FY22E Net Revenues 27,004 25,438 6.2 27,990 (3.5) 99,140 1,10,549 1,20,494 1,36,188 1,53,222 EBITDA 3,947 3,894 1.4 4,366 (9.6) 15,017 17,336 19,348 23,137 27,266 APAT 2,510 2,582 (2.8) 2,972 (15.6) 10,040 11,557 12,626 15,320 18,289 Diluted EPS (Rs) 11.1 10.8 3.3 12.4 (10.2) 41.8 48.1 52.5 63.8 76.1 P/E (x) 61.9 53.9 49.3 40.6 34.0 EV / EBITDA (x) 40.7 35.1 31.1 25.6 21.3 Core RoCE (%) 39.1 39.3 38.7 44.5 51.2

Source: Company, HDFC sec Inst Research

INDUSTRY FMCG CMP (as on 09 Aug 2019) Rs 2,588 Target Price Rs 2,674 Nifty 11,110 Sensex 37,582 KEY STOCK DATA Bloomberg BRIT IN No. of Shares (mn) 240 MCap (Rs bn) / ($ mn) 622/8,788 6m avg traded value (Rs mn) 1,259 STOCK PERFORMANCE (%) 52 Week high / low Rs 3,472/2,522 3M 6M 12M Absolute (%) (3.2) (16.8) (18.3) Relative (%) (3.2) (19.6) (17.1) SHAREHOLDING PATTERN (%) Mar-19 Jun-19 Promoters 50.66 50.66 FIs & Local MFs 12.37 13.11 FPIs 15.75 15.70 Public & Others 21.22 20.53 Pledged Shares 0.00 0.00 Source : BSE

Naveen Trivedi [email protected] +91-22-6171-7324

Siddhant Chhabria [email protected] +91-22-6171-7336

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

BRITANNIA INDUSTRIES: RESULTS REVIEW 1QFY20

Quarterly Financials Year to March (Rs mn) 1QFY20 1QFY19 YoY (%) 4QFY19 QoQ (%) FY19 FY18 YoY (%) Net Revenue 27,004 25,438 6.2 27,990 (3.5) 1,10,547 99,140 11.5 Material Expenses 16,092 15,264 5.4 16,459 (2.2) 65,615 61,071 7.4 Employee Expenses 1,206 1,086 11.0 1,082 11.4 4,418 4,016 10.0 Other Operating Expenses 4,460 4,125 8.1 4,772 (6.6) 23,180 19,036 21.8 EBITDA 3,947 3,894 1.4 4,366 (9.6) 17,334 15,017 15.4 Depreciation 448 356 25.6 469 (4.5) 1,619 1,421 13.9 EBIT 3,499 3,537 (1.1) 3,897 (10.2) 15,715 13,596 15.6 Other Income 675 420 60.6 618 9.2 2,065 1,664 24.1 Interest Cost 101 24 313.9 13 708.0 91 76 19.8 Share of (loss) I profit in associates (0) (0) na (3) na (10) (2) na PBT 3,916 3,933 (0.4) 4,499 (13.0) 17,679 15,182 16.5 Tax 1,430 1,352 5.8 1,557 (8.1) 6,125 5,142 19.1 RPAT 2,510 2,582 (2.8) 2,972 (15.6) 11,555 10,040 15.1 Adjustment 160 - - - - APAT 2,670 2,582 3.4 2,972 (10.2) 11,555 10,040 15.1 EPS 11.1 10.8 3.3 12 (10.2) 48.2 41.8 15.3 Margin Analysis

Particulars (%) 1QFY20 1QFY19 YoY (bps) 4QFY19 QoQ (bps) FY19 FY18 YoY (%) Material Expenses 59.6 60.0 (41) 58.8 79 59.4 61.6 (225) Employee Expenses 4.5 4.3 20 3.9 60 4.0 4.1 (5) Other Operating Expenses 16.5 16.2 30 17.1 (54) 21.0 19.2 177 EBITDA Margin 14.6 15.3 (69) 15.6 (98) 15.7 15.1 53 Tax Rate 36.5 34.4 214 34.6 192 34.6 33.9 77 PAT Margin 9.3 10.2 (86) 10.6 (133) 10.5 10.1 33 APAT Margin 9.9 10.2 (26) 10.6 (73) 10.5 10.1 33 Source: Company, HDFC sec Inst Research

Domestic revenues grew by 7% with volume growth of 3.5%. Revenue grew at slow pace despite sharp (130bps) market share gains in biscuits Commodity inflation was at 4%. Co has taken a price hike of 3.5%. GM expansion was led by richer mix. Employee expense grew by 11% led by increments Advertisment spend grew by 21% to Rs 1.3bn owing to World Cup campaign EBITDAM declined by 69bps owing to operating deleverage and higher A&P spends on new launches. Rs 156mn of exceptional items was on account of VRS expense

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New Launches: Expanding addressable market

Cream Wafers Milk Shakes

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Entry in Salted snacks Croissants


All new launches are gross margin accretive to BRIT Cream wafers (Rs 6bn category) has been launched pan-India. Within 1 year of launch BRIT has become the no 3 player with ~10% share BRIT’s dairy shakes (~Rs 22bn market) have received early success. Winkin’ Cow is now the no 2 milk shake brand BRIT entered the salty snacks category via extruded snacks (~Rs 80bn category). Co has launched 5 variants with focus on Rs 5 pack (80% share of the category). Croissants was recently launched after a long delay (sourcing ingredients). The product has received mixed responses.

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Quarterly Net Revenue Quarterly Domestic Volume Growth


Quarterly EBITDA Quarterly Gross and EBITDA Margin


Momentary softness in rural resulted in moderation of volume growth BRIT continues to be aggressive with its new launches which should accelerate growth in 2HFY20 as the base turns favorable EBITDAM expansion has moderated in the recent past owing to higher marketing spends and moderation in cost savings (low-hanging fruits behind)

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Gross Margin (%) - LHS EBITDA Margin (%) - RHS

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Revenue Performance Gross Margin


EBITDA Margin NPM


We expect revival in consumer demand, continued market share gains and new launches to support healthy growth in FY20E & FY21E We expect ~70bps EBITDAM expansion annually, driven by premiumisation, op-lev and cost savings

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Net Sales YoY Gr. CAGR (%) - RHS

Rs bn

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% 35.6

% 37.6

% 39.7

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Revenue Growth In Weak States

Source: Company, HDFC sec Inst Research Direct Reach Rural distribution (Rural Preferred Dealers)


Weak states now contribute ~20% of revenue mix vs. 40% for the industry. A few years back this share was <10% for BRIT BRIT is successfully gaining share from Parle in North India BRIT’s market share is in the low teens in the weak states

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Gujarat MP UP Rajasthan

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BRIT Vs. Parle Market Share

Overall commodity inflation at 4%


Premiumisation, innovation and distribution expansion were the key drivers for BRIT to gain market share over the years Share gap between BRIT and Parle is now >5% BRIT’s market share in Gujarat, Rajasthan, UP and MP is just 1/5th that of Parle (market leader) Commodity inflation has inched up to 4% led by flour and milk inflation. BRIT has taken a price hike of 3-3.5% to pass on cost inflation BRIT has also hedged flour prices until 3QFY20 by purchasing Rs 7bn of wheat in Aug. We expect milk inflation to reverse in the near-term led by onset of flush season and normal monsoon

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Key Assumptions Assumptions FY17 FY18 FY19 FY20E FY21E FY22E Revenue Growth (%)

Biscuits and high protein food 8.0 8.0 11.5 6.5 9.4 10.0 Bread, bread toast and rusk 7.0 7.0 15.0 13.0 16.0 17.0 Cake 8.0 8.0 15.0 13.0 18.0 18.0 Dairy Business 2.5 (5.2) 8.0 25.0 30.0 25.0 International Business (13.8) (3.1) 13.0 16.0 16.0 14.0

Gross Margin (%) 38.3 38.4 40.6 41.0 41.5 42.0 ASP (% of sales) 4.3 4.1 4.5 4.4 4.3 4.3 Distribution (% of sales) 4.9 4.9 5.2 5.2 5.1 5.0 EBITDA Margin (%) 14.1 15.1 15.7 16.1 17.0 17.8 Tax Rate (%) 32.2 33.9 34.6 34.6 34.6 34.6 NPM (%) 9.8 10.1 10.5 10.5 11.2 11.9 Source: Company, HDFC sec Inst Research

Change in estimates

FY20E FY21E OLD NEW Chg (%) OLD NEW Chg (%)

Sales 1,24,440 1,20,494 -3.2% 1,42,600 1,36,188 -4.5% EBITDA 20,159 19,348 -4.0% 24,028 23,137 -3.7% APAT 13,259 12,626 -4.8% 16,078 15,320 -4.7% EPS 55.2 52.5 -4.8% 66.9 63.8 -4.7% Source: HDFC sec Inst Research

We expect BRIT to continue to gain market share gains and premiumisation in biscuits Re-launch of rusks and focus on value added products in bread is driving growth New launches In cake have accelerated segment growth Launch of milk shakes has accelerated dairy growth We cut our estimates by 5% to factor in (a) pause in new launches and (b) momentary softness in demand

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BRITANNIA INDUSTRIES : RESULTS REVIEW 1QFY20

Peer Set Comparison

Company MCap

(Rs bn)

CMP (Rs) Reco. TP

(Rs)

EPS (Rs) P/E (x) EV/EBITDA (x) Core RoCE (%)

FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E

HUL 3,977 1,841 NEU 1,847 28.1 32.7 39.9 65.4 56.3 46.1 44.1 40.6 32.0 248.6 36.6 25.6 ITC 2,851 254 BUY 362 10.4 11.4 12.5 24.4 22.4 20.4 15.4 13.9 12.4 39.2 40.6 43.8 Nestle 1,156 11,993 NR 11,064 167.1 206.5 245.9 71.8 58.1 48.8 41.3 35.4 30.3 82.1 101.4 121.4 Dabur 773 439 BUY 463 8.2 9.8 11.7 53.6 44.6 37.4 43.0 35.6 30.6 50.1 54.9 60.8 Britannia 622 2,588 NEU 2,674 48.1 52.5 63.8 53.9 49.4 40.6 35.1 30.7 25.3 39.3 38.7 44.5 Marico 506 392 BUY 395 7.2 8.8 10.5 54.4 44.5 37.2 39.4 31.2 27.2 48.8 48.0 54.1 Colgate 335 1,230 NEU 1,281 27.6 30.8 35.5 44.6 39.9 34.7 26.8 23.9 20.9 67.2 70.6 78.4 Emami 145 311 BUY 464 11.0 13.0 15.0 28.2 23.9 20.8 19.1 16.6 14.3 21.5 27.0 33.0 Jub. Food 156 1,183 BUY 1,778 24.1 29.3 36.9 49.1 40.3 32.0 24.9 15.3 12.4 45.8 47.5 40.0 United Spirits 440 605 BUY 650 10.2 12.4 15.7 59.1 48.9 38.6 34.5 27.2 22.5 15.6 18.1 21.1 Radico Khaitan 42 318 BUY 492 14.1 15.8 18.9 22.5 20.2 16.8 13.0 11.5 9.7 11.5 12.2 13.5 Source: HDFC sec Inst Research

Page | 9


Income Statement Year End March (Rs mn) FY18 FY19 FY20E FY21E FY22E Net Revenues 99,140 1,10,549 1,20,494 1,36,188 1,53,222 Growth (%) 9.5 11.5 9.0 13.0 12.5 Material Expenses 61,071 65,615 71,059 79,707 88,911 Employee Expense 4,016 4,418 4,896 5,533 6,250 ASP Expense 4,113 5,008 5,302 5,856 6,589 Distribution Expense 4,864 5,749 6,266 6,946 7,661 Other Expense 10,059 12,423 13,681 15,463 17,397 EBITDA 15,017 17,336 19,348 23,137 27,266 EBITDA Growth (%) 17.5 15.4 11.6 19.6 17.8 EBITDA Margin (%) 15.1 15.7 16.1 17.0 17.8 Depreciation & Amortization 1,421 1,619 1,834 2,038 2,194 EBIT 13,596 15,717 17,514 21,099 25,071 Other Income (Including EO Items) 1,664 2,065 2,672 3,103 3,699

Interest 76 91 718 618 618 PBT 15,184 17,691 19,156 23,584 28,152 Tax 5,142 6,125 6,705 8,254 9,853 RPAT 10,040 11,557 12,466 15,320 18,289 Adjustment - - (160) - - APAT 10,040 11,557 12,626 15,320 18,289 APAT Growth (%) 13.5 15.1 9.3 21.3 19.4 Adjusted EPS (Rs) 41.8 48.1 52.5 63.8 76.1 EPS Growth (%) 13.4 15.0 9.3 21.3 19.4

Source: Company, HDFC sec Inst Research Note: Factored bonus debentures as debt

Balance Sheet Year End March (Rs mn) FY18 FY19 FY20E FY21E FY22E SOURCES OF FUNDS Share Capital - Equity 240 240 240 240 240 Reserves 33,855 41,794 42,872 53,276 65,780 Total Shareholders Funds 34,095 42,035 43,113 53,516 66,021 Bonus Debentures - 7,210 7,210 7,210 Minority interest 131 327 327 327 327 Long Term Debt 846 619 619 619 619 Short Term Debt 1,159 761 761 761 761 Total Debt 2,005 1,380 1,380 1,380 1,380 Net Deferred Taxes (226) (138) (138) (138) (138) Non Current Liabilities 341 387 424 479 540 TOTAL SOURCES OF FUNDS 36,347 43,991 52,315 62,774 75,339 APPLICATION OF FUNDS Net Block 12,174 15,579 17,745 17,707 17,513 CWIP 2,423 1,012 1,012 1,012 1,012 Goodwill 1,282 1,304 1,304 1,304 1,304 LT Loans & Advances 1,744 847 - - - Other Non Current Assets 292 1,011 1,102 1,245 1,401 Total Non-current Assets 17,916 19,753 21,163 21,268 21,230 Inventories 6,528 7,814 8,435 9,397 10,572 Debtors 3,046 3,942 4,217 4,630 5,210 Other Current Assets 11,507 14,910 16,026 18,113 20,379 Cash & Equivalents 12,657 15,325 21,829 31,321 42,718 Total Current Assets 33,738 41,991 50,506 63,461 78,879 Creditors 12,293 15,061 16,420 18,639 21,038 Other Current Liabilities 3,014 2,692 2,934 3,316 3,731 Total Current Liabilities 15,307 17,753 19,354 21,955 24,769 Net Current Assets 18,431 24,238 31,153 41,506 54,110 TOTAL APPLICATION OF FUNDS 36,347 43,991 52,315 62,774 75,339


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Cash Flow Statement Year ending March (Rs mn) FY18 FY19 FY20E FY21E FY22E Reported PBT 15,184 17,691 19,156 23,584 28,152 Non-operating & EO Items (1,511) - - - - Interest Expenses 76 91 718 618 618 Depreciation 1,421 1,619 1,834 2,038 2,194 Working Capital Change 2,283 (3,362) (411) (861) (1,206) Tax Paid (4,965) (6,125) (6,705) (8,254) (9,853) OPERATING CASH FLOW ( a ) 12,488 9,914 14,593 17,125 19,905 Capex (4,212) (4,033) (4,000) (2,000) (2,000) Free Cash Flow (FCF) 8,276 5,881 10,593 15,125 17,905 Investments (6,442) (3,959) (3,500) (5,000) (5,000) Non-operating Income 1,091 904 793 (88) (95) INVESTING CASH FLOW ( b ) (9,563) (7,088) (6,707) (7,088) (7,095) Debt Issuance/(Repaid) 673 (402) - - - Interest Expenses (75) (91) (718) (618) (618) FCFE 3,523 2,332 7,168 9,418 12,191 Share Capital Issuance 151 - - - - Dividend (3,174) (3,618) (4,338) (4,917) (5,784) Others 108 - - - - FINANCING CASH FLOW ( c ) (2,317) (4,110) (5,056) (5,535) (6,403) NET CASH FLOW (a+b+c) 608 (1,285) 2,829 4,502 6,407 EO Items, Others 49 (7) - - - Closing Cash & Equivalents 1,864 572 3,576 8,068 14,466


Key Ratios FY18 FY19 FY20E FY21E FY22E PROFITABILITY (%) GPM 38.4 40.6 41.0 41.5 42.0 ASP 4.1 4.5 4.4 4.3 4.3 EBITDA Margin 15.1 15.7 16.1 17.0 17.8 EBIT Margin 13.7 14.2 14.5 15.5 16.4 APAT Margin 10.1 10.5 10.5 11.2 11.9 RoE 32.9 30.4 29.7 31.7 30.6 RoIC (or Core RoCE) 39.1 39.3 38.7 44.5 51.2 RoCE 31.2 28.9 27.2 27.3 27.1 EFFICIENCY Tax Rate (%) 33.9 34.6 34.6 34.6 34.6 Fixed Asset Turnover (x) 5.7 4.9 4.5 4.8 5.0 Inventory (days) 24.0 25.8 25.6 25.2 25.2 Debtors (days) 11.21 13.02 12.78 12.41 12.41 Other Current Assets (days) 42.4 49.2 48.5 48.5 48.5 Payables (days) 45.3 49.7 49.7 50.0 50.1 Other Current Liab. (days) 11.1 8.9 8.9 8.9 8.9 Cash Conversion Cycle (days) 21.3 29.4 28.2 27.3 27.1 Net D/E (x) (0.3) (0.3) (0.5) (0.6) (0.6) Interest Coverage (x) 179.1 172.9 24.4 34.1 40.6 PER SHARE DATA (Rs) EPS 41.8 48.1 52.5 63.8 76.1 CEPS 47.7 54.8 60.2 72.2 85.2 Dividend 12.5 15.0 17.0 20.0 20.0 Book Value 142.0 174.9 179.4 222.7 274.7 VALUATION P/E (x) 61.9 53.9 49.3 40.6 34.0 P/BV (x) 18.2 14.8 14.4 11.6 9.4 EV/EBITDA (x) 40.7 35.1 31.1 25.6 21.3 EV/Revenues (x) 6.2 5.5 5.0 4.4 3.8 OCF/EV (%) 2.0 1.6 2.4 2.9 3.4 FCF/EV (%) 1.4 1.0 1.8 2.6 3.1 FCFE/Mkt Cap (%) 0.6 0.4 1.2 1.5 2.0 Dividend Yield (%) 0.5 0.6 0.7 0.8 0.8


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RECOMMENDATION HISTORY

Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 10-Oct-18 2,757 NEU 3,083 13-Nov-18 2,908 NEU 3,044 9-Jan-19 3,090 NEU 3,149

11-Feb-19 3,108 NEU 3,115 10-Apr-19 2,963 NEU 3,207 3-May-19 2,783 NEU 3,101 9-Jul-19 2,763 NEU 3,011

11-Aug-19 2,588 NEU 2,674

2,5002,6002,7002,8002,9003,0003,1003,2003,3003,4003,500

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Britannia Inds TP

HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel,Mumbai - 400 013 Board : +91-22-6171 7330 www.hdfcsec.com

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RESULTS REVIEW 1QFY20 11 AUG 2019 Britannia Industries - 1QFY20... · RESULTS REVIEW 1QFY20 11 AUG 2019 Britannia Industries NEUTRAL . Hits a speed bump! BRIT reported a dull show,

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