praveen
04-05-2008, 05:38 PM
Britannia Industries Limited, a 90 year old company that was started in Kolkata, is a leading player in the bakery segment in India. Its products include various types of biscuits, breads and cakes. The company primarily operates in India. It is headquartered in Kolkata, and employed about 2,337 people as on March 2007.
The management of Britannia has undergone a lot of changes. As of now, Associated Biscuits International Holdings (ABIH) holds 51% stake in Britannia and the balance 49% is held by the public. Danone Group, a global food major and Wadia group hold 50% each in ABIH. The business is managed by 4 directors from Groupe-Danone, 4 directors from the Wadia group and 5 independent directors.
Industry
Biscuit industry on a growth path
Higher raw material prices are throwing away unorganized competitors - Biscuit Industry is expected to grow at around 15% p.a. in the near future. It has grown at approx 11% p.a. over last 16 years. There are various factors which contribute to the growth of the industry. In spite of the sharp hike in raw material prices and sagging margins, some of the organized players are offering heavy discounts on their products in order to grow volumes. This has forced many unorganized players to close down their business as they do not hold the requisite financial muscle and brand power to sustain in the market. On the other hand ITC and Surya Agro are spending huge amounts on advertisements, which has helped the category to grow rapidly. These new players along with the 2 existing main players, Britannia and Parle, have introduced a lot of new variants and products in different pack sizes.
Per capita consumption on the rise India’s per capita biscuit consumption is still at about 1 kg, as against 2.5 to 3 kg in Sri Lanka and 2 kg in Vietnam. In developed countries it is around 10 Kg per person p.a. With a growing economy, rising income levels and growing concept of nuclear families, ‘ready to eat’ segment is likely to grow at a much faster rate. As of now biscuit is the only established category in the ‘ready to eat’ segment apart from potato chips and wafers. Biscuits are considered to be more nutritional than wafers and they do enjoy better acceptance among children. Even if the per capita consumption triples in 10 years, it results in a CAGR of approx. 13% for the industry.
The Biscuit industry is a highly competitive one. As biscuits were reserved for the small scale industry in India, there were no major players in the industry apart from Parle and Britannia. After the biscuit industry was deregulated in 1997-98, various new players have ventured into biscuit business and have gained substantial market share. Players like ITC and Surya Agro (Priya Gold) have gained market share of around 5% each. However, there exists a huge unorganized market as well.
According to Federation of Biscuit Manufacturers of India (FBMI), the organized sector produces around 60% of the total production. This shows that the unorganized market is as high as 40%. As the raw material prices have gone over the roof, a lot of organized players have started undercutting. The government has also reduced the excise duty rates on some biscuit products in a systematic manner from 16% to NIL making it economically unviable for the unorganized players to continue the business.
Organized biscuit industry in India is expected to grow at around 15% rate in the near to medium term. Increased advertisement spends by biscuit majors, exit by small scale players, excise duty reduction by Government are the main growth drivers for the industry. Most of the players are introducing many new value added products based on new flavors. They are also introducing various new pack sizes. These efforts are expected to boost growth.
Company
Britannia Industries Limited (Britannia) is engaged in producing and distributing bakery products including a variety of biscuits, breads, rusks, and cakes. Wadia group of India and Groupe Danone of France, are equal shareholders in ABIL, UK which again is the major shareholder in Britannia.
Britannia has a major advantage in the form of a JV with the French collaborator - Groupe Danone, which is one of the leading players in the bakery products business. The company is jointly controlled by Groupe Danone of France and the Nulsi Wadia group, a leading industrial house in India.
The company operates through three broad product categories:
biscuit and high protein food, bread and rusk, and cake. The biscuit products are marketed under the following brands: Tiger, Good Day, 50-50, Marie Gold, Treat, Milk Bikis, Nutri Choice, Time Pass, Pure Magic, Little Hearts, Nice Time, Vita Marie Gold and Greetings.
Bread products are sold under the Premium Bakes, white sandwich bread brand. Cake products are sold under the Premium Bakes, Cakes and Rusks brands. The company also offers ‘Cup Cakes’ in its cakes category. Britannia's dairy operations are conducted through its subsidiary, Britannia New Zealand Foods Company Private Limited (BNZF). BNZF is a joint venture between Britannia and Fonterra Cooperative Group of New Zealand. The company exports its products to the US, Ghana, Seychelles, Singapore, Oman, Saudi Arabia, United Arab Emirates, Qatar, Bahrain and Kuwait. Britannia enjoys a prominent position in the industry. Over the last couple of years, it has trimmed down its wide product portfolio and started to focus on value-added instead of low-margin products. The company has divested a range of unrelated business interests in soyabean extraction, edible oils, export of cashewnuts and shrimp, granites and software. Britannia used to cater mainly to the premium segment. However, with the launch of Tiger brand, it has forayed into the low-end category, taking competition head on with Parle which is the leader in this segment. The company has also diversified within dairy and bakery products and entered the butter, cheese and
ghee markets.
All the Power Brands-Tiger, Good Day, Milk Bikis, Treat, MarieGold, 50:50 and NutriChoice saw brand innovation over a period.
Britannia’s strategy of strengthening and sharpening its brands and liberating them from existing formats and conventional biscuit archetypes has paid off. In that context, 'Tiger' is now more than a glucose biscuit and includes cream and coconut varieties. Innovation has shown its promise as a key business driver addressing several purchase and consumption opportunities both inhome and out of home, as well as for gifting. Company's focus on innovation has meant more new offerings (brands, product and pack forms) than the rest of the industry combined. Prominent innovations include Chota Tiger, 50:50, Chutkule, Treat Fruit Rollz, NutriChoice Digestive, NutriChoice SugarOut, Renovated Milk Bikis and Chocolate Cream in the Tiger range.
Britannia is actively involved in joint ventures and acquisitions. The company formed a Joint Venture with the Khimji Ramdas Group, one of the largest and the most respected business conglomerates in the Middle East. Britannia and its associates have acquired a significant stake in the Dubai based Strategic Food International Co. LLC and Oman based AI Sallan Food Industries Co SAOG. The two companies are key regional players in the biscuit and cookies segment in the GCC markets and export their products across the world. The Joint Venture will provide Britannia an opportunity to grow its international foot print by leveraging on the complementary strengths of the two partners.
Britannia also forged a strategic alliance with Daily Bread, a Bangalore based company engaged in manufacturing and retailing of premium breads, cakes, ready to eat snacks and gelatos. The business model includes a chain of own and franchised retail outlets and catering to institutional customers. This alliance will help to scale up the bakery business in select markets with a range of gourmet products sold under the 'Daily Bread' and 'Deluca's' brand names.
Key Investment Arguments
Britannia has a market cap of Rs. 3193.62cr, average daily volume of 5164 shares for the last six months and net sales of Rs. 2491.3cr during the trailing twelve months ended Dec 31, 2007.
It’s EBITDA and Net profit margins were at 6.4% and 4.5% resp. in 2007. Margins have improved in the 9 months of FY08 ended 200712 to 7.5% and 7.3% respectively.
The company has shown good results in the last 9 months ended December 2007 where in the net sales has grown by 18.25% and adjusted profits by 84.5% as compared to corresponding 9 month of previous year(Apr-Dec 2006).
The company has achieved a 5-year CAGR of 9.5% in revenues, 0.2% in Net Operating Income and 4.3% in Net Profits. Its operating cash flows as well as free cash flows have also grown consistently at a CAGR of 10.4% and 11.9% p.a. over the last 5 years.
Britannia trades at a PE multiple of 18.3 based on trailing twelve month (TTM) earnings, Price to Book ratio of 5.2 on FY07 bookvalue and Price to Sales ratio of 1.3 based on TTM net sales.
Debt-equity ratio of Britannia was NIL in FY07. Interest coverage ratio has also remained impressive over the last 3-4 years.
Media reports suggest that Britannia is expected to sell its 22-acre property in Padi, an old manufacturing hub north of Chennai. This follows the suspension of operations at the company’s plant located there. The company has suspended operations at its Padi unit w.e.f. April 7 2008 after a majority of workers accepted the company’s voluntary retirement scheme offer. The sale of property is anticipated to fetch Britannia close to Rs. 300cr in view of the appreciation in real estate prices in that region, as per media reports. However, the company has not yet confirmed any such information. Britannia’s manufacturing unit at Padi housed three plants which processed 2,000 tonnes of biscuit every month on a nine-shift basis. But in the last two years, only two shifts have been working at each plant. A VRS engagement two years ago saw the exit of 250 people.
Contract packaging is said to be replacing manufacturing operations. Britannia has opted for the strategy of outsourcing its manufacturing process to other entities in a big-way. Out of its current manufacturing capacity of 48000 tonnes per month, nearly 40000 tonnes is outsourced. Whilst this reduces the cost for the company on the one hand, it results in lesser labour-related troubles too.
Macro economic as well as industry specific factors point to continued market expansion for the biscuit industry. However, higher inflation in commodities and rising fuel prices will continue to challenge profitable growth. Britannia is focusing on leveraging its brands, innovation and technology to address these challenges.
Significant investment has been made during the course of last year on enhancing overall organizational capability by focusing on people, processes, systems and the right business metrics.
Britannia is increasing the manufacturing capacities of its owned plants as well as that of its contract manufacturers by investing Rs. 130cr in order to cater to the rising demand for bakery products in India.
The company has an extensive portfolio of top selling food brands. Britannia produces and distributes premium brands such as 50:50, Good Day, Little Hearts, Milk Bikis, MarieGold, Maska Chaska, NutriChoice, Pure Magic, Treat, and Tiger. A strong brand portfolio facilitates customer recall and enhances Britannia’s market penetration capabilities.
Key Concerns
There has been tussle going between the Wadia group and Danone. The three issues between Danone and Wadia group are - Britannia owns a brand "Tiger" which is launched by Danone in South East Asian countries as its own brand. Secondly, Danone wants to enter into packaged water and food business in India without involving Wadias. However, as per the agreement between Wadias and Danone, none of the partners can enter into food related businesses without the consent of the other partner. Lastly, as Danone holds part of the equity and not a holding stake in Britannia, Britannia is reluctant to share the accounts with Danone, as was done previously when Britannia's business used to be consolidated with Danone. Although for the first two issues, Wadias have moved the court, there are reports of both the parties agreeing for out of court settlement. Most likely one of the partner will buy out other’s stake. However, on the positive side, this clarity of single ownership, going into the future, might help the company management to focus more on the business.
Inflation, which recently touched a three-year high, has eaten into the profit margins of domestic biscuit makers in the recently concluded fiscal, with the industry fearing that its margins will be under pressure in the current fiscal too due to the persistent volatility in prices.
Faced with ballooning prices of inputs and the debilitating inflationary trends, biscuit makers, including top brands such as Britannia, Parle and ITC, are engaged in cost-cutting measures, especially in the areas of manufacturing, logistics and distribution costs. The industry had to shoulder a 20 to 25% increase in input prices over the last two years. In spite of the price increases, Britannia was able to maintain its market share in a fiercely competitive environment. In fact Britannia gained market share for its Tiger brand, which included glucose, cream, coconut and recently-launched banana variant.
Latest Development
Britannia Industries Ltd recently selected Hewlett-Packard India to implement a omprehensive IT outsourcing and transformation project that will include infrastructure solutions, SAP Application Services, consulting and outsourced services. This makes Britannia the first major FMCG Company to comprehensively outsource its IT operations including the data center (DC). This strategic outsourced partnership at India’s best known food company will help the various growth and business transformation initiatives within Britannia and ensure its long-term competitive position.
Conclusion
On the basis of our research, we feel that this is a good stock to buy at the current market price of Rs. 1351. If everything goes well, the price is likely to appreciate to Rs. 1605, within 12 months, translating into a gain of about 20%.
The management of Britannia has undergone a lot of changes. As of now, Associated Biscuits International Holdings (ABIH) holds 51% stake in Britannia and the balance 49% is held by the public. Danone Group, a global food major and Wadia group hold 50% each in ABIH. The business is managed by 4 directors from Groupe-Danone, 4 directors from the Wadia group and 5 independent directors.
Industry
Biscuit industry on a growth path
Higher raw material prices are throwing away unorganized competitors - Biscuit Industry is expected to grow at around 15% p.a. in the near future. It has grown at approx 11% p.a. over last 16 years. There are various factors which contribute to the growth of the industry. In spite of the sharp hike in raw material prices and sagging margins, some of the organized players are offering heavy discounts on their products in order to grow volumes. This has forced many unorganized players to close down their business as they do not hold the requisite financial muscle and brand power to sustain in the market. On the other hand ITC and Surya Agro are spending huge amounts on advertisements, which has helped the category to grow rapidly. These new players along with the 2 existing main players, Britannia and Parle, have introduced a lot of new variants and products in different pack sizes.
Per capita consumption on the rise India’s per capita biscuit consumption is still at about 1 kg, as against 2.5 to 3 kg in Sri Lanka and 2 kg in Vietnam. In developed countries it is around 10 Kg per person p.a. With a growing economy, rising income levels and growing concept of nuclear families, ‘ready to eat’ segment is likely to grow at a much faster rate. As of now biscuit is the only established category in the ‘ready to eat’ segment apart from potato chips and wafers. Biscuits are considered to be more nutritional than wafers and they do enjoy better acceptance among children. Even if the per capita consumption triples in 10 years, it results in a CAGR of approx. 13% for the industry.
The Biscuit industry is a highly competitive one. As biscuits were reserved for the small scale industry in India, there were no major players in the industry apart from Parle and Britannia. After the biscuit industry was deregulated in 1997-98, various new players have ventured into biscuit business and have gained substantial market share. Players like ITC and Surya Agro (Priya Gold) have gained market share of around 5% each. However, there exists a huge unorganized market as well.
According to Federation of Biscuit Manufacturers of India (FBMI), the organized sector produces around 60% of the total production. This shows that the unorganized market is as high as 40%. As the raw material prices have gone over the roof, a lot of organized players have started undercutting. The government has also reduced the excise duty rates on some biscuit products in a systematic manner from 16% to NIL making it economically unviable for the unorganized players to continue the business.
Organized biscuit industry in India is expected to grow at around 15% rate in the near to medium term. Increased advertisement spends by biscuit majors, exit by small scale players, excise duty reduction by Government are the main growth drivers for the industry. Most of the players are introducing many new value added products based on new flavors. They are also introducing various new pack sizes. These efforts are expected to boost growth.
Company
Britannia Industries Limited (Britannia) is engaged in producing and distributing bakery products including a variety of biscuits, breads, rusks, and cakes. Wadia group of India and Groupe Danone of France, are equal shareholders in ABIL, UK which again is the major shareholder in Britannia.
Britannia has a major advantage in the form of a JV with the French collaborator - Groupe Danone, which is one of the leading players in the bakery products business. The company is jointly controlled by Groupe Danone of France and the Nulsi Wadia group, a leading industrial house in India.
The company operates through three broad product categories:
biscuit and high protein food, bread and rusk, and cake. The biscuit products are marketed under the following brands: Tiger, Good Day, 50-50, Marie Gold, Treat, Milk Bikis, Nutri Choice, Time Pass, Pure Magic, Little Hearts, Nice Time, Vita Marie Gold and Greetings.
Bread products are sold under the Premium Bakes, white sandwich bread brand. Cake products are sold under the Premium Bakes, Cakes and Rusks brands. The company also offers ‘Cup Cakes’ in its cakes category. Britannia's dairy operations are conducted through its subsidiary, Britannia New Zealand Foods Company Private Limited (BNZF). BNZF is a joint venture between Britannia and Fonterra Cooperative Group of New Zealand. The company exports its products to the US, Ghana, Seychelles, Singapore, Oman, Saudi Arabia, United Arab Emirates, Qatar, Bahrain and Kuwait. Britannia enjoys a prominent position in the industry. Over the last couple of years, it has trimmed down its wide product portfolio and started to focus on value-added instead of low-margin products. The company has divested a range of unrelated business interests in soyabean extraction, edible oils, export of cashewnuts and shrimp, granites and software. Britannia used to cater mainly to the premium segment. However, with the launch of Tiger brand, it has forayed into the low-end category, taking competition head on with Parle which is the leader in this segment. The company has also diversified within dairy and bakery products and entered the butter, cheese and
ghee markets.
All the Power Brands-Tiger, Good Day, Milk Bikis, Treat, MarieGold, 50:50 and NutriChoice saw brand innovation over a period.
Britannia’s strategy of strengthening and sharpening its brands and liberating them from existing formats and conventional biscuit archetypes has paid off. In that context, 'Tiger' is now more than a glucose biscuit and includes cream and coconut varieties. Innovation has shown its promise as a key business driver addressing several purchase and consumption opportunities both inhome and out of home, as well as for gifting. Company's focus on innovation has meant more new offerings (brands, product and pack forms) than the rest of the industry combined. Prominent innovations include Chota Tiger, 50:50, Chutkule, Treat Fruit Rollz, NutriChoice Digestive, NutriChoice SugarOut, Renovated Milk Bikis and Chocolate Cream in the Tiger range.
Britannia is actively involved in joint ventures and acquisitions. The company formed a Joint Venture with the Khimji Ramdas Group, one of the largest and the most respected business conglomerates in the Middle East. Britannia and its associates have acquired a significant stake in the Dubai based Strategic Food International Co. LLC and Oman based AI Sallan Food Industries Co SAOG. The two companies are key regional players in the biscuit and cookies segment in the GCC markets and export their products across the world. The Joint Venture will provide Britannia an opportunity to grow its international foot print by leveraging on the complementary strengths of the two partners.
Britannia also forged a strategic alliance with Daily Bread, a Bangalore based company engaged in manufacturing and retailing of premium breads, cakes, ready to eat snacks and gelatos. The business model includes a chain of own and franchised retail outlets and catering to institutional customers. This alliance will help to scale up the bakery business in select markets with a range of gourmet products sold under the 'Daily Bread' and 'Deluca's' brand names.
Key Investment Arguments
Britannia has a market cap of Rs. 3193.62cr, average daily volume of 5164 shares for the last six months and net sales of Rs. 2491.3cr during the trailing twelve months ended Dec 31, 2007.
It’s EBITDA and Net profit margins were at 6.4% and 4.5% resp. in 2007. Margins have improved in the 9 months of FY08 ended 200712 to 7.5% and 7.3% respectively.
The company has shown good results in the last 9 months ended December 2007 where in the net sales has grown by 18.25% and adjusted profits by 84.5% as compared to corresponding 9 month of previous year(Apr-Dec 2006).
The company has achieved a 5-year CAGR of 9.5% in revenues, 0.2% in Net Operating Income and 4.3% in Net Profits. Its operating cash flows as well as free cash flows have also grown consistently at a CAGR of 10.4% and 11.9% p.a. over the last 5 years.
Britannia trades at a PE multiple of 18.3 based on trailing twelve month (TTM) earnings, Price to Book ratio of 5.2 on FY07 bookvalue and Price to Sales ratio of 1.3 based on TTM net sales.
Debt-equity ratio of Britannia was NIL in FY07. Interest coverage ratio has also remained impressive over the last 3-4 years.
Media reports suggest that Britannia is expected to sell its 22-acre property in Padi, an old manufacturing hub north of Chennai. This follows the suspension of operations at the company’s plant located there. The company has suspended operations at its Padi unit w.e.f. April 7 2008 after a majority of workers accepted the company’s voluntary retirement scheme offer. The sale of property is anticipated to fetch Britannia close to Rs. 300cr in view of the appreciation in real estate prices in that region, as per media reports. However, the company has not yet confirmed any such information. Britannia’s manufacturing unit at Padi housed three plants which processed 2,000 tonnes of biscuit every month on a nine-shift basis. But in the last two years, only two shifts have been working at each plant. A VRS engagement two years ago saw the exit of 250 people.
Contract packaging is said to be replacing manufacturing operations. Britannia has opted for the strategy of outsourcing its manufacturing process to other entities in a big-way. Out of its current manufacturing capacity of 48000 tonnes per month, nearly 40000 tonnes is outsourced. Whilst this reduces the cost for the company on the one hand, it results in lesser labour-related troubles too.
Macro economic as well as industry specific factors point to continued market expansion for the biscuit industry. However, higher inflation in commodities and rising fuel prices will continue to challenge profitable growth. Britannia is focusing on leveraging its brands, innovation and technology to address these challenges.
Significant investment has been made during the course of last year on enhancing overall organizational capability by focusing on people, processes, systems and the right business metrics.
Britannia is increasing the manufacturing capacities of its owned plants as well as that of its contract manufacturers by investing Rs. 130cr in order to cater to the rising demand for bakery products in India.
The company has an extensive portfolio of top selling food brands. Britannia produces and distributes premium brands such as 50:50, Good Day, Little Hearts, Milk Bikis, MarieGold, Maska Chaska, NutriChoice, Pure Magic, Treat, and Tiger. A strong brand portfolio facilitates customer recall and enhances Britannia’s market penetration capabilities.
Key Concerns
There has been tussle going between the Wadia group and Danone. The three issues between Danone and Wadia group are - Britannia owns a brand "Tiger" which is launched by Danone in South East Asian countries as its own brand. Secondly, Danone wants to enter into packaged water and food business in India without involving Wadias. However, as per the agreement between Wadias and Danone, none of the partners can enter into food related businesses without the consent of the other partner. Lastly, as Danone holds part of the equity and not a holding stake in Britannia, Britannia is reluctant to share the accounts with Danone, as was done previously when Britannia's business used to be consolidated with Danone. Although for the first two issues, Wadias have moved the court, there are reports of both the parties agreeing for out of court settlement. Most likely one of the partner will buy out other’s stake. However, on the positive side, this clarity of single ownership, going into the future, might help the company management to focus more on the business.
Inflation, which recently touched a three-year high, has eaten into the profit margins of domestic biscuit makers in the recently concluded fiscal, with the industry fearing that its margins will be under pressure in the current fiscal too due to the persistent volatility in prices.
Faced with ballooning prices of inputs and the debilitating inflationary trends, biscuit makers, including top brands such as Britannia, Parle and ITC, are engaged in cost-cutting measures, especially in the areas of manufacturing, logistics and distribution costs. The industry had to shoulder a 20 to 25% increase in input prices over the last two years. In spite of the price increases, Britannia was able to maintain its market share in a fiercely competitive environment. In fact Britannia gained market share for its Tiger brand, which included glucose, cream, coconut and recently-launched banana variant.
Latest Development
Britannia Industries Ltd recently selected Hewlett-Packard India to implement a omprehensive IT outsourcing and transformation project that will include infrastructure solutions, SAP Application Services, consulting and outsourced services. This makes Britannia the first major FMCG Company to comprehensively outsource its IT operations including the data center (DC). This strategic outsourced partnership at India’s best known food company will help the various growth and business transformation initiatives within Britannia and ensure its long-term competitive position.
Conclusion
On the basis of our research, we feel that this is a good stock to buy at the current market price of Rs. 1351. If everything goes well, the price is likely to appreciate to Rs. 1605, within 12 months, translating into a gain of about 20%.