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Britannia: Over the years - Views on News from Equitymaster
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  • Mar 8, 2005

    Britannia: Over the years

    In India, one associates biscuits undoubtedly with Britannia. It is the market leader in the Rs 30 bn biscuit segment with over 40% market share, in value terms. It has presence across all segments, from the low-end glucose biscuit to the premium ones. Biscuits are one of the most widely consumed products in India. Consumption cuts across regions, age groups and socio-economic strata.

    Promoted by Danone and Mr. Nusli Wadia, Britannia dominates the Rs 40 bn Indian bakery market. Britannia hived off its dairy business in March 2002 to Britannia New Zealand Foods - a 49:51 joint venture with Fonterra Group, New Zealand. The primary business of the company is now bakery, which consists of biscuits, bread and cakes. Biscuits account for 93% of the company's revenues.

    Its MNC promoter, Danone, is the world's largest producer of fresh dairy products and the second largest producer of biscuits and mineral water globally. Though Britannia has a strong MNC parent, till date, Danone has not seemingly played a proactive role in managing the company.

    The journey over the past 5 years…

    Revenues Snapshot…
    (Rs m) FY00 FY01 FY02 FY03 FY04 CAGR
    Biscuits 9,784 11,014 11,681 12,506 13,619 8.6%
    %growth ~ 12.6% 6.1% 7.1% 8.9%  
    % of sales 83.6% 82.7% 80.5% 92.7% 92.6%  
    Bread 665 620 663 638 727 2.2%
    %growth ~ -6.8% 7.0% -3.8% 13.8%  
    %of sales 5.7% 4.7% 4.6% 4.7% 4.9%  
    Cake and rusk 242 271 255 231 286 4.2%
    %growth ~ 12% -6.1% -9.5% 24%  
    %of sales 2.1% 2.0% 1.8% 1.7% 1.9% -1.6%
    Dairy Products 891 1,313 1,822 ~ ~  
    %growth ~ 47.4% 38.8% ~ ~  
    %of sales 7.6% 9.9% 12.6% ~ ~  
    Others 116.4 107.1 88.3 116.2 74.1 -10.7%
    %growth ~ -8.0% -17.5% 31.6% -36.2%  
    %of sales 1% 0.8% 0.6% 0.9% 0.5%  
    Total Sales 11,698 13,325 14,510 13,491 14,705 5.9%
    %growth ~ 13.9% 8.9% -7.0% 9.0%  

    In the last six years, while the biscuits segment has shown a CAGR of 5% to 7%, Britannia managed to clock 7.5% revenue growth during the same period. Biscuits constituted 84% of sales in FY00 and in FY04; they contributed 93% to total revenues. Bread's, which have the least margins, has shown uneven cycles and has grown a measly 2.2% over the years. Breads account for 4.9% of sales. Cake and rusk also, have shown spotty growth, but from FY03 to FY04, it recorded a 24% increase YoY. The share of cakes and rusk is a mere 2% in sales. As mentioned earlier, dairy products business was hived off in March 2002 to Britannia New Zealand Foods - a 49:51 joint venture with Fonterra Group, New Zealand, since the company wanted to focus on baking products and also free resources.

    (Rs m) FY00 FY04 CAGR 9mFY05
    Sales 11,698 14,705 6% 12,046
    PAT 510 1,188 24% 1,382

    In the last five years, the company's topline has grown at a decent CAGR of 6% and the bottomline growth has been a good 24%.

    Britannia has maintained steady margins in the past years and its operating margin stood at a decent 11.8% in FY04. Due to the management's continuous efforts for cost cutting, margins have increased YoY. VRS, closure of high cost plants, relocation to tax free regions, as well as the hiving off of the nascent dairy initiative are the key reasons for the sustained improvement in operating margins, and higher other income, which have led to profits outpacing revenues.

    (Rs m) FY00 FY01 FY02 FY03 FY04
    Operating Profit 876 1,151 1,361 1,471 1,702
    EBITDA margin 7.5% 8.6% 9.4% 10.9% 11.6%

    Going forward
    The company has a strong brand portfolio with successful brands like Bourbon, Tiger, Pure Magic, Little Hearts, Snax, Mariegold and Good Day. Till 1997, the company did not have a glucose biscuit in it's folio, but with the launch of 'Tiger', it managed to capture a huge market share (its No. 2 currently behind Parle-G) and is also the largest selling biscuit from the companies' total offerings in volume terms.

    Britannia has its parent's backing, which is internationally renowned for its bakery products. The per capita consumption of biscuits at 6 gms in our country is way below international standards. With glucose biscuits that are reasonably priced, this figure is likely to go up in the time to come, thus boosting the companies' revenues.

    The fight for share in the market place has intensified with new competitors both domestic and multi-national opening shops here. Its main competitor 'Parle' which concentrated on the mass market traditionally has increased its presence in the higher end by offering 'Hide and Seek'. ITC is another player that has recently entered the market with its 'Sunfeast' range of biscuits. It also has a glucose biscuit positioned at the mass-market level.

    Other problems
    Input costs have been steadily increasing and possibility of increasing consumer prices has become more and more difficult. The company's main inputs are all agri-based which have witnessed a wide fluctuation in recent times. Prices of these commodities are dependant on uncontrollable factors like good and timely monsoons. Rising costs of fuel have direct impact on bottomline, since these are widely used in manufacturing and distribution operations.

    What to expect?
    At the current market price of Rs 930, the stock trades at 14 times our FY07 earnings estimate and market cap. to sales of 1.2x. The company has outperformed our expectations in FY05 so far, so we are likely to upgrade our numbers for future estimates. We had recommended the stock as a BUY in October 2004, with a target price of Rs 990. We maintain this target price over the medium term.

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