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Britannia: Has the street missed this stock?
Mar 23, 2010

Promoted by Mr. Nusli Wadia, Britannia Industries Ltd. (Britannia) is the largest biscuit manufacturer (value terms) in the Rs 50 bn organised Indian bakery market. The primary business of the company is bakery, which consists of biscuits, bread and cakes. In 2006, Britannia picked up a 50% stake in Daily Bread (retailer of high-end bakery products.), which was held by Cafe Coffee Day in a deal valued at Rs 85 m. The company has also formed partnership with Khimji Ramdas Group to run two bakery product companies in the fast growing Middle East market. In FY09, the biscuit division of the company contributed to 87% of revenues with bread and the cake and rusk divisions contributing the remaining 9% and 3% respectively. We herein do a SWOT analysis of Britannia's business and analyse what potential and risks lie ahead for the company. Strengths
Brand name: Britannia is the largest biscuit and bakery product company in India. Its name is synonymous with ‘biscuits’ and its product portfolio is present across all price points, from entry level to premium. The company has several popular brands under its portfolio including Milk Bikis, Tiger, Little Hearts, Good Day, Mariegold, Premium Bake, Pure Magic, Bourbon and Snax. Britannia is a market leader with a 39% market share in value terms and 32% in volume terms. The brand Britannia has been amongst the Top 10 Most Trusted Brands across all categories since the last 5 years in an independent survey conducted by AC Nielsen and The Economic Times.

Diversification of portfolio: The company has in the past been heavily dependent on its biscuit portfolio with biscuits contributing as much as 92.4% of sales in 2005. However, in recent years, the company has made a conscious effort to lower its dependence on biscuits by focusing on other products like bread and cakes. Besides this the company has been concentrating on increasing its share of the dairy portfolio with a tie up with M/s Fonterra Cooperative Group Limited of New Zealand as well as diversifying through the inorganic route in the Middle East market.

Weakness
Competition: Britannia faces stiff competition from a host of Indian players like Parle and ITC in the organised biscuit market as well as from players in the unorganised market. Furthermore, Kraft, after acquiring Cadbury intends to enter India with its biscuit portfolio signalling increase in competition in the already crowded market.

Exposure to agri commodities: Raw material which is 61% of net sales primarily includes wheat, sugar and milk. The prices of all three commodities have been rising in the recent past. This has put pressure on the company’s operating margins due to its inability to pass on the price increase. The biscuit market is sensitive to price points and hence it becomes difficult to increase product prices frequently.

Opportunities
Untapped market: Biscuits manufactures in our country have a wide scope of growth as the per capita consumption of biscuits in India is less than 2.1 kg. This is compared to more than 10 kg in the US, UK and other European countries and above 4.25 kg in South East Asian countries. With higher disposable incomes and availability of a larger variety of products, consumers are more willing to try out new biscuits. Furthermore, organised market is only 45% of the total biscuits consumed in India. This gives an ample opportunity for biscuits manufactures to grow.

Threats
Economic slowdown: Since biscuits are discretionary products, in case of an economic down turn, the volumes tend to get affected.

Food inflation: With high food inflation, middle and low income families tend to curtail the household food spending. Biscuits being a discretionary spending are the first to get affected. This is a double whammy as the biscuits companies not only face higher input costs but also slowdown in sales.

What lies ahead...
At a current market price of Rs 1580, the stock is trading at 14.1 times our estimated FY12 earnings. With rising competition, the net margins of Britannia have suffered as it has been unable to pass on increase in price of raw material. Moreover, due to slowdown and food inflation, the topline of the company has also suffered since the last few quarters. However, the point to be noted is that while the low margins may be structural phenomena due to competition, they will definitely improve once the commodity prices soften. In fact, the softening of commodity prices will be a double benefit for the company as it will also help improve discretionary spending. While the company is going through one of its worst times we believe that that things will start to look up soon. In our opinion, investors can look for long term gains from this stock.

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