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Britannia: Conference call extracts - Views on News from Equitymaster
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Britannia: Conference call extracts
Aug 19, 2008

Britannia is the largest biscuit manufacturer (value terms) in the Rs 80 bn organised Indian bakery market. We recently met the management of Britannia to get a perspective on the opportunities and challenges ahead. Here are the key takeaways. Sector: As per the management, the biscuit segment has witnessed lot of changes in recent times. The orgainsed market size is estimated at Rs 80 bn. It has been witnessing growth in value terms of 20% per annum over the last couple of years. Further the unorganised sector, which was 50% of the total market, has now fallen to 20%. The segment is expected to grow at 12% to 15% per annum going forward. Britannia is the largest player with 34% market share, while Parle and ITC have 32% and 9% share respectively.

Business: Britannia gets 90% of its revenues from biscuits and remaining 10% from bakery and dairy products. While biscuit will continue to be the mainstay, its share would go down in the next 3 to 4 years, as the company wants to increase its presence in other food segments. It is looking at expanding its presence in new regions and segments. It expects the dairy business to witness 10% to 15% YoY growth going forward. With regard to Daily Breads, (Britannia has 50% stake), while the company currently has outlets in Bangalore, Hyderabad and Delhi, it does not plan to go in for an aggressive expansion.

International business: Britannia is currently in the process of realigning and restructuring its international businesses. It is looking at consolidating its presence in the Middle East regions. It has also started local manufacturing in Sri Lanka. Going forward, the company expects the international revenues to contribute around 10% of its sales (marginal share in FY08). Britannia is open to inorganic growth and has the necessary funds.

Capex: The company spent around Rs 2 bn on capital expansion last year and plans to invest around Rs 1 bn every year for the next couple of years on increasing capacities and product development.

Challenges ahead: The main risks for the company are competition and raw material costs. Raw material forms nearly 60% to 65% of its sales. Wheat, sugar and fat oil are the main inputs for the company. While sugar is purchased form the sugar mills directly, the company has tied up with refineries for the fat oil. The wheat is purchased from mandis (local markets). While most of the input costs have increased in recent times, the company is looking at improving its product mix and sale of higher value products in order to sustain its margins. To face the competition, the company is planning aggressive ad spends and also looking at introducing new products.

Looking aheadů
At the current price of Rs 1,391, the stock is trading at a multiple of 9.9 times our FY11 earnings estimates. Though the risk of input prices is a concern, Britannia is taking efforts to improve its margins by expanding its portfolio and through inorganic growth. We expect the operating margins to improve from the FY08 levels (8.5%) though not touching the highs of FY04 (12%). It is also investing heavily towards product development and brand building. Over a longer time frame, the management has indicated its vision to transform the company form a pure biscuit manufacturer to a holistic food company. We retain our positive view on the stock.

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