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Britannia: Gearing up for competition - Views on News from Equitymaster
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Britannia: Gearing up for competition
Aug 26, 2009

Britannia Industries Ltd. (Britannia) is the largest biscuit and bakery company in India. Presently, Bombay Burmah which is a Wadia company holds the majority of stake in Britannia (over 50%). The company grew its sales by 23% YoY during FY09. However, net profit for the year fell by 15% YoY, impacted by pressure on operating margins, higher depreciation, and one-time expense on account of VRS to employees. Standalone performance: Britannia’s standalone sales grew by 21% YoY during FY09. This was driven by both higher volumes and stable to better realisation. Revenues from the company’s biscuits business (which is around 87% of standalone sales) grew by around 18% YoY. This growth was however lower than the 45% YoY growth achieved by the second business segment of cakes (9% of sales). Overall, the company’s bakery business crossed the Rs 3.5 bn mark during the fiscal. This increase came in spite of increasing competition and higher costs of commodities like wheat, flour and sugar, thanks to price increases and cost effectiveness measures.

Performance of key subsidiaries
Britannia New Zealand Foods Private Limited (BNZF): BNZF is a joint venture between Britannia and Fonterra Cooperative Group Ltd. of New Zealand. The joint venture markets and sells dairy products, comprising cheese, dairy whitener, dahi, butter and ghee under the brand name Milkman. For FY09, BNZF recorded sales growth of around 14% YoY during the year. The business though continued to make losses, though the same fell from Rs 51 m in FY08 to Rs 35 m in FY09.

Daily Bread Gourmet Foods (India) Private Limited: Daily Bread is engaged in the business of premium bakery products. Sales of the company increased by 38% YoY in FY09, while its net loss stood Rs 248 m, mainly due to the relatively high infrastructure investment in Hyderabad and Delhi operations, at a time when the retail sector began to slow down. In December 2008, Daily Bread discontinued its operations in Hyderabad and Delhi to focus solely on Bangalore where it has put a franchisee model in place.

Strategic Food International Co. LLC, Dubai (SFIC): Britannia holds 70% stake in SFIC, which recorded sales of AED130 m an increase of 25% YoY, and a net loss of AED22 m. This was due to the severe cost increases in key commodities. Al Sallan Food Industries Company SAOG, Oman (Al Sallan): Britannia holds 65.5% stake in Al Sallan. This company recorded sale of RO6.3 m in FY09, an increase of 94% YoY and a net loss of RO0.6m. However, the market share improved from 7.8% to 11.6%.

What to expect?
At the current price of Rs 1,690, the stock is trading at a multiple of 13.5 times our estimated FY12 earnings. On the business front, we believe Britannia is moving in the right direction. It is steadily innovating and launching new products which keep its portfolio fresh and at the same time cutting costs, the benefits of which are flowing straight to the bottomline. While over 80% of the total sales come from biscuits, it is steadily derisking its portfolio by building up its bread, cakes and dairy products businesses. Now the key will be to see how Britannia faces competition that is intensifying by the day, both from the organised and unorganised segments of the dairy industry. Also, given that Danone, who was once Britannia’s key partner has shown intentions of coming back to the Indian market, it would be interesting to watch how Britannia retaliates.

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