2QFY2012 Result Update | FMCG

November 11, 2011

Britannia
Performance Highlights
(` cr) Revenue EBITDA OPM (%) PAT
Source: Company, Angel Research

NEUTRAL
CMP Target Price
2QFY11 1,095 52 4.7 32 % yoy 18.2 20.4 9bp 18.8 Angel est. 1,291 66 5.1 42 % Diff. 0.3 (6.0) (32bp) (10.4)

`485 -

2QFY12 1,294 62 4.8 38

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

FMCG 5,792 0.4 498/324 19,665 2 17,193 5,169 BRIT.BO

Britannia reported a strong set of numbers for 2QFY2012. The company registered top-line growth of 18.2% yoy, driven by volumes, price hikes and an improved product mix. Earnings growth during the quarter stood strong at 18.8% yoy. Operating margin during the quarter marginally expanded, despite higher staff costs and ad spends. We maintain our Neutral view on the stock. Key highlights for the quarter: Britannia registered robust top-line growth of 18.2% yoy in 2QFY2012. The company continued its impressive top-line growth because of new product launches, price hikes and improved product mix. Britannia has been posting ~20% top-line growth consecutively for the past seven quarters. During the quarter, Britannias operating margin expanded marginally by 9bp yoy, despite higher staff costs and ad spends, as the company managed its raw-material costs efficiently. Earnings for the quarter grew by 18.8% yoy. Outlook and valuation: We expect Britannia to post a ~17% revenue CAGR (largely volume growth) over FY201113E and model in margin expansion of 184bp, despite sustained higher ad spends, aided by a benign input cost environment and higher operating leverage. Further, in terms of earnings, we expect Britannia to post a robust ~36% CAGR. At the CMP, the stock is trading at 21.5x FY2013 EPS (in-line with its historical valuations); hence, we recommend Neutral on the stock with a fair value `495, based on 22x FY2013E EPS. Key financials
Y/E March (` cr) Net sales % chg Net profit (Adj.) % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

BRIT@IN

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 51.0 20.1 11.3 17.6

Abs. (%) Sensex Britannia

3m

1yr

3yr 74.7 108.1

0.8 (16.5) 3.6 11.8

FY2010 3,403 8.3 116.5 (35.4) 4.8 9.8 49.7 14.6 26.7 14.8 1.7 34.7

FY2011 4,246 24.8 145.3 24.7 5.3 12.2 39.9 12.8 34.3 20.9 1.3 25.1

FY2012E 5,014 18.1 184.1 26.7 5.8 15.4 31.5 11.1 37.8 25.3 1.1 19.6

FY2013E 5,858 16.8 268.9 46.0 7.1 22.5 21.5 9.0 46.0 43.0 1.0 13.7

Sreekanth P.V.S
022 3935 7800 Ext: 6841

sreekanth.s@angelbroking.com

Please refer to important disclosures at the end of this report

Britannia | 2QFY2012 Result Update

Exhibit 1: Quarterly performance

Y/E March (` cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Advertising (% of Sales) Other Expenses (% of Sales) Conversion and other charges (% of Sales) Total Expenditure Operating Profit OPM Interest Depreciation Other Income PBT (excl. Extr. Items) Extr. Income/(Expense) PBT (incl. Extr. Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM Equity shares (cr) EPS (`) Adjusted PAT
Source: Company, Angel research

2QFY12 2QFY11 % yoy 1HFY2012 1HFY2011 1,294 841 65.0 48 3.7 101 7.8 135 10.5 107 8.3 1,232 62 4.8 10 12 11 52 52 4.0 14 27.1 38 2.9 12 3.2 38 1,095 721 65.8 31 2.8 77 7.1 123 11.3 91 8.3 1,044 52 4.7 10 10 44 44 4.0 12 27.6 32 2.9 12 2.7 32 18.8 18.8 18.8 16.0 18.0 (0.2) 11.7 18.0 18.0 20.4 9.7 30.3 57.5 18.2 16.6 2,400 1,567 65.3 79 3.3 183 7.6 260 10.8 200 8.3 2,288 113 4.7 19 23 38 109 109 4.5 30 27.1 80 3.3 12 6.7 80 2,008 1,318 65.6 56 2.8 146 7.3 231 11.5 164 8.2 1,916 92 4.6 19 20 35 88 88 4.4 24 26.7 65 3.2 12 5.4 65

% chg 19.5 18.9 39.5 25.6 12.2 21.5 19.4 22.2 (0.6) 11.5 7.7 23.8 23.8 25.7 23.1

12 (11.5)

23.1 23.1

Seventh consecutive quarter of ~20% top-line growth

Britannia posted robust top-line growth of 18.2% yoy to `1,294cr (`1,095cr), in-line with our estimate. We believe top-line growth was led by ~15% volume growth in its core brands. Moreover, a combination of price hikes and change in product mix aided the companys top-line growth.

November 11, 2011

Britannia | 2QFY2012 Result Update

Exhibit 2: Seventh consecutive quarter of ~20% top-line growth

1,400 1,200 1,000 30% 25% 20% 15% 10% 5% 0%

600 400 200 -

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

Top-line (LHS)

YoY growth (RHS)

Source: Company, Angel research

Strong earnings growth aided by top-line growth

In terms of earnings, Britannia reported robust growth of 18.8% yoy to `38cr. Growth came in below our estimates due to a spike in depreciation. Other income for the quarter came in lower by 11.5% yoy to `11cr.

Exhibit 3: Bottom-line growth strong at ~19% yoy

70 60 50 250% 200% 150% 100% 50% 0% -50% -100%

(`cr)

40 30 20 10 -

2Q12

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

PAT (LHS)

YoY growth (RHS)

Source: Company, Angel Research

November 11, 2011

2Q12

(yoy %)

(yoy %)

(`cr)

800

Britannia | 2QFY2012 Result Update

Gross margin expands, OPM up marginally by 9bp yoy

On the operating front, Britannia reported margin of 4.8% in 2QFY2012, registering an expansion of 9bp yoy, resulting in EBITDA of `62cr. Gross margin expanded by 87bp for the quarter. During the quarter, the company has been very efficient in managing its operating costs well. During the quarter, other expense declined by 81bp yoy, advertising expense increased by 72bp yoy, conversion charge remained flat yoy and staff cost increased by 93bp yoy.

Exhibit 4: Gross margin improves, OPM flat for the quarter

12.0% 10.0% 8.0%

(%)

6.0% 4.0% 2.0% 0.0%

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

-2.0%

OPM

Gross Margin

Source: Company, Angel research

Investment arguments
Higher consumption of biscuits to lead to the segments growth: The biscuit industry, which has been steadily recording double-digit value growth over FY200811, is the largest and the fastest growing FMCG category in India. The industry stands at ~`10,782cr in value and has recorded a 9.2% CAGR over FY200611. Biscuit volume growth is estimated to be at ~6% yoy going forward, despite no significant change in the distribution network, implying that the key reason for increased biscuit volumes would be higher per capita consumption of biscuits to ~2.1kg/year (1.8kg/year in FY2009), with a 55% penetration level in the rural market and 85% penetration in the urban market. Cooling raw-material prices to help improve margins: Over the past one year, raw-material prices have been trending high, putting significant margin pressure on Britannia. However, prices of major commodities such as sugar and wheat have shown some signs of cooling in the past one quarter. While we have limited visibility on raw-material prices over the longer term, with the onset of normal monsoons, we do not expect a significant rise in the prices of these commodities going ahead. Moreover, we believe the companys various cost-rationalization methods and improving sales mix will aid operating margins to increase from the current level of 5.3% to 5.8% in FY2012E and 7.1% in FY2013E.

November 11, 2011

2Q12

Britannia | 2QFY2012 Result Update

Increased demand for premium products will lead to higher realization: We expect Britannia to register a ~16% CAGR in its top line, aided by improving sales mix (Britannia has recently introduced premium products in the health and wellness space). Further, we have modeled in the 56% increase in the companys realization on the back of recent price hikes and further price hikes cannot be ruled out. We expect consumers uptrading to value-added biscuits (positioned in the health and wellness space) from plain glucose variants of biscuits to support value growth.

Outlook and valuation

Post 2QFY2012 results, we maintain our revenue and earnings estimates. We expect Britannia to report a CAGR of ~17% in its revenue (largely volume growth) over FY201113E and model in margin expansion of 180bp, despite sustained higher ad spends, aided by a benign input cost environment and higher operating leverage. Moreover, in terms of earnings, we expect Britannia to register a robust ~36% CAGR. At the CMP, the stock is trading at 21.5x FY2013 EPS (in-line with its historical valuations); hence, we recommend Neutral on the stock with a fair value `495, based on 22x FY2013E EPS.

Key risks to our investment argument

1) 2) Higher-than-anticipated raw-material price inflation High competitive intensity leading to much higher ad spends

November 11, 2011

Britannia | 2QFY2012 Result Update

Exhibit 5: Peer valuation

Company Asian Paints Britannia Colgate Dabur GSKCHL GCPL HUL ITC Marico Nestle Reco Neutral Neutral Neutral Buy Neutral Accumulate Neutral Neutral Neutral Neutral Mcap (` cr) 29,340 5,792 14,206 17,155 11,184 13,285 86,428 164,705 9,053 43,349 CMP (`) 3,059 485 1,045 99 2,659 411 396 213 147 4,496 TP (`) 115 Upside (%) 17 11 P/E (x) FY12E 29.8 31.5 32.4 24.5 32.2 24.8 33.9 28.5 29.4 44.5 FY13E 24.2 21.5 27.7 21.4 27.1 19.1 29.8 24.1 23.3 37.4 EV/Sales (x) FY12E 3.1 1.1 5.4 3.4 3.7 3.3 3.8 6.4 2.6 5.9 FY13E 2.6 1.0 4.6 2.9 3.2 2.6 3.3 5.3 2.2 5.1 RoE (%) FY12E 39.6 37.8 111.7 44.9 32.6 36.6 87.5 32.7 30.2 91.1 FY13E 38.3 46.0 108.0 41.6 31.8 29.4 85.3 31.5 28.8 72.9 CAGR Sales 17.3 17.3 14.9 20.5 20.1 22.9 12.7 17.6 17.2 16.1 EPS 19.8 36.0 12.9 18.8 23.9 20.2 17.1 17.4 28.0 18.9

Source: Company, Angel Research

Exhibit 6: Angel vs. Consensus

Top-line (` cr) Angel estimates Consensus Diff (%)
Source: Angel research, Bloomberg

FY2012E

FY2013E

EPS (`) Angel estimates Consensus Diff (%)

FY2012E

FY2013E

5,014 5,112 (1.9)

5,858 6,008 (2.5)

15.41 17.70 (12.9)

22.51 23.50 (4.2)

Exhibit 7: Return of Britannia vs. Sensex

130% 120% 110% 100% 90% 80% 70% 60%

Exhibit 8: One-year forward P/E band

600 500 400 300 200 100 -

Dec-10

Mar-11

Aug-11

Apr-11

Jul-11

Feb-11

Nov-10

Sep-11

Oct-11

May-11

Nov-11

Jan-11

Jun-11

Share Price (`)

Dec-05

Dec-07

Aug-06

Aug-08

Dec-09

Aug-10
30x

Apr-05

Apr-07

Apr-09

Sensex

Britannia

15x

20x

25x

Source: Company, Angel research

Source: Company, Angel research

Exhibit 9: One-year forward P/E

40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 -

Exhibit 10: One-year forward Premium vs. Sensex

180% 160% 140% 120% 100% 80% 60% 40% 20% 0% -20% -40%

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Oct-11

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Dec-06

Dec-07

Dec-08

Dec-09

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Dec-10

Source: Company, Angel research

Source: Company, Angel research

November 11, 2011

Aug-11

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-11

Britannia | 2QFY2012 Result Update

Profit and loss statement

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Total operating income % chg Total Expenditure Cost of Materials Advertising Exp (Incl. Promotion) Personnel Others EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Prior Period & Extra Exp./(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earn. of asso. Less: Minority interest (MI) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 2,618 33 2,585 2,585 17.5 2,353 1,555 180 91 527 232 79.9 9.0 29 203 95.7 7.8 10 50 20.6 243 92.8 10.85 232 41 17.0 202 202 191 77.4 7.4 16.0 16.0 77.4 3,143 31 3,112 3,112 20.4 2,849 1,910 211 96 632 263 13.4 8.4 33 229 13.1 7.4 16 40 15.8 253 4.1 20.63 233 52 20.6 201 201 180 (5.6) 5.8 15.1 15.1 (5.6) 3,427 23 3,403 3,403 9.4 3,241 2,164 269 106 703 162 (38.2) 4.8 38 125 (45.6) 3.7 8 51 30.4 167 (33.9) 46.64 121 4 2.5 163 163 117 (35.4) 3.4 9.8 9.8 (35.4) 4,246 32 4,214 4,214 23.8 3,990 2,764 304 120 801 224 38.0 5.3 45 179 43.8 4.3 40 59 29.7 198 18.4 198 53 26.7 145 145 145 24.7 3.4 12.2 12.2 24.7 5,014 50 4,964 4,964 17.8 4,677 3,223 347 154 953 287 28.0 5.8 52 234 30.7 4.7 42 60 23.6 252 27.3 252 68 27.0 184 184 184 26.7 3.7 15.4 15.4 26.7 5,858 59 5,799 5,799 16.8 5,387 3,694 406 174 1,113 412 43.8 7.1 60 352 50.2 6.1 42 58 15.7 368 46.0 368 99 27.0 269 269 269 46.0 4.6 22.5 22.5 46.0

November 11, 2011

Britannia | 2QFY2012 Result Update

Balance sheet
Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Misc. Exp. not written off Total Assets 453 212 241 10 381 552 44 161 13 348 205 23 860 512 234 278 6 423 539 41 195 14 413 126 27 860 548 266 282 10 491 529 23 198 6 492 37 819 594 290 304 12 545 625 29 228 14 597 29 889 758 342 416 16 485 799 33 266 25 754 45 961 872 402 470 18 125 946 60 302 35 883 63 676 24 732 756 106 (2) 860 24 801 825 25 10 860 24 372 396 430 (7) 819 24 427 451 431 6 889 24 500 524 431 6 961 24 620 644 25 6 676 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

November 11, 2011

Britannia | 2QFY2012 Result Update

Cash flow statement

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Interest / Dividend (Net) Direct taxes paid Payment of VRS/ other comp. Profit on sale of invest/FA (Net) Others Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Interest/Dividend paid (Net) Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 232 29 (140) (11) 41 2 7 (21) 43 (55) (61) (116) 101 42 (8) 67 (5) 49 44 233 33 0.5 (5) 52 (3) 7 26 224 (55) (42) (97) (81) 50 (1) (130) (3) 44 41 121 38 100 (25) 73 33 12 2 183 (40) (68) (108) (2) 112 (21) (93) (17) 41 23 198 45 7 13 53 20 190 (47) (54) (102) 2 70 15 (83) 5 23 29 252 52 60 3 68 (89) 210 (169) 60 (109) 90 7 (97) 4 29 33 368 60 32 15 99 (56) 320 (117) 360 243 (406) 112 19 (537) 27 33 60

November 11, 2011

Britannia | 2QFY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Returns (%) RoCE Angel ROIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC (ex-cash) (days) 5.7 43 7 35 23 6.1 30 6 31 19 6.2 29 4 33 8 7.1 27 5 33 5 6.6 32 5 35 8 6.7 32 5 35 8 27.4 24.3 29.5 26.7 22.3 25.4 14.8 15.0 26.7 20.9 15.8 34.3 25.3 19.1 37.8 43.0 33.3 46.0 16.0 16.0 19.3 3.6 63.3 15.1 15.1 19.6 8.0 69.0 9.8 9.8 16.8 5.0 33.2 12.2 12.2 15.9 6.5 37.8 15.4 15.4 19.8 8.0 43.8 22.5 22.5 27.5 10.6 53.9 30.3 25.1 7.7 2.2 2.2 24.3 6.6 32.1 24.7 7.0 1.8 1.8 21.4 6.6 49.7 28.9 14.6 1.7 1.7 34.7 6.8 39.9 30.5 12.8 1.3 1.3 25.1 6.3 31.5 24.5 11.1 1.1 1.1 19.6 5.9 21.5 17.6 9.0 1.0 1.0 13.7 8.3 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

November 11, 2011

10

Britannia | 2QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Britannia No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

November 11, 2011

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