Leadership in biscuits, a growing confectionary segment and foray into West Asia would sustain volume growth for Britannia Industries.
Indulgence in biscuits is a tasty pastime for many, but treating yourself with the Britannia Industries stock would also gel well with your investment portfolio. The biscuit segment has evolved into a Rs 9,000 crore industry with the organised branded market accounting for more than four-fifths of the market. Among the organised players, Britannia holds the edge having captured around 35 per cent share with well-known brands in its kitty.
Expanded product range in various segments and price points ensures penetration across demographics and geographies. Lower per-capita consumption of biscuit, additional revenue streams from bread, rusk and cake (BRC) and exposure to growing West Asia markets, would drive volumes in the long run.
Cashing on biscuits
The biscuits segment accounts for around 90 per cent of total revenues for the company. Even though Britannia’s product portfolio is diverse, the presence in all segments namely low-end, mid-priced and premium, uniquely positions it vis-à-vis its peers. The leading brands of Britannia such as Good Day, Tiger, Treat, Marie, Milk Bikis, 50:50 are referred to as “power brands”, which together account for around 90 per cent of revenues in the biscuit business.
Britannia’s biscuit business received a boost after biscuits priced at Rs 50/kg and below were exempted from excise duty. This move wiped off the price advantage that cheaper unbranded players had over branded players. Additionally, the spiraling prices of key inputs like wheat, palm oil have consolidated the organised biscuit market elbowing out weaker hands.
Tiger glucose biscuits is Britannia’s largest selling biscuit brand in the low-end category. The introduction of Tiger variants including cream, banana and coconut flavours along with small priced packs have enabled higher sales growth of 18-20 per cent for the Tiger brand. A further boost came in the form of the extension of excise cut for biscuits below Rs 100/kg (announced in 2007-08 budget), benefitting the mid-price segment, which includes popular brands like “Milk Bikis”, “Marie Gold” and “50:50”. This segment contributes around a quarter of revenues for Britannia.
While the mass segment contributes the volumes, the premium segment adds value to the sales. As per AC Nielson data for 2008, the contribution of premium segment to the total biscuit volumes (for industry) is around 17.1 per cent and in value terms, it is 28.6 per cent. “Good Day”, a major brand in the premium category (churns around quarter of total revenues) with cookie variants like cashew, coconut, butter and pista in its product-mix, has cornered the market leadership in this fast-growing segment. The growth in this segment is expected to be good on the back of higher disposable incomes, thus encouraging customers to uptrade from mid-priced biscuits to premium brands.
Britannia has a focus on health segment (high fibre & low fat) through its “Nutrichoice” range with variants like digestive, cream crackers and multi-grain. Although this segment is small, it is still unique as none of its competitors have products in this segment. The growing urban and health conscious population would drive the demand for these biscuits in the future. Overall, expect the company’s biscuit business to sustain growth rates of 18 per cent over the next two years.
Tasty cogs
The Bread, Rusk and Cake (BRC) segment contributes around 10 per cent of the total revenues. The contribution from this segment has been small, but has been growing at a fast clip as revenues from this segment doubled in the last two years. In fact, the overall BRC segment grew by 33 per cent in FY08 (40 per cent in current fiscal).
“Daily bread” in the bread segment, which mustered 47 per cent growth last year aided by re-launch of breads, fortified with vitamins and minerals, has also been doing well. In cakes, it has variants of bar cakes (fruit, butter sponge, chocolate, pineapple, milk) and cup cakes (vanilla, orange). The set-up of manufacturing facilities in Delhi and Hyderabad, apart from Bangalore expansion would be able to cater to the rising demand for BRC products.
Financials
As per Indian Biscuits Manufacturers Association (IBMA), the biscuit industry has grown by 15 per cent in value terms in FY 08; Britannia’s extended portfolio in biscuits along with constant reinvigoration of portfolio through launches of newer variants has enabled it to grow at 18 per cent. In Q2 FY09, although sales were robust at around 27 per cent y-o-y, PAT (profit after tax) growth did not keep up the pace; up only 10 per cent.
| HEALTHY GROWTH | |||
| Rs crore | FY08 | FY09E | FY10E |
| Revenue | 2,585.0 | 2,979.0 | 3,399.0 |
| EBITDA | 232.0 | 270.0 | 322.0 |
| Net profit | 191.0 | 240.0 | 286.0 |
| EPS (Rs) | 80.0 | 100.5 | 119.7 |
| P/E (x) | 15.5 | 12.4 | 10.4 |
| E: estimates | |||
The slower growth in PAT could be attributed to the 36 per cent increase in the raw material costs (wheat, sugar and edible oil). The stability in wheat prices and the decline in edible oil costs is a comforting sign for margins in the future. On the efficiency front, Britannia is taking steps to cut back on its operating costs through process improvement and technology innovation. The company targets cost savings, equivalent to around one percentage point (100 basis points) of net sales, on an annual basis by rationalising non-value adding activities. The increased utilisationof its Baddi-based facility (in tax haven) for premium biscuits would also help the company sustain margins.
Investment rationale
As per IBMA, the per capita consumption of biscuits in the country is only 1.8 kg, as compared to 2.5 kg in South East Asian countries. The under penetration of biscuits, would ensure decent opportunities for growth in the biscuits segment. Apart from launching variants in biscuits, innovations like gift packs along with out-of-home consumption and family packs, fast growing BRC segment and products designed for the health conscious should ensure higher growth rates for Britannia.
Apart from India, the company has diversified its business in the growing economies of West Asia, through its subsidiaries (Dubai-based Strategic Foods International and Oman-based Al Sallan Food Industries). These subsidiaries primarily sell biscuits and cookies in the gulf region and account for around 5 per cent of the consolidated sales. Britannia also has interests in the dairy business through a joint-venture with Fonterra, the world’s second largest player in the dairy business. This business, too, is growing at a healthy pace of 20 per cent and has seen losses decline to just Rs 5 crore in FY08 (Rs 11.2 crore in FY07).
While any news of the resolution of dispute between promoters- Wadia and Danone group, or pertaining to acquisitions could provide a trigger, the stock (trading at around 10.5 times its FY10E earnings) can deliver about 17-20 per cent returns in a year’s time.
