CFA Institute Research Challenge Hosted by CFA Society India Indian Institute of Management - Tiruchirappalli
The CFA Institute Research Challenge is a global competition that tests the equity research and valuation, investment report writing, and presentation skills of university students. The following report was submitted by a team of university students as part of this annual educational initiative and should not be considered a professional report.
Disclosures: Ownership and material conflicts of interest The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation Compensation of the author(s) of this report is not based on investment banking revenue. Position as an officer or a director The author(s), or a member of their household, does not serve as an officer, director, or advisory board member of the subject company. Market making The author(s) does not act as a market maker in the subject company’s securities. Disclaimer The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society India, CFA Institute, or the CFA Institute Research Challenge with regard to this company’s stock.
th 9 Oct, 2018 Britannia Industries Limited
Bloomberg/Reuters: BRIT IN/ BRIT.BO Target Price (1Year Forward): ₹6,302.20 BUY Current Price (as of 9th Oct 2018): ₹5,511.25 (NSE Price) Industry: Packaged Foods Upside: 14.36% Exchange: NSE/BSE
Established in 1918, Britannia Industries is a packaged foods company which manufactures and markets Stock Profile (₹) biscuits, bread, cake, rusk and dairy products. Having revenues of close to ₹100,000 Million, it is a leading Closing Price ₹5,511.25 foods company with brands like Good Day, Bourbon and Marie Gold. Market Cap (mn) ₹661,675.9 Avg. Daily Volume 198848 Highlights 52 Week High/Low ₹6,934/₹4,302 Beta 0.69 We initiate coverage on Britannia Industries with a buy recommendation and a target price of ₹6,302.20, Source: Thomson Reuters which is a 14.36% upside on the closing price of ₹5,511.25 on 9th October 2018. Our valuation is based on an Valuation Method Value Weight equal mix of DCF Model, P/E Multiples and EV/EBIDTA Multiples. Our recommendation is based on the DCF ₹4,806.01 33.33% following catalysts: (1) Capitalising its brand to grow into new segments and markets (2) Aggressive Expansion in Rural Market (3) New Room for Margin Expansion. EV/EBIDTA ₹7,209.83 33.33% P/E ₹6.890.75 33.33% Britannia’s Brand Leverage: Britannia’s Brand Leverage - Already a market leader in biscuits with ~32% Equity Value Per Share ₹ 6,302.20 Upside 14.36% share, Britannia changed its corporate strategy to be a total foods company by aggressively expanding into Dividend ₹34.07 new segments such as cake, rusk, dairy and bread. These categories have a higher growth potential due to Total Return 14.97% the base effect and a lack of any organised player. Britannia’s brand which we believe will be a moat and give Valuation Date Oct 9th, 2018 room for margin expansion as well due scope for premiumisation of certain categories. Source: Student Research Improving Market Shares in Rural India: The rural market is a huge and a very lucrative segment for Britannia vs Nifty most of the companies as it contributes to 40% of industry revenues and is growing faster than the urban 250 market since the last few years. Parle, Britannia’s biggest competitor dominates this market with its biscuit brand Parle-G. Britannia is increasing its distribution network and introducing products at similar price points 200 of ₹5 and ₹10 to increase its market share from the current 20% market share in rural.
150 Re-starting Margin Expansion: Rise in disposable income and favourable demographic shifts 100 complemented with Britannia’s brand image enables the company to charge a premium, thereby giving the company a room for margin expansion. Britannia is leveraging its new manufacturing and R&D facilities to 50 innovate and market premium products through its existing distribution network. The company is pursuing
its cost efficiency program by increasing automation, reduction in stock write-offs and conversion charges
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Key Financials FY 2018A FY 2019E FY 2021E FY 2023E FY 2026E FY 2028E Source: Company Annual Report Revenues (₹ mn) ₹ 99,225 ₹ 1,14,827 ₹ 1,60,458 ₹ 2,20,375 ₹ 3,20,380 ₹ 3,94,507
Fig 2 Segment Revenue (FY18) Gross Margin 39% 40% 41% 43% 44% 44% EBIDTA (₹ mn) ₹ 15,102 ₹ 19,497 ₹ 32,069 ₹ 48,794 ₹ 76,407 ₹ 98,461 Biscuits EBIDTA Margin 15% 17% 20% 22% 24% 25% 6% 3% Cakes PAT (₹ mn) ₹ 10,127 ₹ 12,790 ₹ 20,536 ₹ 30,708 ₹ 47,275 ₹ 60,442 5% PAT Margin 10% 11% 13% 14% 15% 15% 5% Bread EPS (₹) ₹ 83.63 ₹ 106.55 ₹ 171.06 ₹ 255.80 ₹ 393.80 ₹ 503.49 5% EPS (Diluted) ₹ 83.59 ₹ 106.49 ₹ 170.98 ₹ 255.67 ₹ 393.60 ₹ 503.24 Dairy RoE 30% 30% 31% 30% 28% 26% Rusk RoCE 30% 29% 30% 29% 27% 25% 76% International CFA Institute Research Challenge 2019 1 Business Source: Company Annual Report, Student Research
Fig 3 Population Growth Industry Overview & Competitive Positioning: 3.0% 2.5% The packaged foods industry is characterized to be an industry which is highly dependent on consumer 2.0% preference and macroeconomic factors. Variation in consumer trends is bringing out innovative products in the market. High Consumption Index and high disposable income are the drivers for industry. It is an attractive 1.5% industry in big economies like USA, Europe, China, India etc. 1.0% Macro-Economic Over View: 0.5% 0.0% Global Economy: Population growth and rising GDP per capita are the major drivers of the packaged foods 2017 2018 2019F 2020F 2021F industry. With a 3.7% growth in real GDP, macroeconomic scenario looks favourable for the industry. Advanced Economies (AE) like the US, European Union and Emerging Market Developing Economies (EMDE) India AE EMDE are expected to grow at a stable growth of 1.7% and 6% respectively. GDP per capita growth is estimated to MENA World grow at around 4.5%. Inflation has also been fairly stable during these forecasts. Demand of commodities has picked up, especially in emerging markets on the basis of rising consumption. These forecasts can be uncertain Source: World Bank due to Iran sanctions, rising tension between China and the US because of trade wars and increasing crude oil prices. Overall the current macroeconomic scenario seems favourable for the packaged foods industry. Fig 4 Read GDP Growth Rate MENA Economy: A growth trajectory of 3.2% and reviving GDP per capita signals the higher demand and increasing consumption in the MENA region. Britannia can certainly leverage this situation to expand its 9 revenue base from this market which is currently at 4.5% of the consolidated revenue. Increasing crude prices 8 7 can boost the economy though Iran sanctions or Libya and other conflicts can stymy the growth trajectory. 6 5 Indian Economy: The fastest growing economy of the world, India is estimated to grow at a rate of 7.4- 4 8% in the period of 2019-2023. GDP per capita growth has also been projected at an average of 8.5%. 3 Increasing demand on the base of population growth (1.32%) and rising disposable income is favourable for 2 the packaged foods industry. Increasing consumption and changing consumer preferences are currently the 1 big drivers for the industry in India. Demand for innovative products is rising. Rising packaged food 0 consumption per capita in rural areas can boost the overall revenues for the industry. In FY 18, rural 2016 2017 2018 2019F 2020F consumption grew at a rate of 9.7%.
Input materials are the major cost components of the industry and inflation in these can affect the profitability India AE EMDE of the overall industry. Food inflation is fairly stable, though input cost may see inflation on the mandate of MENA World MSP (Minimum Support Price). Consumer confidence in the economy is also a demand driver and currently Source: World Bank future Consumer Confidence Index is rising as per the RBI Consumer Confidence Survey. According to IBEF, Consumption expenditure is expected to increase in double digits in the period 2017-2021. Demonetization and GST (Goods and Service Tax) have affected the growth in past two years but India is back on the growth Fig 5 Inflation Rate trajectory. Uniform GST rate on biscuits (18%) will provide level playing field as opposed to 12% up to 100/kg 10 biscuits and 24% on others. Given this scenario, we anticipate Britannia to increase its revenue and 8 profitability in the forecasting period 2019-2028. (Fig 3,4,5,6) 6 Heavy Investment in FMCG sector – Big Driver for Indian Economy: FMCG is the 4th largest 4 sector of India. Food & Beverage contributes 19% to FMCG sector. To boost growth and margins, FMCG 2 companies are investing heavily in energy efficient plants. Britannia has already established energy efficient 0 plants and it is further expanding capacity by building new plant in Ranjangaon. 2017 2018 2019F 2020F 2021F Industry Overview: India AE EMDE Market Overview: Increase in consumption capacity, specially from the middle-class segment of the MENA World Source: World Bank society, is likely to make India the fifth largest consumer market by 2030 and F&B is the largest segment of the consumption basket. Packaged food industry is expected to grow at a CAGR of 13.6% from 2017-22.
Fig 6 GDP Per Capita Growth Rate Baked Goods: Biscuit, the largest category of the Baked Goods Sector, comprises of nearly 2/3rd of the (In US Dollar Terms) INR 500k Million baked goods industry. The remaining is bread, cake, rusk and others. Bakery categories have 15% seen a growth ranging from 8-14% over the past 5 years. There is a trend of shift towards packed baked goods, even in tier 2 cities. Longer shelf life, large variety and products available at various price points being some 10% of the reasons that motivate consumers to buy packaged baked goods. (Fig 7)
5% Biscuit: The Indian biscuit market is in a very sweet spot with an expected projected growth of 13.5% for 2018-23. The biscuit category has witnessed robust growth on both the per capita volume consumption front 0% as well as price front. Regardless of this growth India continues to be on the lower end of both these factors 2016 2017 2018 2019F 2020F 2021F pointing to a massive growth potential in the coming years. Consumers are looking for more variety of options -5% with a shift from traditional biscuits to new verities of cookies. This shift to cookies is introducing a premium
India AE EMDE segment in biscuits with companies offering exotic and high-quality ingredients for the customers.
MENA World Cake: Cake is still dominated by the unorganized sector and product evolution has been far less than that Source: World Bank seen in biscuits. Cake’s inherent product characteristics such has sponginess and juiciness are the factors
CFA Institute Research Challenge 2019 2
Fig 7 Baked Goods Industry
300 18% which allow for innovation and product differentiation. Coupling these with increased shelf life can create a 265 16% massive competitive advantage in this sector. Organized players are entering this space rapidly which has led 250 15.50% 14% to a double-digit growth in the recent years. 13.50% 200 11.50% 12% 10% Bread: Traditionally, bread has strong regional pockets of consumption but with consumers increasingly 150 135 8% adding wheat to their diet, it has been gaining traction in new markets as well. Since bread has a short shelf 100 6% life, it is produced as well as consumed in a short radius, which translates into regional players having a 52 4% significant dominance. Britannia is one of the few organized players with lot of variants and were the pioneer 50 2% in launching healthy bread products. 0 0% Biscuits Bread Cakes and Rusk: Traditionally, the bakeries that serve bread also serve rusk which is a double baked bread. This practice pasteries still being prevalent has led to occupancy of unorganized players largely. Britannia was the first player to Market size(2017-18)(Rs. Bn) establish national business in this category and promote it with uniform product quality and characteristics Estimated CAGR(Till 2023) across India.
Source: Euro monitor Dairy: Dairy has always been an attractive occupation for farmers in India with nearly two third of milk Fig 8 Industry Forces money being received by farmers. In 2018, unprocessed cheese in India continued to be dominated by paneer,
Power of which benefits from huge demand across the country. Private players have gained a lot of market share and Buyers are well placed with a huge market available for them. Ultra-high temperature (UHT) processing has enabled longer shelf life and convenience of packed milk. But, in rural part of the country, the unorganised sector is
Threat of Power of still the major player with people preferring fresh milk from local dairies. (Fig 8,9 Appendix 7,23) Substitutes Suppliers Competitive Positioning:
Threat of Competitive Britannia Industries ranked third in packaged food in 2017 with a value share of 3%. The company leads sales New Entrant Rivalry in sweet biscuits, snack bars and fruit snacks, where it posted a value share of 27% in 2017. Britannia Industries has seen a revenue growth of 12.6% (FY12-17 CAGR) as opposed to the biscuits industry growth of 12% during Source: Student Research this period owing to various factors such as relatively better brand positioning, focus on power brands, growth Fig 9 Demand Drivers in rural areas by establishing a powerful distribution network, cost-control, in-house manufacturing and continuous innovations.
Increase in Distribution is one Biscuits: From trailing its rival Parle by 6% in market share in 2012-13, it has now achieved leadership domestic players of the biggest and customer position, with a 3% higher market share than Parle. The company has been aggressive in distribution drivers centric attitude expansion as its direct-reach has increased by 2.5x in the last four years. Parle’s iconic Parle-G continues to hold 20% share of biscuit market by value according to market research firm Nielsen (December 2017). In the decades since Parle-G’s launch in 1939, Parle has kept the prices of its products at the entry level, introduced Savoury Snacks offering new Rural a big only one premium variation, and even kept the vintage Parle girl affixed on packets. Parle-G has managed to retain 75-80% of the glucose biscuits market, while premium biscuits are worth only Rs. 50,000 Million in the opportunities for opportunity CPG total biscuits market. Britannia has introduced several upgrades to Tiger which was positioned as competitor to Parle-G. There are 7 variants to Tiger glucose biscuits compared to Parle’s single variant—Parle Gold—
Health is becoming along with a special kid’s edition branded as “Chota Bheem”. Parle-G is consistently ranked among the most new premium with Improved retail enduring brands in India. Parle-G is growing slower than other categories at about 4-5% annually but the convenience and robust supply company’s Hide & Seek brand is among the top 5 in the cookie market, as per Euro-monitor. leading the way In the year 2003, ITC stepped in the manufacturing of biscuits and introduced the “Sunfeast” range that at first dealt with biscuits and later on with other food items also. By launching the high premium quality of Improved biscuit range, Sunfeast has become a major new competitor for Britannia Industries at the higher price points. Avialability and Sun feast has been able to penetrate deeply in the rural as well as urban Indian market because of the well- Affordability established distribution channel provided by its parent company ITC. The company is also tapping the e- Choupal network that includes direct communication and working with the farmers to obtain materials and Source: Food India Report, Euromonitor, Grant Thompson deliver the finished products. Sunfeast is currently the market leader in the cream biscuits category. (Fig 10,11,12) Fig 10 Biscuit Market Share Breads: Organized segment of the bread industry currently stands at approximately 45%. The entry of the 5% mid-sized regional players is consolidating industry towards a more organized structure. Britannia(BIL), 3% Modern Foods Industries Ltd (MFIL), Bonn, Kitty and Harvest are some prominent players presently in the industry.
14% 32% Dairy: Britannia has only 0.5% organized Dairy, FY18 market share in the dairy sector. India is the world’s largest milk consumer and its demand for value added dairy products is expected to grow at CAGR of 25% till 2020 as per Euromonitor. Britannia has a structural long term plan to scale up its dairy business. The dairy industry is dominated by established state cooperatives like: GCMMF which markets Amul and other companies like Kwality Ltd and Mother Dairy which manufacture and market products ranging from flavoured milk, yogurt to dairy beverages. Even though Britannia dabbled with products such as gourmet cheese and flavoured milk under its flagship Tiger brand, its focus has been heavily on cheese as a category in India. It 28% also sells curd and packaged milk. While Amul’s all-India volume share in cheese rose to 71% during the period from March 2017 to February 2018 from 64% in the previous year, Britannia’s volume share declined to 17% from 20% and Go’s share shrunk to 6% from 10%, respectively. The company will be launching Tetra pack milk Britannia Parle Sufeast Surya Foods Anmol drinks and with an increase in sourcing capacity by 10-15x from the current level of 2005 litters per day. CFA Institute Research Challenge 2019 3 Source: Euro monitor
Fig 11 Britannia vs Parle (Market Share) 120 Category Britannia Parle ITC Others Cookies Nutri-choice, Milano Cookies, Delishus, Farmlite, Unibic, Patanjali 100 Wonderfulls, Hide n Seek, 20- Mom’s Magic cookies 80 Good Day, Tiger 20, Happy-happy Cookies 60 Cream Biscuits Pure-magic, Milk- Golden Arcs, Fab, Dark fantasy, Oreo 40 bikis, Jim-jam, Milk shakti, Black- Yumfills, Dream- 20 Bourbon, Tiger bourbon, Jam-in, cream, Bounce cream Magix 0 Digestive Nutri-choice Nutricrunch Farmlite Patanjali Glucose Tiger glucose Parle-G Sunfeast - Marie Marie Gold Parle Marie Marie light - Britannia Industries Ltd. Parle Others Savoury and Little-hearts, Monaco, Top spin, Snacky, Nice - Snack Cracker, 50-50 Krackjack, Coconut
Other: The cake category has a penetration level in the low double-digits and offers a huge opportunity in terms of occasional snacking market. The packaged cake segment with an approximate value of 20000 Million has seen entry by players like Parle, Britannia and ITC due to high growth. Most players in the cake category are local manufacturers such as Monginis.
In the rusk category, Britannia’s focus is on premiumisation and the company has recently launched Multigrain Rusk under a new brand Toastea. (Appendix 5,6) Source: CMIE, student research, Company Report Fig 12 Perceptual Map (Age: 21-25) 400
350 Parle-G 300
250
Favourite Good-day Hide and Seek 200 -100 -50 0 50 100 150 200 250 300 Oreo 350 400 450
Marie 150 Bourbon Tiger 100 Unibic Monaco Bakery-Home Jim-Jam 50 Patanjali Other 0
Value for Money -50 Source: Primary Survey, student research Business Description: Fig 13 Britannia’s Brands
Britannia Industries is one of India’s leading food companies with a 100-year legacy and annual revenues in excess of Rs. 100,000 Million (FY18). It is part of the Wadia Group and has 17 domestic subsidiaries of which 6 are located abroad. The subsidiaries include 3 companies limited by guarantee, 3 finance companies and 18 subsidiaries that are wholly owned by Britannia. During FY18 a wholly owned subsidiary Britannia Nepal Private Limited was incorporated. (Fig 13,14)
Britannia Industries manufactures brands like Good Day, Tiger, NutriChoice, Milk Bikis and Marie Gold which are household names in India. Britannia’s product portfolio includes biscuits, bread, cakes, rusk, and dairy products including cheese, beverages, milk and yoghurt. Britannia products are available across the country in close to 5 million retail outlets and reach over 50% of Indian homes. Britannia’s products are retailed in over ~3.2 million outlets which are distributed through ~51 depots and ~3700 stockists. The company has around 23 subsidiaries and associate companies situated both in India and abroad. It operates research and development facility in two states and manufacturing plants in nine states. The R&D capacity and capability is to launch “new-to market” innovations, renovation of existing products, product and packaging, value engineering and building readiness for the launch of new adjacent category products in the coming years. Growth Story: Britannia has cut down from 16 brands to 5 power brands which has resulted in significant improvement in visibility, offtake and market share of these brands. The company has positioned itself as a premium brand in the urban markets while simultaneously pushed value products in the rural market with focus on increasing the distribution network. Britannia’s investment in the R&D facility has led to the launch of lots of innovative and premium products. They were the first to introduce the low-fat variants by launching Marie Digestive biscuits in India. Apart from the above, they have achieved energy efficiencies in production,
increasing in-house production, more focus on lesser-SKU’s and focus on premiumisation leading to lesser sales promotion and has ultimately led to better gross margins. Brands like Good Day and Marie Gold are cash-cows for Britannia Industries. These have helped Britannia in venturing into new product categories and Source: Student Research launch premium brands like Pure Magic and Nutri Choice. CFA Institute Research Challenge 2019 4
Fig 14 BCG Matrix Baked Goods: More than 70% of their portfolio is the biscuit category
Pure magic with strong brands like Good Day, Marie Gold, Nutri Choice, Treat, Bourbon, Nutrichoice 50-50 etc. Britannia Bread is the largest brand in the organized bread market with an annual turnover of over 100 thousand tons in volume and Cake & rusk Bourbon & treat Good day Rs. 4500 Million in value. 50-50 The business operates with 13 factories and 4 franchisees selling close to 1 Bread million loaves daily across more than 100 cities and towns of India. Milk Bikis Marie gold Tiger Britannia built category relevance in categories where it was strong, Market growthMarketrate thereby building consumption and penetration. Competitive mixes were built in relatively weaker product lines. Britannia focused on innovations in Relative market share 2 ways - plugging gaps and white spaces in existing portfolio that could be high value yielders and truly path breaking, new-to-market, disruptive Appendix 4: Explanation of BCG matrix product formats. Source: Student Research
Dairy: Currently, Britannia has dairy products in the sub-segments of cheeses, fresh dairy and Fig 15 Britannia's Market Share accompaniments. The company’s dairy business contributes close to 5% of revenue and Britannia dairy 35% products directly reach 100,000 outlets. The pilot for milk procurement commenced in Ranjangaon, 30% Maharashtra. Britannia is continuously extracting benefits from an integrated sales and distribution system 25% and is also implementing the viability of a fully integrated business model. 20% 15% International Business: Britannia has a presence in more than 73 countries across the globe. Their 10% 5% international footprint includes presence in Middle East through local manufacturing in UAE and Oman. 0% Britannia is the no. 2 biscuit player in UAE and has a strong market position in other GCC countries. Their Hindi Belt Rural Area National strategic plan for international markets is to venture into one new market every year. They have Average commissioned a manufacturing plant in Nepal in FY17 and has already achieved market leadership. (Fig 15, 16, Source: Euro monitor, Student Research Appendix 8,37) Fig 16 Britannia’s Product Segment Positioning Company Strategies:
Bread & Dairy Cake Change in Corporate Strategy & Product Mix: Established in 1918, Britannia High Rusk Industries completed 100 years in FY 2018. At this juncture, Britannia has meaningfully changed its corporate strategy to attain its objective as a total foods company by International reinventing its brand identity and philosophy. With a focus to diversify its product Business Medium Biscuits portfolio, aggressively explore new segments; namely dairy, bread, rusks and cakes along with strengthening its biscuit segment by rebranding and relaunching its power brands,
puts the company on a growth trajectory. We expect Britannia to increase its market in
the biscuit segment by 50 bps in the next year and gradually increase over medium term, Low
IndustryAttractiveness growing more than the industry average. Company is moving towards a decentralized structure for the respective SBUs. (Appendix 1) Low Medium High Expanding Direct Distribution Reach and Focus on Hindi Belt: Britannia has Competitive strength of Business Unit constantly increased its direct and total distribution. As of FY 2018, it has a total reach of Source: Euro monitor, Student Research 5.2 million retail outlets, of which 1.84 million are direct retail outlets, serving more than 75% of Indian households (180 mn). Britannia has been expanding its direct distribution reach at a CAGR of 26% over the
Fig 17 Rural Distribution last 4 fiscal years and its rural distribution reach is growing at a CAGR of 27%. Growing footprint in rural India 16 with low unit packages priced aggressively at ₹5 and ₹10 will be a growth driver for Britannia. (Fig 17,18,19,20) 14 12 Britannia services barely 45,000 of the villages in India, out of universe of close to 0.69 million villages-which 10 gives it enough room to grow. Favourable macroeconomic conditions like rising disposable incomes increases
8 the overall consumption pattern. Currently, Britannia has a low market share in ‘Hindi Belt’ region (Gujarat, Thousands 6 Madhya Pradesh, Uttar Pradesh and Rajasthan) where it is expanding its distribution reach. The company’s
4 share in these states is 1/5th the leader and so is in rural India as compared to its national average. (Appendix 2) 2 0 Focus on Product Differentiation through R&D: Britannia recently entered into joint venture with FY14 FY15 FY16 FY17 FY18 Chipita (world’s leading company in making croissants) to make a ready to eat croissants for the Indian market. Currently, the Italian brand Mauli is selling croissants in India but due to economies of scale, Britannia Source: Company, Student Research will be able to price and position itself more aggressively in this segment. Croissants will be marketed by Britannia in H2FY19 and is likely to contribute ₹2500 Million to its consolidated top-line over the next three Fig 18 Per Capita Biscuit Consumption fiscal years. The management believes that innovative and new products will be contributing to up to ~5% of 16 14 its consolidated top-line. The innovation referred here is not just limited to launching new products but 12 rebranding and repackaging power brands as well. With management’s focus on innovative premium 10 8 products, we expect a possible margin expansion in the near future. (Appendix 4) 6 4 Vertical Integration by Leveraging Its Fixed Cost: Britannia in H2FY19 will be ready with its 2 0 Ranjangaon facility dedicated to cakes, croissants, dairy, innovative products and biscuits with a total capacity of 1,20,000 tones, thus making the total plant count to ten in the nation with one in Nepal as well. To increase
CFA Institute Research Challenge 2019 5
Source: IMF
Fig 19 Direct Distribution (Mn outlets) its dairy margins, it is undertaking a vertical integration. Through increasing its in-house production, vertical 2 integration, established distribution network and investment in R&D, the company will be able to
1.8 market/produce products which can significantly expand operating margins over the coming years. (Appendix 37) 1.6
1.4 Investment Summary: 1.2 1 Premiumization of Core Portfolio: Britannia’s core and premium products contribute up to 85% of its 0.8 revenue and the non-premium products proportion has only dropped in the recent years. Premiumization is 0.6 a long-term strategy which gradually will increase its average realization price which is not just limited to 0.4 0.2 biscuits, but other segments as well. This, along with low units’ package and strong volume growth will trigger 0 Britannia’s long-term growth. The management believes that the core and premium brands have an upside FY14 FY15 FY16 FY17 FY18 trend which will have them expanding the Gross and EBIDTA margins. Recently launched Good Day Chunkies
Source: Company, Student Research is priced at a 290% of the base variant. (Fig 21, 22, 23, Appendix 5) Fig 20 Reduction in customer distance Driving Growth Through Low Unit Packages: Britannia is making inroads in the rural market with 700 low unit packages. It becomes an important growth driver to acquire customers for premium products, not 600 just in the rural markets (where price points of ₹5 and ₹10 are important to compete against Parle and other 500 local players), but for urban markets as well -since these LUPs become on-the-go convenience snacks for the 400 customers. Currently, SKUs at ₹5 and ₹10 price points drive more than half of overall revenue in the biscuit 300 market. Increased distribution complemented with low unit packages and favourable rural demographics 200 gives it room for expansion in the rural market. 100
0 Explore New Markets and Segments: Britannia will also be aggressive in its dairy business through FY12 FY17 FY18 FY19E value added products like cheese, yogurt etc. Cake and Rusk are relatively nascent markets where the Source: Company, Student Research company already commands a huge market share. These segments have a higher scope for premiumization as well as volume growth. Britannia currently has been selling its products in close to 73 geographies across Fig 21 Production the globe and further expects to expand on new geographies YoY. It has the highest market share in Nepal
(17%-18%) and is a leading company in United Arab Emirates and Oman. The company wants to aggressively expand in MENA i.e. Middle East and North Africa which will augment its revenue from international business. 40% In relation to its international business revenue, it has opened an exports-oriented facility in Mundra, Gujarat. 60% Currently, biscuits contribute 75% to its consolidated top line which will reduce over the coming years given the growth in other key segments. (Appendix 1)
In house Out sourced Cost Efficiency Programs: New Room for Margin Expansion Synergies with Vertical Source: Company, Student Research Integration: Since Mr. Varun Berry took over as the CEO of Britannia, a companywide cost efficiency Fig 22 Value vs Premium Contribution program was initiated. Over ₹2250 Million of cost savings were achieved over the past fiscal year starting from ₹510 Million in FY 2014. Costing savings is achieved through reduction in conversion charges by investing 15% in efficient plants, increased automation and reducing the distance of product to the market through its distribution network. With possible vertical integration from the Ranjangaon facility, we believe that there is room for margin expansion in coming years. (Fig 24) 85% Corporate Governance:
Value Premium Board of Directors: The Board consists of Executive, Non-executive and Independent Directors and is Source: Company, Student Research headed by Mr. Nusli N Wadia since 1993. The board has only 1 female representative. The Board has 64% (9) Fig 23 Margin Independent Directors which gives the Board the authority it needs for transparent and unbiased functioning. 50% Mr. Varun Berry was appointed as Managing Director with effect from 1st April 2014 to 31st March 2019.
40% For four consecutive, fiscal years Mr. Varun Berry has kept Britannia on double digit growth trajectory despite 30% the market moving at snail’s pace. Mr Nasser Munjee, who was previously a member, resigned on 25th May, 2017 with Mr Keki Elavia taking his position from 7th Aug, 2017. Mrs Ranjana Kumar is the only woman in the 20% board. For Independent Directors, the company has a familiarization programme in which it provides
10% necessary presentations, documents, reports, internal policies and updates to familiarise them with the company’s policies, procedures and practices. All executives have expertise in FMCG industry and it comprises 0% of members promoted internally and top executives hired from FMCG companies like PepsiCo and Godrej FY16A FY17A FY18A FY19E FY23E FY28E Consumer. As the company is planning to increase its dairy business it appointed Mr. Venkat Shankar as its Gross Margin EBITDA Margin Profit Margin head of dairy division in 2018. He has a diverse experience with domains like sales, operations and private Source: Company, Student Research equity and plans on expanding Britannia’s’ name in the dairy market. Key management profiles can be found Fig 24 Cost Efficiency Program in the Appendix 26,27. (Appendix 26,27) 2500
2000 Shareholdings: The company has 120 million outstanding shares as of 31st march 2018. The company is having a majority stake, the biggest promoter being Associated Biscuits International ltd. with a stake of 1500 44.9%. All other promoters have less than 2% of holding. For institutions, foreign portfolio managers hold the 1000 maximum stake of 15.51%. LIC India also holds 4.87% stake in the company.
500
0 FY14 FY15 FY16 FY17 FY18 CFA Institute Research Challenge 2019 6
Source: Company, Student Research
Fig 25 Corporate Governance Score Card
Corporate Social Responsibility (CSR): Britannia Industries undertakes the activities with Britannia Evaluation Criteria Score Nutrition Foundation (BNF) or Sir Ness Wadia Foundation or other NGOs. The Company spent 221.4 Million Board Structure 3 on CSR activities for FY 2017-18 with 143.7 Million into Sir Ness Wadia Foundation for health care projects. Shareholder rights 4 Further, the Company contributed Rs. 77.7 Million to Nowrosjee Wadia Maternity Hospital. The company was Compensation Policies 3 also involved in the development and nutrition programs reaching a total of 12,750 children. BNF also joined Audit and Risk oversight 3 hands with Govt. of Karnataka to provide Tiger Choco Glucose biscuits to anganwadi children in Uttar Kannada Overall 3.25 district, Karnataka. Britannia launched the first Employee Volunteering Program called ‘Britannia Big Hearts’. Source: Student Research, Annual Report The program provided volunteering opportunities to employees and promotes social responsibility. Fig 26 Wastage Reduction 150 Source: Company, Student Research Related Party Transactions: During FY17-18, all the related party transactions were on arm’s length and required no prior approvals of the Board or shareholders. Also, there were no material related party 100 transactions for the last fiscal year. The company saw an increase in its usage of Inter corporate deposits (ICD’s) with ICD deposits placed increasing from Rs. 5120 Million to Rs. 7670 Million for FY17-18. It has also 50 increased its redemption of ICD from Rs. 2940 Million to Rs. 6600 Million in last fiscal year. 0 FY13 FY14 FY15 FY16 FY17 FY18 Corporate Governance Scorecard: We have developed a scorecard for the corporate structure of Stock Write Off Trade Loads Market Returns Britannia to measure the potential risk to shareholders. We have used ISS Governance Standard Framework Source: Student Research, Annual Report while measuring the score. According to our analysis the company poses low risk to shareholders. The scorecard can be found in the Appendix 25. (Fig 25, Appendix 25)
FigSource: 27 Consolidated Company, Student Revenue Research x 10000 x 12 Financial Analysis: 10 8 Revenue Growth: Britannia’s revenue has grown constantly at CAGR of 13.8% from FY 2012-16. Revenue 6 growth reduced to 7.6% & 9.8% in FY 17 & 18 due to demonetisation & implementation of GST. YoY growth 4 for the last three quarters is around 13%, owing to lower revenue in base quarter and recovery in the demand 2 sentiments. Revenues until FY 2023 are expected to increase at a CAGR of 17.2%. Britannia operates in the 0 bakery industry (90% of net sales in FY 18), dairy (4%) and international business (6%). In the bakery segment, FY12 FY13 FY14 FY15 FY16 FY17 FY18 Britannia offers biscuit (75% of net sales), cake (5%), bread (6%) and rusk (3%). The company is working
Source: Student Research, Annual Report aggressively in increasing its distribution network in the rural & Hindi belt market (40% share in biscuit industry), as it has huge upside potential for Britannia (only 20% contribution to revenue). (Fig 27, Appendix 13) Fig 28 Material cost (FY16) Britannia is the market leader in the biscuit industry with 32% market share and with the rising demand for premium cookies and Britannia’s strong presence in the segment we expect further expansion in its market share. Britannia has aggressive expansion plans in other categories under bakery segment and revenue is 15% Flour expected to grow at a CAGR of 23.4% till FY 2023 from these segment. 44% Fats and oils 19% Sugar Owing to aggressive investment in dairy segment, we expect exponential growth of revenue from dairy
Lamination roll business from FY 2021. We expect revenue from international business to grow at a CAGR of 19.6%. Revenue 22% from adjacent business such as croissants is projected in accordance with management guidance. (Appendix 18)
Source: Student Research, Company data Savings in Operating Expenses: Cost of material invariably represents 73% of the operating expenses and around 60% of sales. Material consumed in producing goods are wheat flour, edible oil, sugar and Fig 29 Cost Effieciency Program packaging material. Based on futures prices, we expect material cost to remain constant. The company has limited ability to transfer any price increase on consumers and any adverse change in price may impact the 6% profitability adversely. We expect Britannia’s material cost to decrease by 2.3% on EBITDA margin by FY 2021. Our assumption is based on management guidelines to reduce outsourced manufacturing from 50% to 40%. 4% In-house production will help in reducing the cost by leveraging on the backward integration plan and IOT based manufacturing process is helping in reducing wastage and product return from the market. Owing to 2% the automation of the production process, we expect employee cost to reduce. As the company is operating with low operating leverage, we expect Britannia to be more responsive in case of any downturn. Under cost 0% efficiency program conversion charges, distribution charges and sales promotion charges have substantially FY16 FY17 FY18 FY19E FY23E FY28E Conversion Distribution Promotion come down. (Fig 26, 28, 29, Appendix 30,35)
Source: Student Research, Company data Margin: Traditionally, Britannia operates at a considerably higher EBITDA (15.4% vs 10.8%) & net (10.1% vs 6.2%) margin than the industry average, primarily owing to the strong presence in the premium category. Fig 30 EBITDA Gross and EBITDA margins have improved by 70 & 110 basis points respectively in the FY 18 due to the cost 20.0% 15.4% efficiency program and premiumisation. We expect margins to improve further due to favourable 14.6% 14.3% 15.0% macroeconomic trends and management strategies. (Fig 30, Appendix 31)
10.0% Cash Generation: Britannia operates with a negative working capital cycle, it allows the company to make 10.8% short-term investments. Though in FY 2017 & 18, Britannia has increased credit period provided to debtors, 5.0% 7.2% 6.9% as a result DTR reduced from 54 in FY16 to 41 in FY18. The company is able to meet its working capital 0.0% requirements from the cash generated from operations. Britannia has considerably improved its current ratio 2016 2017 2018 in the last couple of financial years and is expected to maintain a healthy current ratio in the future. Also Britannia Industry historically, Britannia has maintained a better current ratio than the industry median and has utilised its
Source: Student Research, Company data CFA Institute Research Challenge 2019 7
Fig 31 Cash Generation debtors and inventory more efficiently than the industry. (Fig 31, Appendix 33) 2000 12% 9.8% 9.0% 8.2% 10% 1500 7.1% CAPEX: Britannia has planned to invest Rs. 10000 Million in the Ranjangaon facility of which 1700 million 8% was invested in FY 18. Apart from this Britannia has also planned to invest in upgrading its other production
1000 6% facilities. The company has maintained a very low level of debt and cash from operations were sufficient to 4% finance the CAPEX requirements. We have capitalised R&D expenses using Ashwath Damodaran’s R&D 500 4.5% 4.7% 4.7% 4.6% 2% converter, as the R&D expenses as a % of sales are minimal its impact on price is negligible. (Fig 32, Appendix 16) 0 0% 2018 2019E 2020E 2021E DuPont Analysis: Britannia has traditionally delivered ROE of around 30%. Higher return than the industry (food processing industry) median is generated by higher net margins (10.1% vs 6.2%) and asset turnover FCF Capex/Sales FCF/Sales (1.94 vs 1,06). On the other hand, equity multiplier is low. We expect Britannia to deliver the same return in Source: Student Research, Company data the forecasted future. DuPont analysis suggests that higher return will be sustained by higher profitability and stable asset turnover. As Britannia is working with low financial leverage, we expect it won’t face any financial Fig 32 CAPEX risk in the future. Britannia has delivered substantially higher return on equity and asset turnover than the
industry average. (Fig 33, Appendix 28,31) 25 4.8% 20 4.7% 4.6% Reported Earnings: We evaluated the earnings quality of Britannia using eight variable Beneish M-score 15
Thousands 4.5% analysis for FY 2018. Britannia has an M-score of -2.63, which indicates low likelihood of manipulating the 10 4.4% earnings. M-score below -2.22 indicates low likelihood of manipulating earnings. (Appendix 32) 5 4.3% 0 4.2% Inter Corporate Deposit: ICD of Rs. 3500 Million is extended to a group company Bombay Dyeing &
FY18 FY19EFY20E FY23E FY28E Manufacturing Company Limited, which has suffered losses in 2 of the last 3 financial years. It might result in CAPEX CAPEX/Sales blockage of funds. The company plans to reduce inter group ICDs, though they have negated any possibility Source: Student Research, Company data of reducing it to zero in the near future. Fig 33 ROE vs ROC vs ROA 35% Valuation:
25% We have used the DCF and Relative multiples valuation method to arrive at a target price of Rs. 6,302.20 with
an upside of 14.36%. P/E and EV/EBITDA multiples have been used for relative valuation. The weights assigned to DCF as well as relative valuation are 33.33% and 66.67% respectively. DCF has been assigned a lower weight 15% due to its sensitivity to terminal growth rate and required rate of return. In relative valuation, we have considered two-year forward (FY20) multiples. In multiples, we have assigned equal weight (i.e. 33.33%) to 5% 2018 2019F 2020F 2023F 2028F EV/EBIDTA and P/E. We have used EV/EBITDA because of the capital-intensive nature of the industry and ROE ROA ROCE varying accounting policies used for depreciation of PPE, capitalization of R&D and operating lease expenses. Source: Student Research, Company data P/E multiple was assigned the same weight due to low leverage of the company and future growth profitability expectations of the company. (Fig 35) Fig 34 Industry Growth Rate 20% Revenue Projections: We considered consolidated revenue top line projections for valuation as revenue contributed by the subsidiaries and associates is 4.55% of consolidated top line which ideally should not affect 15% the overall projected segmental revenue. We expect the company to have a higher growth in FY19 and this higher growth rate will be sustained in the near future due to company’s strategy of innovation in products
10% and increasing the distribution reach. We have used Top Down approach to project revenues where we have estimated the industry growth rate and used the market share of Britannia to estimate revenues. We believe 5% that the company will sustain its growth by increasing its market share in its product segments. (Appendix – Top Line Projections) (Fig 34, Appendix 3,13) 0% 2018 2019F 2020F 2021F 2023F 2028F Intrinsic Valuation using Discounted Cash Flow Method by FCFF (Free Cash flow to the Biscuit Bread Cake Firm): Since Britannia is in its growth phase due to the change in management strategy, free cash flow will Rusk Dairy grow over the medium term. We have used a three stage FCFF approach where in the first stage is the Growth Source: Student Research, Crisil Research Phase, the second stage is the Convergence Phase and the third stage is the Perpetual Phase. We have used Fig 35 Valuation Results ten-year projections using top line projections (Top Down approach) in which the initial five years (2019 – 23) Valuation Method Value Weight are in the growth phase and the later five years (2024-2028) are in the convergence phase. In the third stage DCF 4806.01 33.33% we believe that Britannia will sustain its ROC, so we have assumed Terminal ROC to be 25%. (Fig 35, Appendix 22) EV/EBITDA 7209.83 33.33% P/E 6890.75 33.33% Weighted Average Cost of Capital: WACC has been calculated by using risk free rate and equity risk Equity Value Per Share 6302.20 33.33% premium of Indian markets. Risk free rate was estimated using long term 10-year government bond yield DCF Method (In Millions) while debt for the projected period has been assumed to be the same for Britannia which is currently at
Value of Firm 576604.85 c2.47%. Beta value (0.69) has been determined by regressing 3 years’ returns of Britannia against Nifty returns. We’ve used CAPM to calculate the cost of equity (10.84%) and later used weighted average to arrive Cash 1401.03 at Weighted Average Cost of Capital of 10.79%. (Fig 36, Appendix 17) Debt 1060.88
Value of Equity 576945.00 Terminal Growth Rate and Terminal Value: We have assumed terminal growth rate of 6% for our Price Per Share (In Rupees) 4806.01 FCFF model based on the long-term GDP growth of India. India is the fastest growing economy as of now and Period Phase in the long term also is expected to grow at a higher rate. We are taking the conservative approach here to 2019-2023 Growth keep our terminal growth below the estimated GDP growth rate. We have assumed terminal reinvestment 2024-2028 Convergence rate of 24% based on the continuous growth of Britannia and required capital investments to sustain the Beyond 2028 Perpetual growth. We have expected terminal ROC to be 25% in the perpetual phase to arrive at reinvestment rate. Terminal Rates Based on these assumptions we have calculated the present value of terminal value which is Rs. 417982.25 Terminal Growth Rate 6% Million. (Fig 35, Appendix 22) Terminal ROC 25%
Terminal Value (In Millions) 417982.25 CFA Institute Research Challenge 2019 8 Source: Student Research Fig 36 DCF Assumptions & Relative Valuation Assumptions Relative Valuation: Currently Britannia is trading at a higher premium than its peers. We believe this Effective Tax Rate 33.52% premium to be justified by considering double digit growth. We also believe these levels to sustain in the near Marginal Tax Rate 34.00% future as well by considering the management strategy to become a “Total Foods” company. We have used Number of Shares (in two-year forward multiples of EV/EBIDTA and P/E (FY2020) to calculate the consolidated value of the Millions 120.05 Britannia. As Britannia’s management is focusing on in-house production of its products, we believe Britannia Beta 0.69 to be capital intensive and EBITDA negates the effect of depreciation. Since the industry is less levered, P/E Rf 7.47% seems to be a better fit and other players in the industry also have low leverage. Market Return Expected 12.36% Market Risk Premium 4.89% For selecting the peers of Britannia, we have used the Indian FMCG sector, in which Britannia and its peers Cost of Equity 10.84% operate. We have used our metric to select peers. (Appendix – Peer Analysis). The metric used is based on Cost of Debt 8.50% similar characteristic of growth, leverage, firm size and cash flows. Higher premium for Britannia is also D/E 2.47% justified by its estimated EPS growth. (Appendix – Peer Analysis) By selecting peers based on our metric, we have used median of multiples for relative valuation. We have used a median P/E multiple of 44.42 and a WACC 10.79% P/E EV/ median EV/EBITDA multiple of 29.97. These multiples are in line with Britannia’s peers. By using these multiples, finally we have arrived at a value of Rs. 7,209.83 and Rs. 6,890.75 by EV/EBITDA and P/E multiples Current EBITDA Company Name (LTD) Year P/E FY20 FY20 respectively. (Fig 36, Appendix 12) Median 51.56 44.42 29.97 Risk to Target Price: We are aware that minor adjustments to our valuation can affect the target price. Britannia Industries 59.45 45.61 30.67 To analyse this, we have performed Scenario Analysis, Sensitivity Analysis and Monte Carlo Simulation Dabur India 42.31 40.99 34.80 Analysis to our assumptions. Godrej Consumer Products 45.6 38.04 28.39
Hindustan Unilever 55.38 47.85 33.99 Scenario Analysis: To understand the effect of our assumptions, we have performed a Scenario Analysis Marico 51.56 38.16 27.30 by using upside, base and downside scenarios. For the upside case, we have taken the bullish view and for downside case, we have taken the bearish view of our assumptions respectively. We have estimated the share Nestle India 61.94 48.89 29.93 price to be Rs 8201.45 for the upside case and Rs. 4743.71 for the downside case. (Appendix – Scenario P&G HHL 61.94 50.72 30.01 Analysis Assumptions) (Appendix 11) Relative Valuation Domestic FY20 Sensitivity Analysis: Based on our insights and growth trajectory of Britannia, we believe that WACC and terminal growth rate are the most sensitive parameters which are highly dependent on the macroeconomic Multiples EV/EBITDA FY20 P/E factors. To verify our belief, we have performed a sensitivity analysis by using WACC and Terminal Growth Median Multiple 29.97 44.42 rate. We estimate that there is a downside of 8.92% if the terminal growth rate and WACC is 4% and 12% respectively. Similarly, we performed the sensitivity analysis for reinvestment rate and WACC as well. EBITDA/Earnings in case of (Appendix – Sensitivity Analysis) (Appendix 10) P/E/Sales for EV/EBITDA 28923.94 18622.48 Monte Carlo Simulation: We performed the Monte Carlo simulation to understand the change in our assumptions and its impact on the target price. We performed the Monte Carlo simulation using the key Fair Enterprise Value (Equity assumptions: Cost of goods sold (COGS), Weighted Average Cost of Capital (WACC), Revenue CAGR, Terminal value in case of P/E) 866850.60 827210.39 Growth Rate, Other expenses (Conversion Charges, Distribution and Advertising Expenses). Simulation results Subtract: Debt 1335.80 show that there is 79.48% certainty to have an upside buy from the market price as of 9th October, 2018. Based on Monte Carlo Simulation results (Appendix – Monte Carlo Simulation), the most sensitive factors to Fair equity value 865514.81 827210.39 our target price are Revenue CAGR, Raw Material Inflation and WACC. We ran Monte Carlo simulation for Price Per Share 7209.83 6890.75 25000 trials which we believe gives optimum simulation results, beyond which increase in the simulation Source: Student Research, Thomson Reuters trials, do not affect our results much. (Fig 37, 38, 41, Appendix 9) Fig 37 Football Field Investment Risks: Base Case - 6302 We have used risk matrix to identify key risks and have assigned them probabilities to find their impact target P/E 5208 8808 price. Since, Britannia has low leverage on its balance sheet, it is exposed to market and operational risks. We are including only key risks, which will have a material impact on stock’s valuation. (Fig 39) EV/EBITDA 5500 9158 Operational/Strategic Risks:
OR1 - Dependency on Biscuits (Medium Likelihood, Low Impact): Biscuits contribute up to DCF 3522 6637 75% of the total consolidated revenue of Britannia which reflects its high dependency on that segment. With increased industry competitiveness, the company might lag growth given its dependency. Its immediate peers 3000 4500 6000 7500 9000 like ITC, Nestle and Dabur have been diversifying their portfolio in other businesses. Currently, Britannia is Source: Student Research looking to expand in dairy, cakes and rusk categories as well as entry into new geographies in the coming fiscals thereby decreasing the share of biscuits but given smaller market pie of cakes and rusk, inherent sector Fig 38 Share Price weakness of diary, high competition and weak global growth, the biscuit sector might still end up being a 5000 6000 7000 8000 dominant category in its portfolio. Impact on Valuation - We have reduced the growth of Bread, Rusk, Cake and Dairy segment which are growing at the fastest rate, by 10% of the base case to get a downside of 2.19%. COGS 64% 57% OR2 - Cost Efficiency Program (Low Likelihood, Medium Impact): Britannia is expected to reduce its cost by 150-200 basis points due to the increase in operational efficiency because of the automated WACC 11% 10% in-house manufacturing. Distribution distance is also expected to decrease from 350 Kms to 250 Kms. There is medium probability of not realizing the cost efficiency since the low hanging fruit might have already been captured, the impact of which can be medium on the Britannia’s overall price. Margin can be impacted by 1-
Revenue CAGR 14% 16% 2%. Impact on Valuation - We have increased the cost related to distribution, conversion and advertising charges by 10% of base case to get a downside of 6.5%.
Upside Downside CFA Institute Research Challenge 2019 9 Source: Student Research
Fig 39 Risk Matrix OR3- Regulatory risk (Low Likelihood, High Impact): Food Safety and Standards authority of India (FSSAI) is the regulatory body for
the industry which checks the quality and ingredient mix of the food products. In the recent past, the Nestle Maggie’s brand image was highly High MR1 MR5 deteriorated because of the reported increase in lead levels. Such
instances can affect Britannia’s brand image as well. It can reduce the
OR1 MR2 revenue and overall share price.
Medium MR3
MR3 Market Risks: Probability
OR2 MR1 - Changes in consumer preferences (High Likelihood, Low Since today’s customer tastes are ever evolving OR3 Medium Impact): and there are demographic shifts in mass market customers as well, Low Medium High changes in customer preferences might be threat companies would Impact have deal with. Britannia in FY 2019 is going to launch close to 50 Operational/Strategic Market Risk products which, if not received well by the customers would result into Risk a slow top line growth and a decline in market share. If Croissants are (Appendix 24) not well received, it would fail to receive the market traction and will add less to the top line against the estimated ₹2500 Million. Impact on Valuation - We have reduced the market share in the coming years by Source: Student Research 10% of base case in biscuits category, to get a downside of 3.14%. Fig 40 Inflation Trends MR2 - Increase in industry competition (Medium Likelihood, Medium Impact): After gaining a 9% share from Parle, Britannia is currently the market leader in the biscuit category. It is also the market leader in the packaged cake category. Parle is also increasing its investments in the premium biscuit category through its Platina range of products and Nutri Crunch (which is into the health segment). ITC has been relatively stable in its investments and the promotional strategy for its biscuit segments. However, small players like Anmol Industries and Surya Foods might pose a threat soon. International players like Mondelez are also seeing double digit revenue growth. Threat of new entrants like Unibic might result in slow growth in the cookie segment. Impact on Valuation - We have reduced the market share in the coming years by 10% of base case in biscuits category, (since it’s the largest contributor to the consolidated topline and has a material effect on stock price) to get a downside of 3.14%.
MR 3- Increase in input cost (Medium Likelihood, High Impact): Input costs as a percentage of sale, including raw materials cost and purchase in stock in trade constitutes around 58-62% of sales. One percent increase in overall cost decreases the price per share by 3-3.5%. Apart from that, it can impact the margins and bottom line as well. Rising competitiveness in the industry makes it difficult to pass on the price and there can be lag as well in passing on the price. There is medium probability of rising raw materials cost like sugar, wheat, palm oil and milk due to changing economic scenario. Impact on Valuation - We have increased the cost of materials consumed and purchase of stock in trade by 10% of the base case to get a downside of 14.84%. (Fig 40)
MR 4 - Slowdown in overall consumption (Low Likelihood, Medium Impact): Rising disposable income and increasing consumption in India indicates a low probability for a slowdown in overall consumption. However, rising political instability due to the upcoming general elections and current liquidity crisis in India can cause the slowdown in consumption, which in turn can impact our revenue stream and growth projections. Impact on Valuation - We have reduced the growth rate by 10% of the base case in each
category to get a downside of 4.18%.
MR 5 - Uncertainty in Dairy Segment (High Likelihood, Low Impact): To become a total foods company, Britannia is banking on its dairy segment to reduce its dependency on the biscuit segment. The Ranjangaon facility already has a lead time of two to three years which leads to a delayed growth in production Source: IMF of value-added dairy products. The Sectors’ inherent weakness and company’s past failure with Ghee, Cheese and other products makes this segment a bumpy ride in the coming years. Impact on Valuation-We have
Fig 41 Share Price reduced the growth dairy segment by 10% of the base case to get a downside of 0.44%. 79.48% Certainty to Buy Recommendation:
1000 Given its successful track record, strong brand equity and professional leadership, we expect Britannia to outperform the market and its peers given its new strategy. This coupled with the fact that, the company has 800 a lower beta and is expected to be less volatile than the market considering the current market conditions. We believe Britannia as a stock will not just lead to capital appreciation for its investors but also is a safe stock 600 that every investor should have in its portfolio. 400
FREQUENCY 200 0 4092.66 5181.73 6270.81 7359.89 8448.97
Source: Student Research CFA Institute Research Challenge 2019 10
Appendix 1: Segment Revenue & Product Mix:
Forecasted Segment Revenue Historical Segment Revenue 120.00% 120.00% 100.00% 100.00% 80.00% 80.00% 60.00% 60.00% 40.00%
20.00% 40.00%
0.00% 20.00%
0.00% 2012 2013 2014 2015 2016 2017 2018 Biscuits Bread Cakes Biscuits Bread and Rusk Rusk Dairy International Business Cake Dairy Adjacent Business International Business
Source: Student Research, Company Report Appendix 2: Hindi Belt: Appendix 3: Britannia’s Market
Hindi Belt Growth Share 30 ReductionBritannia's in Customer Market Distance Share 700 40.00% 25 600 500 20 30.00% 400 20.00%
15 300 InKms 10.00%200 10 100 0.00% 5 0 2018 2019F 2020F 2021F 2023F 2028F FY 2012 FY 2017 FY 2018 FY 2019E 0 Biscuit Bread Cake FY 2015 FY 2016 FY 2017 FY 2018 Rusk Dairy UP Gujarat MP Rajasthan Source: Student Research, Company Report Source: Student Research, Company Report
AppendixSource: Student Research4: Innovativ, Company Reporte Categories in Cheese and Cakes and BCG Matrix Explanation
Innovative Categories in Cake and Cheese BCG Matrix Explanation – On x-axis, we have considered relative market share and on y-axis, we have Cakes considered market growth rate. Bubble size represents revenue share of the product in Britannia’s total Choco Muffils revenue. Strawberry Muffils Nut Raisin Good Day as a brand is a cash cow for Britannia. Britannia is also introducing new variants such as Cheese Good Day Wonderfulls. Accordingly, we have considered part of Good Day as cash cow and part Mexican Chilli rising star. Asli Pepper Healthy biscuit is the new trend in the industry. Nutrichoice offered the healthy biscuits to Four Pepper Tango consumers and considered as rising star. Cream Cheese Bourbon, Treat and 50-50 are mature brand but their relative market share is low with high growth Cheezza rate, So, we have considered them as question mark. Peppy Pizza Roasted Garlic Cake, Rusk and Bread are growing at a healthy rate in organized sector and Britannia is already market leader in this categories, we have considered them as partly rising star and partly cash cow.
Source: Student Research, Company Report CFA Institute Research Challenge 2019 11
Appendix 5: Key Product Launched
Source: Student Research, Company Report, Big Basket, Groffers, Amazon Appendix 6: Primary Survey Results
Perceptual Maps: We have done a survey to analyse the perceptions about the Britannia’s presence in the biscuit sector as biscuits is the major segment for revenue generations for Britannia. We received 359 responses.
<15 Age Group 15 to 20 Age Group 25 7
6 OreoBourbon 20 Hide and Parle-G 5 Other Seek 15 Jim-Jam 4
3 Good-day 10 -2 0 2 4 6 8 10 Hide and Seek
Favourtite -5 0 5 10 15 20 25 2 Favourite Monaco Bakery-Home Bourbon Tiger 5 Parle-G1 MarieOther Good-day Oreo Bakery- PatanjaliMonacoMarieUnibic 0 Patanjali Home Jim-Jam 0 -1 Unibic Value for Money -5 Value for Money
15 to 20
CFA Institute Research Challenge 2019 12
Region 26 to 30 Age Group 350
300 Parle-G 250
200 Good-day Marie 150 -2 0 2 Hide and4 SeekBourbon6 8 10 12 14 16 Favourite 100 Tiger Oreo Monaco Location Bakery-Home Patanjali Unibic 50 Jim-Jam
0 Other
-50 Value for Money
>30 Age Group 400
350 Parle-G 300
250 Good-day Age Breakup
200 6.50% Marie -50 0 50 100 150 200 250 300 350 150 >30 <15
Favourite Tiger Patanjali Hide and Seek 21% 100 Bakery-HomeBourbon 15 to 20 MonacoOreo 17.50% JimUnibic-Jam 50 21 to 25 Other 26% 26 to 30 0 29% >30 -50 Value for Money
Insights: The perception of Good Day is better than Parle-G and it also scores good on value for money front for consumers above the age of 26. This shows that even though Tiger can’t compete effectively with Parle-G, Good day is a very good competitor.
For ages below 25, Hide n Seek and Bourbon are close competitors.
The other competitors such as Oreo or Unibic are popular among ages 21-25 but are perceived as costly i.e. they score low on the value for money scale. General Distribution Channel in Industry:
Clearing and Super Manufacturer Distributer Agency Retail shop forwarding agent stockist
General Margins:
We have conducted few interviews with distributors to identify the margins in the industry. Following are the details. Britannia’s exclusivity in distributorship provides them an edge in terms of distributors’ margin and increase its net revenue.
Retail Shops – 8% on MRP, Agency (5 per district) – 3.5% on Retail Shop cost price, Distributer (1 per district) – 1% on Agency cost price, Super stockist (4/5 per state) – 0.5% - 1% on Distributer cost price, Clearing and Forwarding Agent (1 per state) – 0.5% MAX on Super stockist cost price. Margin depends on movement of product. If the product is fast moving (selling easily and fast), the margin given are less. Big Retailers like Big Bazar, D-Mart get the margin percentage from the level they buy. The company can control the exclusivity of products to be sold till distributer. Our insights suggest that this exclusivity will play a major role for Britannia in incremental net revenue.
Source: Student Research CFA Institute Research Challenge 2019 13
Appendix 7: Porter’s Five Forces
Buyer Power Supplier Power Customers are more Concentration of concentrated than suppliers the industry they… 3 5 Customers' quality 2.5 Customers face is not 4 Suppliers do not 2 Industry participants few switching subsatantially 3 depend heavily on 1.5 have high switching costs affected by the… 2 industry 1 costs 1 0.5 0 0 Industry products Customers earn are low profits Suppliers offer undifferentiated Credible threat of differentiated forward integration Industry purchases products Credible threat of represent a backward significant fraction integration of their cost Few substitutes for supplier products
Power of Buyers – High: Buyer power is high as the products are Power of Suppliers – Moderate: Supplier power is moderate is low not much differentiated and the switching costs are very few owing to low concentration of suppliers and the industry players are strong.
Competitive Rivalry Threat of New Entrants
Supply side economies of Product lacks scale differentiation 5 Demand side 5 Slow industry benefits of Rivals have Higher fixed costs growth 4 diverse 4 and lower scale approaches 3 marginal costs 3 Anticipated 2 vigorous 2 Customer 1 Capacity must incumbent switching cost Exit barriers are 1 increase in large response high 0 increments 0
High barriers Capital Industry growth is Product is of exit requirements slow perishable
Restrictive Competitors are Incumbency government numerous and advantages roughly equal in policy size Access todistribution channels or supplier…
Competitive Rivalry – High: The rivalry is strong between few Threat of New Entrants– High: New players with established big players in the industry and the players are usually price distribution network can enter easily as ITC did but establishing a takers due to low scope in product differentiation. brand is a challenge. New players have to pour in lot of investment to compete against the existing brands.
Threat of Substitutes Closeness of substitutes Threat of Substitutes– High: Fresh products, usually produced 5 locally by the informal sector are the major substitutes. The 0 switching costs are less for customers and brand loyalty is rare in this
industry. Performance/price ratio of substitute Source: Student Research, HBR Research Paper by Michael Porter
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Appendix 8: SWOT Analysis
Strengths Weakness Diversified product portfolio High dependence on contract Strengths Strong distribution network manufacturers Product Market leader in biscuit segment Change in leadership portfolio 5.0 Deriving more revenue from ICD extended to weak group Technologic 4.0 Distribution premium segment companies al… 3.0 network 2.0 Strong power brands - Good day, High dependence on biscuits 1.0 Market Cash flows 0.0 Marie segment leader Focus on innovation & strong Products in the portfolio are close Premium Innovation pipeline of new launches substitutes which might lead to portfolio High & stable operating cash flows product cannibalization Power Fully automated manufacturing Aggressive investment in the dairy brands facilities and state of art R&D segment facilities Increasing level of receivables Weakness Opportunities Threats High growth opportunities in Hindi The volatility of commodity prices Contract belt & rural market Changing consumer preferences manufacturi Favorable macro-economic trends Increasing competition in premium ng 5 Higher growth rate of the segment segment Increasing 4 Leadership receivables 3 where Britannia has a strong Increasing health consciousness 2 presence such as cookies Uncertainties in major export 1 Dairy 0 Under-penetrated cake, Rusk & markets ICD investment bread market Easy availability of substitutes at Product Portfolio Rising demand for packaged food similar price points cannibalizat skweness Lack of customer loyalty ion Change in the regulatory framework Political instability Opportunities
Hindi belt & rural market 5.0 SWOT 4.0 Demand for 3.0 Macro Opportunities packaged 2.0 economic 25 food 1.0 trends 0.0 20 15 Under- High growth 10 penetrated rate segments 5 Weakness Threats 0 Threats
Commodity prices 4.0 consumer Substitutes 3.0 preferences 2.0 Export 1.0 Competition markets Strengths 0.0 Political Health instability consciousn… Regulatory Customer Source: Student Research framework loyalty
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Appendix 9: Monte Carlo Simulation Share Price 79.48% Certainty to Buy
Forecast values Base Case – 6302.20 Trials 25,000 Base Case 6302.20
Mean 6320.18 1000 900 Median 6319.41 Mode --- 800 Standard Deviation 808.54 700 Variance 653740.27 600 Skewness 0.0411 500 400 Kurtosis 2.49 Frequency Coeff. of Variation 0.1300 300 Minimum 4056.35 200 Maximum 8833.57 100 Range Width 4777.22 0 4092.66 5181.73 6270.81 7359.89 8448.97 Mean Std. Error 5.11
Monte Carlo Assumptions Assumption Min Base Max Equity Value Per Share COGS 54.78% 60.87% 66.96% Equity4000.00 Value5000.00 Per6000.00 Share7000.00 8000.00 WACC 9.71% 10.79% 11.87% 5000.00 6000.00 7000.00 8000.00 Revenue CAGR 13.28% 14.75% 16.23% COGS 64.23% 57.51%
Terminal Growth Rate 5.40% 6.00% 6.60% Cost of Materials Consumed 52.15% 46.69% Advertising Cost 3.69% 4.10% 4.51% WACC 11.39% 10.19% Distirbution Expenses 4.24% 4.71% 5.18% WACC 11.39% 10.19% Conversion Charges 3.70% 4.11% 4.52% Terminal Growth Rate 5.67% 6.33% Purchase of Stock-in-Trade 12.08% 10.82% Distribution Expenses 4.97% 4.45% Terminal Growth Rate 5.67% 6.33% Carriage, Frieght & We have performed Monte Carlo by using above variables with min, base and Conversion Charges 4.97%4.34% 4.45%3.88% max case. Distribution AdvertisingConversion Expenses Charges 4.34%4.33% 3.88%3.87% By using this tornado diagram, we can predict that Cost of Materials Advertising & Sales consumed and WACC are the most sensitive factors to our valuation 4.33% 3.87% RevenuePromotion CAGR 13.93% 15.56% model.
Source: Student Research UpsideUpside DownsideDownside
Appendix 10: Sensitivity Analysis Value WACC per Share 6302.20 9.59% 9.99% 10.39% 10.79% 11.19% 11.59% Below are the assumptions of Sensitivity analysis. 4.00% 6236.68 6126.29 6029.85 5944.89 5869.50 5802.16 5.00% 6482.41 6331.54 6203.19 6092.69 5996.57 5912.23 Growth 6.00% 6865.05 6639.68 6455.51 6302.20 6172.62 6061.67 Sensitivity Analsysis 7.00% 7543.15 7153.94 6856.68 6622.27 6432.69 6276.24 Growth Rate 6.00% 8.00% 9074.21 8185.03 7593.57 7171.77 6855.82 6610.34 WACC 10.79% Reinvestment Rate 24.00% Value Reinvestment Rate ROC 25.00% per Share 6302.20 16.00% 20.00% 24.00% 28.00% 32.00% Value per Share 6302.20 4.00% 6029.45 5987.17 5944.89 5902.61 5860.33 5.00% 6192.81 6142.75 6092.69 6042.63 5992.57 Growth 6.00% 6424.37 6363.28 6302.20 6241.11 6180.03
7.00% 6778.13 6700.20 6622.27 6544.34 6466.41 8.00% 7385.48 7278.63 7171.77 7064.92 6958.07
Source: Student Research
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Appendix 11: Scenario Analysis
Year FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 Scenario Assumptions Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Upside 46.94% 46.61% 46.33% 46.04% 45.76% 45.47% 45.19% 44.90% 44.62% 44.33% Cost of Materials Consumed Base Case 49.42% 49.07% 48.77% 48.47% 48.17% 47.87% 47.57% 47.27% 46.97% 46.67% Downside 51.89% 51.52% 51.20% 50.89% 50.57% 50.26% 49.94% 49.63% 49.31% 49.00% Upside 10.88% 10.21% 9.98% 9.74% 9.45% 9.26% 9.19% 9.12% 9.05% 8.98% Purchase of Stock in Trade Base Case 11.45% 10.75% 10.50% 10.25% 9.95% 9.75% 9.68% 9.60% 9.53% 9.45% Downside 12.02% 11.29% 11.03% 10.76% 10.45% 10.24% 10.16% 10.08% 10.00% 9.92% Upside 13.75% 14.85% 15.40% 15.40% 14.85% 14.30% 13.48% 12.65% 12.10% 11.00% Biscuit Industry Growth Base Case 12.50% 13.50% 14.00% 14.00% 13.50% 13.00% 12.25% 11.50% 11.00% 10.00% Downside 11.25% 12.15% 12.60% 12.60% 12.15% 11.70% 11.03% 10.35% 9.90% 9.00% Upside 34.13% 34.65% 34.91% 35.18% 35.70% 35.70% 35.44% 35.18% 34.65% 34.39% Brtiannia's Market Share Base Case 32.50% 33.00% 33.25% 33.50% 34.00% 34.00% 33.75% 33.50% 33.00% 32.75% of Biscuits Downside 30.88% 31.35% 31.59% 31.83% 32.30% 32.30% 32.06% 31.83% 31.35% 31.11% Upside 13.20% 13.75% 14.30% 14.30% 13.75% 13.48% 12.93% 12.38% 11.83% 11.28% Bread Industry Base Case 12.00% 12.50% 13.00% 13.00% 12.50% 12.25% 11.75% 11.25% 10.75% 10.25% (Organized) Growth Rate Downside 10.80% 11.25% 11.70% 11.70% 11.25% 11.03% 10.58% 10.13% 9.68% 9.23% Upside 12.10% 13.20% 14.30% 15.40% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% Brtiannia's Market Share Base Case 11.00% 12.00% 13.00% 14.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% of Bread Downside 9.90% 10.80% 11.70% 12.60% 13.50% 13.50% 13.50% 13.50% 13.50% 13.50% Upside 16.50% 18.70% 17.60% 17.60% 17.05% 16.78% 15.95% 15.40% 14.85% 14.30% Cake Industry Growth Base Case 15.00% 17.00% 16.00% 16.00% 15.50% 15.25% 14.50% 14.00% 13.50% 13.00% Rate Downside 13.50% 15.30% 14.40% 14.40% 13.95% 13.73% 13.05% 12.60% 12.15% 11.70% Upside 12.65% 13.75% 15.40% 17.05% 18.70% 19.80% 19.80% 19.80% 19.80% 19.80% Brtiannia's Market Share Base Case 11.50% 12.50% 14.00% 15.50% 17.00% 18.00% 18.00% 18.00% 18.00% 18.00% of Cake Downside 10.35% 11.25% 12.60% 13.95% 15.30% 16.20% 16.20% 16.20% 16.20% 16.20% Upside 9.90% 11.55% 12.10% 12.10% 11.55% 11.00% 10.45% 9.90% 9.35% 8.80% Rusk Industry Growth Base Case 9.00% 10.50% 11.00% 11.00% 10.50% 10.00% 9.50% 9.00% 8.50% 8.00% Rate Downside 8.10% 9.45% 9.90% 9.90% 9.45% 9.00% 8.55% 8.10% 7.65% 7.20% Upside 17.05% 18.15% 19.80% 21.18% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% Brtiannia's Market Share Base Case 15.50% 16.50% 18.00% 19.25% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% of Rusk Downside 13.95% 14.85% 16.20% 17.33% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% Upside 11.00% 12.10% 10.18% 9.63% 9.35% 9.35% 9.08% 8.80% 8.53% 8.25% Dairy Industry Growth Base Case 10.00% 11.00% 9.25% 8.75% 8.50% 8.50% 8.25% 8.00% 7.75% 7.50% Rate Downside 9.00% 9.90% 8.33% 7.88% 7.65% 7.65% 7.43% 7.20% 6.98% 6.75% Upside 0.55% 0.61% 0.99% 1.27% 1.54% 1.82% 2.04% 2.20% 2.37% 2.60% Brtiannia's Market Share Base Case 0.50% 0.55% 0.90% 1.15% 1.40% 1.65% 1.85% 2.00% 2.15% 2.30% of Dairy Downside 0.45% 0.50% 0.81% 1.04% 1.26% 1.49% 1.67% 1.80% 1.94% 2.15% Upside 16.50% 18.70% 22.00% 20.90% 19.25% 18.15% 17.05% 15.95% 14.85% 13.75% Britannia's International Base Case 15.00% 17.00% 20.00% 19.00% 17.50% 16.50% 15.50% 14.50% 13.50% 12.50% Business Growth Rate Downside 13.50% 15.30% 18.00% 17.10% 15.75% 14.85% 13.95% 13.05% 12.15% 11.25% Source: Student Research Revenue EBITDA Long Term Dividend Appendix 12: Peer Analysis Peers Size Business Growth Margin Debt/Equity Yield We have used Firm Size, Industry, Capital Structure, Revenue Growth and EBITDA Margin to Dabur identify our peers. We have used FMCG Industry to GCPL identify our peers. The colour code matrix used HUL here is to show the similarity in different metric Marico parameters used by us. Nestle Source: Student Research, Thomson Reuters P&G HHL
Color Highly Moderate Not Code Similar Less Similar Similar Similar Similar
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EPS Growth Comparison:
EPS EPS Growth EPS Growth EPS Growth Company EPS (FY -1) EPS (FY0) EPS(FY1) EPS(FY2) EPS(FY3) Growth (FY1) (FY2) (FY3) Name (FY0) Britannia 73.72 83.59 106.52 139.16 171.02 13.39% 27.44% 30.63% 22.90% Dabur 5.67 7.66 9.06 10.63 12.29 35.10% 18.28% 17.33% 15.62% GCPL 12.76 15.99 17.28 20.29 23.57 25.31% 8.07% 17.42% 16.17% HUL 20.73 24.07 28.72 33.59 39.20 16.11% 19.32% 16.96% 16.70% Marico 6.20 6.32 7.39 8.90 10.11 1.94% 16.93% 20.43% 13.60% Nestle 103.86 127.07 170.29 201.06 234.65 22.35% 34.01% 18.07% 16.71% P&G HHL 133.31 115.40 149.32 186.40 223.06 -13.43% 29.39% 24.83% 19.67% Median 16.75 20.03 23.00 26.94 31.39 19.23% 18.80% 17.74% 16.43%
Revenue Growth Comparison:
Revenue Growth ROIC EBITDA Margin
Industry Industry Industry Year Peers Peers Peers Britannia (Median) Britannia (Median) Britannia (Median) FY0 7.14% 2.46% 29.72% 40.93% 15.35% 21.07% FY1 14.88% 11.83% 30.07% 44.90% 17.12% 22.11% FY2 17.25% 13.41% 31.20% 51.52% 19.31% 22.74% FY3 19.31% 13.81% 30.66% 47.62% 20.13% 22.61%
Britannia has higher growth compare to its peers and has higher potential for more EBITDA margin. EPS growth is also high for Britannia. This shows the higher valuation for Britannia compare to its industry peers.
Source: Student Research, Thomson Reuters
Appendix 13: Top Line Projections
We have used Top-Down approach for our revenue projections. We have used 10 years’ period for our revenue projections with growth phase and convergence phase. We have estimated the segment revenues of Britannia of the past two years based on the market share and annual revenue data of each segment. We have taken organized industry data to estimate segmental revenue except Cake Values in Millions Industry Size (In Millions) and rusk segment. Bakery Segment 2017 2018 We have used the consolidated revenue of Britannia for our revenue projections as Biscuit Industry 218000.00 236000.00 the subsidiaries revenue is only 4-5% of overall revenue. In this Dairy and International subsidiaries revenue consist the major proportion. Bread Industry In 2019-2023 period, we have estimated the CAGR of Biscuit Industry to be 13.50%, (Organized) 58000.00 60750.00 Bread Industry to be 12.60%, cake industry to be 15.90%, Rusk and Dairy industry Cake Industry 48000.00 52000.00 to be 10.40% and 9.50% respectively. International business is expected to grow at Rusk Industry 18000.00 19000.00 a CAGR of 17.69%. Dairy Segment We have considered the Demonetization and GST base effect for our revenue Dairy Industry 566144.80 624192.80 projections.
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According to Management adjacent business operations is expected to start in Britannia's Market Share November or December, we expect it to generate a sale of Rs 250 Million in Q4 and in Bakery Segment 2017 2018 third year it will cross Rs 2500 Million mark. Biscuit Industry 31.50% 32.00% We have estimated Britannia’s biscuit market share to expand to 33% level in 5 years. We have considered the effects of competition and have taken a conservative approach. By the end of 2028 it will be around 32.40%. Bread Industry 10.00% 10.00% We have estimated that Britannia will have 15%, 18% and 20% market share of Bread, Cake Industry 10.50% 10.50% Cake and Rusk industry respectively by the end of 2028. These estimates are based on Rusk Industry 15.00% 15.00% the Britannia’s strategy to become total foods company. Dairy Segment Dairy will see a growth in these years due to Ranjangaon Facility and will capture a Dairy Industry 0.58% 0.50% market share of 2.30% in organized dairy segment by the end of 2028.
Hist Hist. CAGR CAGR CAGR % Share Britannia's Sales Value (In Millions) CAGR CAGR Estimated Estimated (2019 - in Bakery Segment 2017 2018 (2011-16) (2013-18) (2019-2023) (2024-2028) 2028) Business Biscuit 68670.00 75520.00 Biscuit 13.24% 10.50% 14.20% 11.14% 12.66% 63.39% Break & Rusk 15.99% 10.12% 20.55% 10.65% 15.49% 9.61% Bread 5800.00 6075.00 Cake 19.69% 10.44% 27.62% 15.36% 21.34% 9.63% Dairy 10.18% 0.24% 34.44% 19.27% 26.63% 8.46% Cake 5040.00 5460.00 International Business 21.74% 11.04% 17.69% 14.49% 16.08% 6.91% Rusk 2700.00 2850.00 Adjacent Business 16.99% 2.00% Dairy Segment Consolidated Revenue 13.84% 9.93% 18.61% 100.00% Dairy 3302.61 3132.20
Year 2018 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F 2028F Industry Growth Rate Biscuit 8.26% 12.50% 13.50% 14.00% 14.00% 13.50% 13.00% 12.25% 11.50% 11.00% 10.00% Bread 4.74% 12.00% 12.50% 13.00% 13.00% 12.50% 12.25% 11.75% 11.25% 10.75% 10.25% Cake 8.33% 15.00% 17.00% 16.00% 16.00% 15.50% 15.25% 14.50% 14.00% 13.50% 13.00% Rusk 5.56% 9.00% 10.50% 11.00% 11.00% 10.50% 10.00% 9.50% 9.00% 8.50% 8.00% Dairy 10.25% 10.00% 11.00% 9.25% 8.75% 8.50% 8.50% 8.25% 8.00% 7.75% 7.50% Britannia Projected Market Share Biscuit 32.00% 32.50% 33.00% 33.25% 33.50% 34.00% 34.00% 33.75% 33.50% 33.00% 32.75% Bread 10.00% 11.00% 12.00% 13.00% 14.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% Cake 10.50% 11.50% 12.50% 14.00% 15.50% 17.00% 18.00% 18.00% 18.00% 18.00% 18.00% Rusk 15.00% 15.50% 16.50% 18.00% 19.25% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% Dairy 0.50% 0.50% 0.55% 0.90% 1.15% 1.40% 1.65% 1.85% 2.00% 2.15% 2.30% Britannia Estimated Growth Rate Using Market Share & Indusry Growth Rate Biscuit 9.98% 13.38% 14.38% 14.88% 14.87% 13.50% 13.00% 11.91% 10.99% 10.15% 9.66% Bread 4.74% 23.20% 22.73% 22.42% 21.69% 20.54% 12.25% 11.75% 11.25% 10.75% 10.25% Cake 8.33% 25.95% 27.17% 29.92% 28.43% 26.68% 22.03% 14.50% 14.00% 13.50% 13.00% Rusk 5.56% 12.63% 17.63% 21.09% 18.71% 14.81% 10.00% 9.50% 9.00% 8.50% 8.00% Dairy -5.16% 9.61% 22.10% 78.77% 38.96% 32.09% 27.88% 21.37% 16.76% 15.83% 15.00% International Business 5.12% 15.00% 17.00% 20.00% 19.00% 17.50% 16.50% 15.50% 14.50% 13.50% 12.50% Adjacent Business (Croissant) NA NA 500.00% 53.33% 30.00% 20.00% 19.00% 18.00% 17.00% 16.00% 15.00% Consolidated Revenue 7.35% 14.88% 17.25% 19.31% 18.04% 16.45% 14.87% 13.06% 12.00% 11.24% 10.71% 100.00% 25.00% Britannia's Product Segment Growth Rate 80.00% 20.00%
60.00% 15.00% 40.00% 10.00% 20.00%
5.00% 0.00% 2018 2019F 2020F 2021F 2023F 2028F -20.00% Biscuit Bread Cake Rusk Dairy International Business Consolidated Revenue 0.00%
Source: Student Research, Crisil Research, Company Data CFA Institute Research Challenge 2019 19
Appendix 14: P&L Assumptions
P&L Assumptions FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 In Crores Rupees Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Cost of Materials Consumed 52.42% 49.49% 49.42% 49.07% 48.77% 48.47% 48.17% 47.87% 47.57% 47.27% 46.97% 46.67% Purchase of Stock in Trade 8.70% 12.05% 11.45% 10.75% 10.50% 10.25% 9.95% 9.75% 9.68% 9.60% 9.53% 9.45% Employee Benefit Expenses 3.82% 4.05% 3.95% 3.85% 3.78% 3.73% 3.66% 3.72% 3.70% 3.69% 3.71% 3.70% Changes in Inventories of stock in trade -0.60% 0.06% -0.20% -0.25% -0.13% -0.19% -0.19% -0.17% -0.18% -0.18% -0.18% -0.18% Advertising & Sales Promotion 4.17% 4.15% 4.10% 3.85% 3.80% 3.75% 3.70% 3.65% 3.60% 3.55% 3.50% 3.45% Conversion Charges 4.79% 4.16% 4.11% 3.81% 3.76% 3.56% 3.40% 3.40% 3.40% 3.40% 3.40% 3.40% Carriage, Frieght and Distribution 4.83% 4.91% 4.71% 4.46% 4.31% 4.11% 4.02% 3.93% 3.84% 3.75% 3.66% 3.57% R&D Expense 0.52% 0.29% 0.44% 0.44% 0.44% 0.44% 0.44% 0.44% 0.44% 0.44% 0.44% 0.44% Rent 0.46% 0.36% 0.41% 0.41% 0.40% 0.41% 0.41% 0.40% 0.41% 0.40% 0.40% 0.40% Power & Fuel 1.13% 1.30% 1.35% 1.35% 1.28% 1.24% 1.21% 1.22% 1.21% 1.22% 1.22% 1.22% Other Expenses 3.97% 4.04% 3.95% 3.83% 3.78% 3.73% 3.68% 3.63% 3.58% 3.53% 3.48% 3.43% Source: Student Research, Annual Report Appendix 15: Balance Sheet Assumptions
Balance Sheet Assumptions (In %, as a % of sales) FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Days Receivable 7 7 11 11 10 11 10 10 10 10 10 10 10 Days Inventory 32 43 39 38 40 39 39 39 38 37 36 36 36 Days Payable 56 49 59 59 59 60 60 60 59 60 59 59 59 Capital Work in Progress 1.08% 0.34% 2.06% 1.16% 1.19% 1.47% 1.27% 1.31% 1.35% 1.31% 1.32% 1.33% 1.32% Investment Property 0.00% 0.17% 0.15% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16% Other current financial liabilities 2.02% 2.07% 2.39% 2.16% 2.20% 2.25% 2.20% 2.22% 2.22% 2.22% 2.22% 2.22% 2.22% Non Current Provisions 0.08% 0.08% 0.09% 0.08% 0.09% 0.09% 0.09% 0.09% 0.09% 0.09% 0.09% 0.09% 0.09% Current Provisions 2.10% 2.04% 1.82% 1.99% 1.95% 1.92% 1.95% 1.94% 1.94% 1.94% 1.94% 1.94% 1.94% Other Current Liabilities 1.09% 1.02% 0.90% 1.01% 0.98% 0.96% 0.98% 0.97% 0.97% 0.98% 0.97% 0.97% 0.97% Source: Student Research, Annual Report
Appendix 16: R&D Expense Capitalization
R&D Expense Capitalization FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Capital 18.6 95.33 117.33 149.03 215.07 212.26 205.70 262.82 300.66 339.73 375.27 Recurring 266.8 405.82 437.36 458.16 560.05 670.06 797.37 887.95 980.13 1084.03 1204.97 Recurring as % of Total 93.48% 80.98% 78.85% 75.46% 72.25% 75.94% 79.49% 77.16% 76.53% 76.14% 76.25% Total R&D 285.4 501.15 554.70 607.19 775.12 882.32 1003.07 1150.76 1280.79 1423.76 1580.24 Value of Research Asset 514.23 670.82 796.84 885.00 1011.28 1196.15 1430.77 1642.88 1837.89 2033.44 2254.37 Amortization for the Year 213.00 249.23 224.21 281.06 298.51 339.40 410.04 489.15 561.77 622.69 688.06 Adjustment to the Operating Income 53.80 156.59 213.16 177.09 261.54 330.66 387.34 398.80 418.36 461.34 516.92 Tax Effect of R& D Expensing 18.03 52.48 71.45 59.36 87.66 110.83 129.83 133.67 140.23 154.63 173.26 Source: Student Research, Annual Report
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Appendix 17: Beta Calculation Regression Beta Plot We have used regression to calculate the Beta for 20.00% Britannia. We have done the regression using the 3 15.00% Years return of Britannia and NSE (Nifty) returns by keeping the Britannia returns as independent variable. 10.00% We have got a value of Beta (0.69) from regression and 5.00% Britannia Return
regression show the significance for our beta value. Y 0.00% Predicted Britannia -10.00% -5.00% 0.00% 5.00% 10.00% -5.00% Return Source: Student Research, Thomson Reuters -10.00% -15.00% Nifty Returns
Appendix 18: Income Statement
Year FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 In Millions Rupees Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Revenue From Operations (Less Excise Duty) 83254.40 89622.80 98380.60 113898.44 133548.78 159335.56 188072.41 219017.70 251592.12 284446.42 318576.76 354379.49 392326.56 Other Operating Revenue 717.90 918.10 844.70 928.71 1021.08 1122.64 1234.30 1357.07 1492.04 1640.44 1803.60 1982.99 2180.21 Total Revenue From Operations (Less Excise Duty) 83972.30 90540.90 99225.30 114827.15 134569.87 160458.20 189306.71 220374.77 253084.16 286086.86 320380.36 356362.48 394506.78 Cost of Materials Consumed 43314.90 48395.70 49060.80 56288.61 65532.39 77707.95 91158.70 105500.83 120437.15 135311.16 150591.23 166452.05 183098.81 Purchase of Stock in Trade 6855.00 8033.10 11947.20 13041.37 14356.49 16730.23 19277.42 21792.26 24530.23 27520.19 30583.37 33754.65 37074.86
Gross Profit 33802.40 34112.10 38217.30 45497.17 54680.99 66020.01 78870.59 93081.68 108116.78 123255.51 139205.76 156155.78 174333.11 Gross Margin 40.60% 38.06% 38.85% 39.95% 40.94% 41.43% 41.94% 42.50% 42.97% 43.33% 43.70% 44.06% 44.44%
Changes in inventories of finished goods, work-in-progress-42.70 -542.00 and stockin-trade63.00 -224.76 -328.55 -201.46 -357.21 -410.58 -422.54 -517.07 -570.45 -624.64 -702.40 Employee benefit expenses 3413.60 3526.10 4016.00 4498.99 5141.63 6022.88 7015.10 8005.10 9363.42 10530.84 11764.92 13131.95 14517.13 Advertising and Sales Promotion 4460.70 3850.20 4112.90 4669.84 5141.63 6054.75 7052.72 8103.66 9183.11 10240.07 11309.47 12403.28 13535.27 Conversion Charges 4482.60 4421.90 4126.10 4681.23 5088.21 5991.02 6695.38 7446.60 8554.13 9671.18 10831.61 12048.90 13339.10 Carriage, Frieght and Distribution 4274.00 4459.30 4864.10 5364.62 5956.28 6867.36 7729.78 8804.51 9887.57 10922.74 11946.63 12970.29 14006.06 R&D Expenses 438.00 478.40 285.40 501.15 554.70 607.19 775.12 882.32 1003.07 1150.76 1280.79 1423.76 1580.24 Rent 360.80 428.90 355.20 472.53 550.98 629.76 766.51 887.29 1013.01 1152.31 1287.98 1431.74 1586.84 Power & Fuel 951.60 1042.80 1288.30 1537.63 1682.25 1956.70 2236.61 2509.16 2937.18 3289.73 3701.82 4108.19 4553.44 Other expenses 3319.90 3664.70 4004.40 4498.99 5114.92 6022.88 7015.10 8059.85 9132.79 10183.18 11245.76 12332.41 13456.80
EBITDA 12143.90 12781.80 15101.90 19496.97 25778.95 32068.94 39941.48 48793.77 57465.03 66631.75 76407.22 86929.90 98460.63 EBITDA Margin % 14.59% 14.26% 15.35% 17.12% 19.30% 20.13% 21.24% 22.28% 22.84% 23.43% 23.98% 24.53% 25.10% Depreciation and Amortization 1134.10 1192.70 1420.70 1653.16 2116.13 2664.55 3315.29 4072.32 4880.08 5777.82 6764.34 7840.92 9010.23
EBIT 11009.80 11589.10 13681.20 17843.81 23662.82 29404.39 36626.20 44721.45 52584.95 60853.93 69642.88 79088.98 89450.39 EBIT Margin 13.22% 12.93% 13.91% 15.67% 17.72% 18.45% 19.47% 20.42% 20.90% 21.39% 21.86% 22.32% 22.80% Other Income 1243.50 1505.40 1663.70 1470.87 1546.66 1560.41 1525.98 1544.35 1543.58 1537.97 1541.96 1541.17 1540.37 Finance Cost 48.70 54.50 75.90 75.90 75.90 75.90 75.90 75.90 75.90 75.90 75.90 75.90 75.90 Profit Before Tax 12204.60 13040.00 15269.00 19238.78 25133.57 30888.90 38076.27 46189.90 54052.62 62316.00 71108.94 80554.25 90914.86 Tax Expense 3961.00 4196.70 5142.20 6448.42 8424.23 10353.29 12762.34 15481.85 18117.27 20886.97 23834.18 27000.04 30472.69
Profit for the Year 8243.60 8843.30 10126.80 12790.36 16709.35 20535.61 25313.93 30708.05 35935.36 41429.03 47274.77 53554.21 60442.17 Profit Margin % 9.67% 9.61% 10.04% 11.00% 12.28% 12.67% 13.26% 13.84% 14.11% 14.40% 14.69% 14.96% 15.26%
Earnings Per Share Basic 68.73 73.72 83.63 106.55 139.19 171.06 210.87 255.80 299.35 345.11 393.80 446.11 503.49 Earnings Per Share Diluted 68.72 73.71 83.59 1064.91 1391.20 1709.77 2107.61 2556.72 2991.94 3449.34 3936.05 4458.87 5032.35
Dividend Payout per share 24.04 26.21 34.07 46.60 59.83 73.80 102.32 134.71 155.30 177.21 200.75 226.57 Dividend Payout Ratio 32.61% 31.34% 31.98% 33.48% 34.98% 35.00% 40.00% 45.00% 45.00% 45.00% 45.00% 45.00% Total Dividend Paid (Inclusive of Corporate Dividend Tax) 2884.20 3173.80 4090.04 5593.88 7182.85 8859.88 12283.22 16170.91 18643.06 21273.64 24099.40 27198.98 Retained Earnings 5959.10 6953.00 8700.31 11115.46 13352.75 16454.06 18424.83 19764.45 22785.97 26001.12 29454.82 33243.19 Source: Student Research, Annual Report
CFA Institute Research Challenge 2019 21
Appendix 19: Balance Sheet
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 In Million Rupees Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Assets Non Current Assets Property, Plant and Equipment 8210.00 10052.90 11944.40 15236.32 18927.62 23138.06 27962.42 33362.25 39346.96 45859.67 52855.97 60317.97 68250.65 Capital Work in Progress 900.70 300.70 2028.20 1320.83 1583.34 2340.55 2391.14 2866.16 3395.64 3725.96 4213.92 4704.14 5178.79 Intangible Assets 133.30 116.10 79.70 106.26 143.12 193.93 259.14 340.13 437.28 549.98 678.55 823.37 985.04 Investment Property 0.00 152.50 149.90 183.68 209.42 253.41 297.02 347.11 398.03 450.40 504.23 561.01 621.02 Investment in Associate 12.90 21.90 20.10 20.10 20.10 20.10 20.10 20.10 20.10 20.10 20.10 20.10 20.10 Goodwill 1159.10 1278.40 1282.00 1282.00 1282.00 1282.00 1282.00 1282.00 1282.00 1282.00 1282.00 1282.00 1282.00 Investments 3713.50 3098.10 2204.70 3005.43 2769.41 2659.85 2811.56 2746.94 2739.45 2765.99 2750.79 2752.08 2756.28 Loans 1952.20 459.20 1342.40 1342.40 1342.40 1342.40 1342.40 1342.40 1342.40 1342.40 1342.40 1342.40 1342.40 Other Financial Assets 378.00 121.20 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Deferred Tax Assets 444.00 231.10 225.70 0.00 0.00 0.00 0.00 0.00 1.00 2.00 3.00 4.00 5.00 Income Tax Assets 232.00 253.60 223.20 236.27 237.69 232.39 235.45 235.17 234.34 234.99 234.83 234.72 234.84 Other Non-Current Assets 562.20 1609.90 866.10 866.10 866.10 866.10 866.10 866.10 866.10 866.10 866.10 866.10 866.10 Total Non-Current Assets 17697.90 17695.60 20366.40 23599.39 27381.20 32328.78 37467.33 43408.35 50063.29 57099.58 64751.89 72907.89 81542.23 % of Total Assets 50.65% 43.07% 39.26% 38.39% 36.42% 35.05% 33.27% 32.11% 31.50% 30.60% 29.87% 29.03% 28.16%
Current Assets Inventories 4406.50 6614.50 6527.90 7211.49 8740.81 10086.93 11788.65 13703.88 15092.49 16506.19 17869.28 19746.41 21916.83 Trade Receivables 1706.10 1791.60 3046.00 3432.56 3609.77 4680.64 5425.42 6223.98 7266.08 8167.94 9133.95 10190.39 11265.25 Investment 4157.40 1748.50 8568.00 14278.22 22496.46 32198.67 44977.24 58892.88 73541.38 91868.67 112066.89 135310.68 161865.23 Cash 647.10 561.60 1299.10 835.93 835.93 835.93 835.93 835.93 835.93 835.93 835.93 835.93 835.93 Bank balance Other than above 229.40 646.00 565.10 565.10 565.10 565.10 565.10 565.10 565.10 565.10 565.10 565.10 565.10 Loans 4592.80 8291.00 8443.40 8443.40 8443.40 8443.40 8443.40 8443.40 8443.40 8443.40 8443.40 8443.40 8443.40 Other Financial Assets 189.60 810.60 1007.40 1007.40 1007.40 1007.40 1007.40 1007.40 1007.40 1007.40 1007.40 1007.40 1007.40 Other Current Assets 1312.30 2928.60 2055.90 2098.93 2098.93 2098.93 2098.93 2098.93 2098.93 2098.93 2098.93 2098.93 2098.93 Total Current Assets 17241.20 23392.40 31512.80 37873.04 47797.80 59917.01 75142.08 91771.50 108850.72 129493.57 152020.88 178198.25 207998.08 % of Total Assets 49.35% 56.93% 60.74% 61.61% 63.58% 64.95% 66.73% 67.89% 68.50% 69.40% 70.13% 70.97% 71.84% Total Assets 34939.10 41088.00 51879.20 61472.43 75179.00 92245.79 112609.41 135179.85 158914.01 186593.15 216772.77 251106.14 289540.31
Equity and Liabilities Equity Equity Share Capital 240.00 240.00 240.10 240.10 240.10 240.10 240.10 240.10 240.10 240.10 240.10 240.10 240.10 Reserves and Surplus 20676.80 26724.20 33822.20 42522.51 53637.98 66990.73 83444.78 101869.61 121634.06 144420.02 170421.14 199875.96 233119.15 Non-controlling interests 24.60 26.00 131.40 131.40 131.40 131.40 131.40 131.40 131.40 131.40 131.40 131.40 131.40 Total Equity 20941.40 26990.20 34193.70 42894.01 54009.48 67362.23 83816.28 102241.11 122005.56 144791.52 170792.64 200247.46 233490.65 % of Total Assets 59.94% 65.69% 65.91% 69.78% 71.84% 73.02% 74.43% 75.63% 76.77% 77.60% 78.79% 79.75% 80.64%
Liabilities Non-Current Liabilities Borrowings 376.80 314.00 845.70 1060.88 1335.80 1666.04 2073.00 2528.69 3017.52 3581.07 4224.15 4952.65 5774.84 Other Financial Liablities 213.40 230.90 252.00 252.00 252.00 252.00 252.00 252.00 252.00 252.00 252.00 252.00 252.00 Government Grant 40.80 22.70 19.40 19.40 19.40 19.40 19.40 19.40 19.40 19.40 19.40 19.40 19.40 Provisions 68.30 76.20 88.70 95.62 113.94 137.42 160.18 187.43 215.52 243.12 272.61 303.24 335.58 Total Non-Current Liabilities 699.30 643.80 1205.80 1427.90 1721.14 2074.86 2504.58 2987.52 3504.44 4095.59 4768.16 5527.28 6381.82 % of Total Assets 2.00% 1.57% 2.32% 2.32% 2.29% 2.25% 2.22% 2.21% 2.21% 2.19% 2.20% 2.20% 2.20%
Current Liabilities Borrowings 861.30 843.10 936.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Trade Payables 7690.80 7573.10 9940.90 11206.76 12913.55 15524.09 18153.88 20924.89 23433.08 26766.80 29285.76 32362.18 35589.72 Other Financial Liabilities 1679.40 1853.70 2347.70 1960.27 2053.89 2120.62 2044.92 2073.14 2079.56 2065.88 2072.86 2072.77 2070.50 Other Current Liabilities 909.50 915.70 888.90 1145.70 1304.84 1533.06 1846.31 2132.44 2446.74 2776.05 3103.03 3452.22 3824.05 Government Grant 21.60 19.60 13.60 13.60 13.60 13.60 13.60 13.60 13.60 13.60 13.60 13.60 13.60 Provisions 1750.30 1824.60 1789.70 2261.79 2600.11 3054.94 3667.43 4244.74 4868.63 5521.31 6174.32 6868.23 7607.56 Current Tax Liabilities 385.50 424.20 562.40 562.40 562.40 562.40 562.40 562.40 562.40 562.40 562.40 562.40 562.40 Total Current Liabilities 13298.40 13454.00 16479.70 17150.52 19448.39 22808.70 26288.55 29951.22 33404.01 37706.04 41211.97 45331.39 49667.83 % of Total Assets 38.06% 32.74% 31.77% 27.90% 25.87% 24.73% 23.34% 22.16% 21.02% 20.21% 19.01% 18.05% 17.15% Total Equity and Liabilities 34939.10 41088.00 51879.20 61472.43 75179.00 92245.79 112609.41 135179.85 158914.01 186593.15 216772.77 251106.14 289540.31 Source: Student Research, Annual Report
CFA Institute Research Challenge 2019 22
Appendix 20: Cash Flow Statement
FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 In Million Rupees Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Cash flow from Operating Activities Profit before taxes 19238.78 25133.57 30888.90 38076.27 46189.90 54052.62 62316.00 71108.94 80554.25 90914.86 Depreciation and Amortization 1653.16 2116.13 2664.55 3315.29 4072.32 4880.08 5777.82 6764.34 7840.92 9010.23 Change in Inventories -683.59 -1529.32 -1346.13 -1701.71 -1915.23 -1388.62 -1413.70 -1363.08 -1877.14 -2170.42 Change in Accounts Payable 1265.86 1706.78 2610.54 2629.80 2771.01 2508.19 3333.72 2518.96 3076.42 3227.54 Change in Accounts Receivable -386.56 -177.22 -1070.87 -744.78 -798.56 -1042.10 -901.86 -966.01 -1056.44 -1074.87 Change in other Assets -618.07 236.02 109.56 -151.72 64.62 6.49 -27.53 14.19 -2.28 -5.21 Change in other liabilities -372.95 884.33 1103.50 1279.77 1374.60 1461.52 1559.46 1659.54 1802.13 1963.44 Cash paid for taxes -6461.49 -8425.65 -10347.98 -12765.40 -15481.58 -18116.43 -20887.62 -23834.02 -26999.93 -30472.82 Other Adjustments Cash flow from Operations 13635.15 19944.65 24612.07 29937.50 36277.08 42361.76 49756.28 55902.86 63337.93 71392.76
Cash flow from Investing Activities Net Purchase of Tangible Assets (inclu CWiP) -4237.71 -6069.94 -7632.20 -8190.24 -9947.16 -11394.27 -12620.85 -14248.61 -15793.14 -17417.56 Net Purchase of Intangible Assets (inclu CWiP) -60.34 -62.60 -94.80 -108.82 -131.08 -148.08 -165.07 -182.40 -201.60 -221.68 Total -4298.05 -6132.54 -7727.00 -8299.05 -10078.23 -11542.35 -12785.92 -14431.00 -15994.74 -17639.24
Cash from from Financing Activities Dividends paid -4090.04 -5593.88 -7182.85 -8859.88 -12283.22 -16170.91 -18643.06 -21273.64 -24099.40 -27198.98 Corporate Tax Dividend Paid Total -4090.04 -5593.88 -7182.85 -8859.88 -12283.22 -16170.91 -18643.06 -21273.64 -24099.40 -27198.98
Net Increase/(Decrease) in C&CE 5247.06 8218.23 9702.22 12778.57 13915.63 14648.50 18327.30 20198.21 23243.79 26554.55 OB of Cash and Cash Equivalents and current Investments 10432.20 15679.26 23897.49 33599.70 46378.28 60293.91 74942.41 93269.71 113467.92 136711.71 CB of Cash and Cash Equivalents and current Investments 15679.26 23897.49 33599.70 46378.28 60293.91 74942.41 93269.71 113467.92 136711.71 163266.26 Source: Student Research, Annual Report Appendix 21: ROE
ROE FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 In Million Rupees Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Shareholders' Equity 34193.70 42894.01 54009.48 67362.23 83816.28 102241.11 122005.56 144791.52 170792.64 200247.46 233490.65 R&D Asset 514.23 670.82 796.84 885.00 1011.28 1196.15 1430.77 1642.88 1837.89 2033.44 2254.37 Total Shareholders' Equity 34707.93 43564.83 54806.32 68247.23 84827.56 103437.26 123436.32 146434.40 172630.53 202280.90 235745.03 Adjusted Operating Income 13735.00 18000.40 23875.98 29581.48 36887.74 45052.11 52972.28 61252.74 70061.24 79550.33 89967.31 Net Income 10162.57 12894.46 16851.06 20653.34 25487.81 30927.87 36192.87 41694.16 47552.90 53860.92 60785.83 ROE 29.72% 30.06% 31.20% 30.66% 30.41% 30.25% 29.66% 28.80% 27.84% 26.90% 26.03% ROA 19.59% 20.98% 22.41% 22.39% 22.63% 22.88% 22.78% 22.34% 21.94% 21.45% 20.99% Asset Turnover 2.13 2.03 1.97 1.92 1.85 1.78 1.72 1.66 1.59 1.52 1.46 RoCE 29.67% 29.45% 30.47% 29.90% 29.61% 29.42% 28.81% 27.95% 27.02% 26.10% 25.26% Source: Student Research, Annual Report
Appendix 22: DCF Calculation: We have taken one-year target price i.e. on 9th October 2019. For this we have used the half-yearly discount for FY2020 and calculated present value from that date forward (i.e. FY20 (Oct 19 – Mar 20) – Half Year).
DCF Calculation FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast EBIT 18000.40 23875.98 29581.48 36887.74 45052.11 52972.28 61252.74 70061.24 79550.33 89967.31 Tax 6033.34 8002.71 9915.07 12363.97 15100.49 17755.16 20530.59 23483.01 26663.54 30155.09 EBIT - Tax 11967.05 15873.27 19666.41 24523.77 29951.62 35217.12 40722.15 46578.23 52886.78 59812.22 Plus- Depreciation 1902.39 2340.34 2945.61 3613.79 4411.72 5290.12 6266.96 7326.12 8463.61 9698.29 Less- Capex 5377.46 6281.65 7383.96 8764.90 10223.19 11759.32 13291.17 14869.36 16531.77 18309.55 Less- Change in Non-Cash Working Capital -872.65 -159.39 -421.77 -496.55 -343.35 -391.77 -1347.47 -516.85 -492.03 -354.09 Terminal FCFF FCFF 9364.63 12091.34 15649.83 19869.21 24483.50 29139.69 35045.41 39551.84 45310.66 51555.04 998648.41 Discount Year 0.50 1.50 2.50 3.50 4.50 5.50 6.50 7.50 8.50 8.50 Discount Factor 0.95 0.86 0.77 0.70 0.63 0.57 0.51 0.46 0.42 0.42 PV of FCFF 11487.47 13420.19 15379.04 17104.94 18375.21 19947.02 20319.50 21010.97 21578.26 417982.25 Source: Student Research, Annual Report
CFA Institute Research Challenge 2019 23
Appendix 23: Price Point Analysis with Competitors
Source: Student Research, Companies Websites, Big Basket, Grofers, Amazon Appendix 24: Risk Matrix
Source: Student Research, Thomson Reuters, Crisil Research
CFA Institute Research Challenge 2019 24
Appendix 25: Corporate Governance Scorecard
Criteria We have developed a scorecard based on ISS Governance QuickScore to assess the risk to shareholders
Note A lower score signifies lower risk. Score<=5 Lower risk Score>=5 Higher Risk Corporate Governance Evaluation Score Weightage
1 Board Structure 3/10 25% a. 64% independent board members with diversified and qualified board members
b. A familiarization programme for independent board members
c. Date of board meeting with each member’s attendance is given. Also, maximum gap between 2 board meeting is 120 days
d. Committees are formed with specific guidelines and working principles
e. Remuneration of each member specified f. Timely and efficient performance evaluation of board members
g. Very low female representation 2 Shareholder's rights 4/10 25% a. 15/15 shareholder complains were disposed off in last fiscal year through SEBI Complaints Redress System (SCORES)
b. Shareholders are furnished with half yearly results regularly 3 Compensation Policies 3/10 25%
a. Remuneration committee does not have any executive director b. 100% attendance by 5/6 member of remuneration committee c. Annual revision of remunerations c. Specific policies for remuneration committee 3 Audit and Risk oversight 3/10 25% a. Audit committee has 4/6 independent directors
b. Internal audits are performed to curb financial quality risk
c. Audit committee is responsible for related party transaction approval Total Corporate Governance Score 3.25 Conclusion : The company has low risk to shareholders
Positives Negatives
Very low female representation on High percentage of independent directors board Strong presence of a single family Whistle blower policy in place (Wadia family) in the board and committees
Training program for independent directors No executive director in remuneration
committee Related party transactions monitored by
audit committee CFA Institute Research Challenge 2019 25 Source: Student Research, Annual Report
Appendix 26: Organization Structure – Building SBU Focus
Managing Director (Varun Berry)
Front End Development Supply Chain Enabling Business units
VP- Supply Chain VP-Sales VP-R&D & Quality CFO VP- International (Vinay S (Gunjan Shah) (Sudhir Nema) (N Venkataraman) (Anindya Dutta) Kushwaha)
General Manager- VP-Marketing VP-CI,Media,CI VP- Dairy Business Purchase (Ali Harris Shere) (Manjunath Desai) (Venkat Shankar) (Manoj Balgi)
VP-Bread,Cakes, VP-HR Rusk External Hires into the role (Ritesh Rana) (Jayant Kapre)
Internally promoted
Source: Student Research, Company Report Appendix 27: Top Management Profiles
Board of Directors Name Designation Description Nusli N Wadia Nimesh Kampani BE Mechanical from the Punjab University. 27 years of experience with Varun Berry Managing Director Varun Berry Keki Dadiseth HUL and PepsiCo. MD of Britannia A K Hirjee Ajai Puri Industries on 1st pril 2014
Jeh N Wadia Ranajana Kumar Joined in 2007 and have worked in finance department of eicher motors. Ness N Wadia Ajay Shah N. VENKATARAMAN Chief Financial Officer Responsible for cost efficiency Avijit Deb Y S P Thorat enhancement for the company S S Kelkar Keki Elavia Joined Britannia in 1998 . He is Executive officers ALI HARRIS SHERE Head - Marketing responsible for marketing strategies for all new and existing products Varun Berry Managing Director Manoj Balgi Head - Procurement With an M.Sc. in Foods Technology from Head - Consumer Head - R & D & Quality CFTRI, Mysore and Agriculture graduate SUDHIR NEMA Manjunath Insight,Media & Assurance from J.N.K.V.V. Jabalpur, Sudhir joined as Desai HeadCompetitive - International Intelligence VP-R&D and quality in 2014. Anindya Dutta Business He was inducted on the Company’s Board Ali Harris Shere Head - Marketing on 5th September 1993 and has been the NUSLI N WADIA Chairman Head - BCR & Adjacency Chairman of the Company since 8th Jayant Kapre Businesses September 1993. Ritesh Rana Head - HR He holds a master in Science from the NESS N WADIA Director Gunjan Shah Head - Sales Warwick University in Coventry, UK. Venkat Shankar Head - Dairy business Vinay Singh Mr. Hirjee is B.A. (Hons.), LL.B. (Hons.), Promoter Non-Executive Barrister-at-Law, SLOAN Fellow of London Kushwaha Head - Supply Chain A.K. HIRJEE Director Business School. Diverse experience in N. fields like finance, legal, commercial etc. Venkataraman Chief Financial Officer Source: Student Research, Company Report
CFA Institute Research Challenge 2019 26
Appendix 28: DuPont Analysis
DuPont Analysis 2016 2017 2018 2019E 2020E 2021E Net margin 9.7% 9.6% 10.0% 11.0% 12.3% 12.7% Asset turnover 2.4 2.2 1.9 1.9 1.8 1.7 Leverage 1.7 1.5 1.5 1.4 1.4 1.4 ROE 38.8% 32.2% 29.1% 29.4% 30.6% 30.2% *Difference in ROE calculation due to capitalisation of R&D expenses.
Source: Student Research, Annual Report Appendix 29: Food Processing Industry Comparison
Britannia Industry Average EBITDA Margin 14.7% 8.3%
PAT Margin 9.9% 3.7%
ROA 20.6% 10.1%
ROE 35% 13.3%
Asset Turnover 1.97 1.09
Cash conversion cycle -8.1 39.9
Ratios of the last three financial years is shown in the graph their average is used for numerical presentation.
Source: Student Research, Company Report, Thomson Reuters, ACE Equity Appendix 30: Operating Expenses Breakup & Revenue Growth
Material cost YoY Revenue Growth 7% 5% Employee benefit 15% 6% expenses Advertising and Sales 5% 10% Promotion 5% Conversion Charges 5%
73% Carriage, Frieght and 0% Distribution Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Other expenses FY17 FY18 FY19 2016Revenue growth 2017 Volume growth2018 2019
Source: Student Research, Company Report CFA Institute Research Challenge 2019 27
Appendix 31: Competitor & PEER Comparison
Efficiency Profitability SCompanyource: Student Research,DTR Company ReportITR ATR Gross margin EBITDA PAT Britannia 41 9.3 1.94 38.8% 15.4% 10.1% AppendixNestle 31: EBITDA63.1 Improvement5.3 1.44 52.1% 21.0% 12.0% Pratap Snacks 55.7 8.2 1.89 32.5% 8.5% 4.3% Industry median 13.2 7.45 1.06 35.5% 10.8% 6.2% Liquidity Leverage Company Current Ratio Quick ratio Cash conversion days Total asset/Equity Debt/Equity LT Debt/Capital Britannia 1.9 1.39 -2.14 1.52 0.05 0.02 Nestle 2.64 2.03 8.6 2.15 0.01 0.01 Pratap Snacks 2.62 1.97 5.8 1.28 0.05 0.00 Industry median 1.57 0.95 44.4 1.98 0.23 0.12 Source: Student Research, Company Report Appendix 32: Beneish’s M Score
M-Score for Britannia 2018 Input variables FY17 FY18 Net Sales 89622.8 98380.6 Cost of Goods Sold 58587.0 61832.1 Net Receivables 1748.9 2418.8 Current Assets 23392.4 31512.8 PPE 10353.6 13972.6 Depreciation 1192.7 1420.7 Total Assets 41088.0 51879.2 SGA Expense 21872.3 23052.4 Net Income 8846.1 10039.6 Cash Flow from Operations 4412.8 12487.7 Current Liabilities 843.1 936.5 Long-term Debt 314.0 845.7 Derived variable Other L/T Assets [TA-(CA+PPE)] 7342.0 6393.8 Inputs used in calculating M-Score Days Sales in Receivables Index(DSRI) 1.260 Gross Margin Index(GMI) 0.932 We used Beneish’s to Asset Quality Index(AQI) 0.690 analyse earnings quality of Sales Growth Index(SGI) 1.098 Britannia and to detect any Depreciation Index(DEPI) 0.998 likelihood of manipulation. SGA Expenses Index(SGAI) 0.960 Note: If M-Score>-2.22, Total Accruals to Total Assets(TATA) -0.053 earnings are likely to Leverage Index(LVGI) 1.220 manipulated
M = -6.065+ .823 DSRI + .906 GMI + .593 AQI + .717 SGI + .107 DEPI M-Score (5 variable model) -2.63 For 2018 M = -4.84 + .920 DSRI + .528 GMI + .404 AQI + .892 SGI + .115 DEPI -.172 SGAI + 4.679 Accrual to TA - .327 Leverage M-Score (8 variable model) -2.88 For 2018 RESULT: As M-Score<-2.22 in 8 variable model, likelihood of earnings manipulation is low Source: Student Research, Company Report
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Appendix 33: Financial Analysis Britannia operating cycle Britannia profitability margin 2016 2017 2018 2019E 2020E 2021E 2016 2017 2018 2019E 2020E 2021E Revenue 83254.4 89622.8 98380.6 113898.4 133548.8 159335.6 Gross margin 40.6% 38.1% 38.8% 39.9% 40.9% 41.4%
Average Debtors 1532.1 1748.9 2418.8 3239.3 3521.2 4145.2 EBITDA 14.6% 14.3% 15.4% 17.1% 19.3% 20.1% DTR 54.3 51.2 40.7 35.2 37.9 38.4 Pretax margin 14.3% 14.2% 15.1% 16.5% 18.5% 19.1% Average collection period6.7 7.1 9.0 10.4 9.6 9.5 Effective tax rate 32.5% 32.2% 33.7% 33.5% 33.5% 33.5% COGS 50127.2 55886.8 61071.0 69105.2 79560.3 94236.7 Net margin 9.7% 9.6% 10.0% 11.0% 12.3% 12.7% Average inventory 4223.5 5510.5 6571.2 6869.7 7976.1 9413.9 ITR 11.9 10.1 9.3 10.1 10.0 10.0 Average inventory days30.8 36.0 39.3 36.3 36.6 36.5 Britannia Liquidity Material purchased50784.2 55769.3 63439.1 70372.5 81268.0 96848.0 2016 2017 2018 2019E 2020E 2021E Creditors 7363.0 7632.0 8757.0 10573.8 12060.2 14218.8 Current ratio 1.3 1.7 1.9 2.2 2.5 2.6 CTR 6.9 7.3 7.2 6.7 6.7 6.8 Quick ratio 0.9 1.0 1.4 1.7 1.9 2.1 Average payable period52.9 49.9 50.4 54.8 54.2 53.6 Operating cycle days -15.4 -6.8 -2.1 -8.2 -8.0 -7.6 Cash ratio 4.9% 4.2% 7.9% 4.9% 4.3% 3.7%
Source: Student Research, Company Report Appendix 34: Altman Z Score Appendix 35: EBITDA Improvement & Cost Bridge
ALTMAN Z-Score for Britannia Income statement FY17 FY18
Net Sales 89622.8 98380.6 15.2% EBIT 13094.5 15259.5 Net Income 8846.1 10039.6 Balance Sheet Total Assets 41088.0 51879.2 Working Capital 22549.3 30576.3 Retained earning 26327.1 33186.3 Total Liabilities 14097.8 17685.5 Public companies MV of equity NA 596870.0
Working Capital / Total Assets (Z1) 0.55 0.59 Retained Earnings / Total Assets (Z2) 0.64 0.64 EBIT / Total Assets (Z3) 0.32 0.29 MV of Equity / Total Liabilities (Z4) 28.72 33.75 Sales / Total Assets (Z5) 2.18 1.90 Altman Z score 24.72 Britannia has sound financial position as the Altman Z-Score is 24.72. Z-Score = 1.2*Z1 + 1.4*Z2 + 3.3*Z3 + 0.6*Z4 + 1.0*Z5 Source: Student Research, Company Report 15.2% Altman Z-Score is used to analyse financial position of the company and to know the chances to filing for bankruptcy. In case Z-Score is below 1.89 chances of filing of bankruptcy are high and if score is above 2.99, company is financially sound and the chances of filing for bankruptcy are negligible.
Source: Student Research, Company Report Source: Student Research, Company Report
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Appendix 36: Marketing Campaign Brand Campaign Theme Good Day Smile more for a Good Day Spreading optimism & happiness with families Marie Gold Swasth Khao, Tan Mann Jagao Focused on fuelling the everyday athletes in homemakers Bourbon Bourbon Friends Forever (BFF) Fulfilling snack for fulfilling friendships Treat fun in the middle Inspired kids & tweens to have of the mundane Nutri Choice It all starts with a good choice Power of a good choice among health seeking adults Milk Bikis Kalkeliyeroz Focused on kids nutrition by urging them to focus on every day Pure Magic – It’s so Deuce An exciting proposition to indulgence lovers Deuce Source: Student Research, Company Report Appendix 37: Plant Locations Headquarter Factory/Plant Upcoming Facility Khiccha, Hajipur, Bihar Uttarakhand Delhi Guwahati, Assam Jhagadia, Gujarat Kolkata, WB
Ranjangaon, Maharashtra Khurda, Odisha Bidadi, Karnataka Chennai, TN
Perundurai, TN
Source: Student Research, Company Report Appendix 38: References
1. Source - https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/CCS0510201885488D5D164E4D11965BCD73EE32A35D.PDF 2. Source – Mckinsey Article retrieved from - https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights 3. Macro economy data from world bank data source - https://data.worldbank.org/indicator/ 4. Packaged good industry data retrieved from – Crisil Research, Euro Monitor 5. NSE India Britannia Historical Share Price Data – https://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuote.jsp?symbol=BRITANNIA&illiquid=0&smeFla g=0&itpFlag=0 6. News Source - https://www.livemint.com/Consumer/8DDutPsI8dNxpOSUeFOZNJ/Britannia-launches-ad-campaign-to-mark-100- year-milestone-in.html 7. Britannia Annual Report Data retrieved from - http://britannia.co.in/investors 8. Industry data for Biscuit, Bread, Cake and Dairy Industry – Crisil Research, Euro Monitor, CMIE Data 9. Competitive & Peers data - Thomson Reuters 10. Britannia Data - https://www.moneycontrol.com/india/stockpricequote/food-processing/britanniaindustries/BI 11. News Source – Live Mint, Economic Times, Business Standard 12. Image Sites – Amazon, Big Basket, Groffers 13. Different Industry Parameters Data – Ace Equity, Capital Line 14. All India Bread Manufacturing Association, All India Dairy Assocaition 15. Government Sources – Ministry of Food Processing Industry, RBI 16. Industry Data Points - Anmol RHP 17. Company Data - http://britannia.co.in/
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