Britannia Industries

Investment Presentation

1
Competitive advantages

2
• Brand Equity: Among the top two market players in biscuits in India with a ~30% value market share. The other leading player is
Parle. The two make up nearly two thirds of the biscuit marker in India. Both are household names. Britannia has several leading
brands across different biscuit segments which have higher shares in their segments and high recall with customers. This makes it
easier for new product innovations, variants and extensions to be accepted in the market. Brands essentially reduce ‘search costs’ for
customers. Britannia has been in the Indian market for ~100 years. Building a strong mass market brand in India remains the most
challenging for new entrants.

• Distribution reach: Biscuit is a ticket item (low price per pack sold) but is widely penetrated (~90% penetration in India). That
means any serious player must go wide in distribution to make their product available. Britannia’s total reach is 5.5mn retail outlets
(direct reach is 2.2mn). Distribution dominance is a key barrier entry in India as 80%+ of sales happen through small mom & pop
stores which prefer stocking what sells fast and have limited shelf space. Parle is only slightly ahead of Britannia at about 6.3mn
outlets. Britannia products now reach ~21k villages.

• Economies of scale: Being a sizeable player lends advantages of economies of scale at multiple levels – manufacturing at scale (for
in-house) or ability to favorably priced outsourcing contracts, highest absolute ad spend amongst biscuit makers (~4bn p.a.) and
ability to attract high quality managerial talent.

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Evidence of Competitive advantages – consistent ROCEs with steady to improving market shares

12% revenue CAGR over the last 10 years (FY09-19) Steady to improving market shares (Euromonitor)

Revenue (INR bn) % YoY

Britannia biscuit market shares
120 25% 31%
30%
100 20% 30%
29%
80
15% 29%
60 28%
10% 28%
40 27%
27%
20 5%
26%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
0 0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

India biscuits market share data (Euromonitor). As per AC Nielson,

Consistent value creation – average 10 year ROE/ROCE of 35%+ Britannia has overtaken Parle in FY20.

ROE COE
CY19 India biscuit market shares as per Euromonitor
70%

60%
25%
31%
50%

40%

30% 14%

20%
30%
10%
Parle Britannia ITC Others
0%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

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Industry structure – biscuits a large packaged foods category with premiumisation at play

• Biscuits is a large market in India at ~US$5bn in CY19 (per Euromonitor) making it the largest segment of the packaged foods market in India.
The market has been growing at a 10% CAGR (INR terms) over the last five years and about 12-14% 10 years before that (Annual reports).
• Britannia and Parle are the two leading players with ~30% share with ITC being the third largest at 15% shares. Over the last two decades,
Britannia has made moderated market share gains from Parle. ITC entered biscuits in mid 2000s and gained ~15% share within 10 years. ITC
was extremely aggressive in the initial years and today is dominant player in the premium cream segment of the market.
• The overall biscuits market in India can be divided into five broad sub-segments. It is important to look at sub-segments as different players
have different market positions (and hence pricing power) in each of the sub-segment. See table below.
• Plain biscuits (lowest priced) have been losing share to the more premium segments – savoury, cookies and cream. Premium segment has an
average realization of 2x versus plain biscuits. Rising incomes, changing lifestyles have led to higher spends on packaged foods and within
that a higher preference for premium offerings. Companies like Britannia have innovated with small Rs5 packs to drive consumption of
cookies and cream biscuits.

Industry revenue mix by type of biscuits sold in India. Plain biscuits (largely Parle G) have steadily lost share to cookies (Britannia leads) and cream (ITC leads)

% value mix
Savoury 10% 10% 8% 9% 9% 10% 11% 12% 12% 12% 13% 13% 13% 14% 14%
Cookies 10% 12% 13% 15% 16% 17% 18% 20% 21% 22% 24% 25% 25% 27% 28%
Cream 14% 14% 15% 15% 16% 16% 17% 17% 18% 18% 18% 18% 19% 19% 19%
Plain 64% 63% 62% 60% 58% 56% 53% 50% 48% 46% 44% 42% 41% 40% 39%
Wafers 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%

• Biscuits is one of the highest penetrated categories in India at about 90%. Almost everyone in India can consume biscuits. The growth in this
market must come from higher per capita consumption (volumes) and continued trend in premiumization. Biscuit per capita consumption in
value terms in India is about half of some of the other EM regions and substantially lower versus even developed regions.

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 • Looking at overall market shares suggests Britannia and Parle respectfully share the top places (each with a
~30% share)with a steady number three in ITC (~15%). This might suggest two players setting prices and ITC
following their lead. However each sub-segment (described on previous slide) has a different dominating player.
• Parle has a substantial lead in plain and savoury biscuits, Britannia dominates in cookies while ITC’s portfolio is
quite dominant in the cream segment. This means that each of the top three players has strong brand equity
(and probably pricing power) in but one sub-segment of the market.
Industry structure • Moreover, all players have presence in their non-dominant segments and attempt to gain shares either through
product innovation and promotion. Even in their respective dominant segments, market shares do not exceed
– aggregated 50%.
market shares • In the most premium segment – non top 3 players now account for nearly 30% of the market as players such as
misleading; Mondelez, Anmol, Surya have gained shares over the years.
• This suggests ‘moats’ while existent are not as strong as it may seem at first glance. This shows up in the
different leaders in relatively weaker pricing power in biscuits versus several other FMCG categories (lower and more volatile gross
different sub- margins).
segments

Value market shares Overall Savoury Cookies Cream Plain

Parle 31% 29% 26% 17% 42%
Britannia 30% 13% 45% 22% 30%
ITC 14% 2% 9% 35% 13%
Others 25% 56% 20% 27% 15%

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Industry structure – biscuits have less pricing power than other FMCG categories
Britannia has lower gross margins than HUL and Nestle demonstrating lower pricing Gross margins have not only been lower but also more volatile for Britannia – another
power in biscuits and comparatively weaker category dominance indication of the inability to take price hikes to cover input cost inflation

60% Gross margins 120 Gross margins (rebased to 100)

110
50%
100
40%
90

30% 80
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
HUL Nestle Britannia HUL Nestle Britannia

Britannia’s gross margins are more sensitive to inflation trends (a proxy for input cost
inflation) than some other leading consumer peers
1. Gross margins are a function of two parts – input cost
Britannia gross margins sensitive to inflation trends on either side inflation and competitive intensity. Wheat, sugar, palm oil,
68% 14% milk and crude (packaging) are the main input costs in that
66% 12% order.
64% 10%
2. FY06 to FY11 saw a sharp erosion in Britannia’s gross
62% 8%
margins due to high input cost inflation and sharp share
60% 6%
58% 4%
gains by ITC. Both these factors have been benign last few
56% 2%
years allowing the company to improve margins.
54% 0% 3. However this shows that margins are not as defensible for
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
this company if any of these factors come back.
Britannia RM costs % sales (LHS) Inflation in India (RHS)

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Industry structure – more evidence of less pricing power in biscuits
Average price hikes (including premiumization effects) have trailed consumer price
inflation over the last five years. Nestle manages to take twice as large price hikes

Average 5 year change (FY15-19)

6% 5%
5%
5% 4%
4%
4% 3%

3%
2%
3%
2%
2%
NEST price/mix CPI HUL price/mix BRIT price/mix

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Porter’s five forces at play in biscuits
Threat of new entrants -
Low

Creating new large brands in

the category is difficult. Most
brands including small ones
have been around for a long
time. New entrants such as
GSK have struggled.

Power of customers –
Power of suppliers – Moderate
Moderate Rivalry b/w existing
competition – Customers have limited choice
Britannia is a price taker of Moderate to High beyond the few large brands
inputs such as wheat, sugar, especially in tier 2 where
palm oil and milk. High pricing Two large players going to distribution is limited.
power with suppliers of low head to head in shares; deep However, within the top 2 or
end biscuits. pocketed third player. 3, loyalties are limited.

Threat of substitute
Moderate to High

Biscuits compete with

numerous other categories as
snacking options. Globally,
biscuits are a much smaller
portion of total snacking
versus India.
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Scalability

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 Long runway for revenue growth but pace likely to be moderate

• Over the last 10 years, the three largest biscuit manufacturers have grown their topline by – Britannia (12% CAGR), Parle (8%) and ITC (13%).
For Britannia, this has been achieved through about 8% average volume growth and 4% pricing. Over the last five years (FY15-FY20E),
revenue CAGR has been ~10% with 7% volume and ~3% pricing growth.
• There is no reason to believe that Britannia can grow revenues faster than 12% over the next 5 to 10 years given the underlying market
dynamics are likely to remain the same. Biscuits is a 90% penetrated category and Britannia is largely (has always been) a single category
company with biscuits making up ~80% of consolidated revenues. In softer years, revenue growth would be more in the high single digits.
• The overall biscuits market should continue to grow with higher per capita volume consumption and upgrading to higher valued biscuits –
even today, nearly two thirds of the country consumes plain biscuits (by volume) such as glucose and Marie.
• Britannia has done a decent job over the last few years in driving its revenue growth using levers such as ramping up distribution (particularly
in rural and central India where it was under indexed), innovating with small packs and keeping busy its new launch engine.
• While the street thinks this is unique to Britannia, we think Britannia has admittedly done a good job, but others are not very behind. ITC has
grown slightly ahead of Britannia in biscuits over the last 10 years. Parle has grown at 8% CAGR versus Britannia’s 12% but that is in large part
due to the mix impact of premium biscuits growing faster. Parle’s portfolio mix is heavily weighted towards plain biscuits while Britannia’s is
skewed towards cookies and creams which have been faster growing segments of the market.

Britannia’s rural distribution reach to large wholesalers Britannia’s share gains in hitherto weak states
Britannia’s direct distribution reach to end retail points

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Lot of excitement around non-biscuits (not for the first time)

• Biscuits make up nearly 80% of revenues for the company. The other 20% comprises of bakery items viz. cakes, rusks, bread and non-bakery
is entirely made up of dairy products (cheese, ghee, curd, milk). These have been around as a part of company’s portfolio for a long time but
have failed to scale up significantly and profitability has been low. Brief reasons for the limited successes in these are as below.
• Cakes (5% of sales): Cake – in packaged forms remains an underdeveloped category. Local bakeries continue to dominate this market.
Company has tried several innovations and launches in the past but has continued to scale up. However, salience of this category
remains relevant as packed foods continue to gain shares. This is not a natural existing consumption category for Indians so cake eating
habits need to be developed. Needs investments in branding and marketing.
• Rusk (5% of sales): – This has been a traditional consumption category. Rusk or double toasted bread is something Indians already
consume but is largely produced and supplied by the local, small standalone bakeries or small regional and unorganized players.
Indian’s are habituated to buy rusk from bakeries and not from general stores where the branded rusks are sold. This is slowly
changing. As of now, Britannia is the largest national organised player and has been for several years now but has failed to scale this
up. The brand recognition/ re-call in this space is not strong like it is in biscuits.
• Bread (5% of sales): This category faces the challenge of having limited shelf life. Needs to be produced and supplied within a small
radius. Thus dominated by local producers. Britannia the only large pan India player but has not been able to scale up. Premium is
already dominated by several regional niche brands. Category is seeing some premiumization with brown and wheat bread and such.
By and large remains a commoditized as of now which is why profitability has been a challenge in this segment.
• Diary (3% of sales): Britannia has always been present in cheese and have tried (and failed) at flavoured milk in the past. Now trying to
have direct milk procurement in place. Diary is still largely unorganised, but the organised segment is dominated by AMUL and
companies like Nestle. Diary is a complex business with need for cold storage supply chain which the company is now building.
• Apart from the above categories, Britannia has also forayed into a few new categories viz: filled croissants, wafers, salted snacks and dairy
drinks (milk shakes). These are currently very small and in almost in pilot stage.
• Filled croissants is a small market (company hopes to develop it). Wafer biscuits is also a very small portion of the overall biscuits
market (company hopes to develop).
• Salted snacks is a large Rs250bn category but highly fragmented (2000 players) including MNCs and Indian heritage players like
Haldiram’s. Packaged milkshakes is a small market with multiple players attempting to capitalize on value added dairy.
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Lot of excitement around non-biscuits (not for the first time) cont.…
Recent new product introductions

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Lot of excitement around non-biscuits (not for the first time) cont.…
1. In FY12, the company launched multiple products which did not scale up (snacks, oats, flavoured milk, gourmet cheese).
2. So the recent new launches are some sort of a ‘second coming’
3. Arguably, Britannia does not have a strong record of creating profitable large brands outside biscuits (this time its different?)
4. Some investors may argue that ‘this time its different’ given a different CEO at helm but I remain sceptical.
5. My base case is that these do not scale up significantly and are margin and ROCE dilutive at the margin given incremental ad spends,
capital investment in manufacturing besides a drag on mgmt. bandwidth.
6. Below are launches in FY12 which did not scale up.

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Culture

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Some sore points

• Britannia is giving out subsidised loans (Intercorporate deposits) to group companies – majorly to Go Air and Bombay Dyeing
• GO Air is India’s fourth largest airline but operates in an industry which except Indigo (the leader), everyone struggles to make money
• Bombay Dyeing has historically been a textile company but more recently running a large real estate operation
• Both these business are typical cash guzzlers – these companies borrow from Britannia at ~ 10% interest rates which is likely
substantially below their market rate of borrowing
• Britannia justifies saying these make a higher rate of interest versus those with HDFC bank and Kotak bank which give 8%.
• Either the management is foolish when it comes to understanding concepts like credit risk or a risk adjusted return
• Or they think the investors can be easily fooled and the issue brushed aside
• The exposure has been rising through FY16-19 although came down in Sep-19.
• This is murky as the lending is to two capital starved and leveraged business with a poor FCF profile.
• Investors see the debt/cash position as on the BS date every six months – we do not know the interim level of lending/ exposure
• It seems as through the Wadia's drive this with the current CEO – Varun Berry having a limited say
• Classic case of Britannia shareholders being asked to subsidise shareholders of other group companies
• Britannia has a lower dividend pay-out ratio versus other FMCG peers.

ICDs to group companies (INR mn)

FY16 FY17 FY18 FY19 1HFY20
Bombay Dyeing 1,000 3,500 3,500 3,500 3,000
GO Air - - - 3,350 1,500
Total 1,000 3,500 3,500 6,850 4,500
% total equity 5% 13% 10% 16% 9%
% OCF 10% 79% 28% 59%
% capital employed 8% 16% 15% 24%
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Some sore points (cont..)

• Although not a major red flag, one subtle observation is that Britannia Chairman Nusli Wadia takes amongst the highest remuneration
among his peers. Seems more of an outlier when one compares with the median wage of the company.
Company Chairman Name FY19 Remuneration (INR mn) Versus median salary
Btiannia Nusli Wadia 54 189x
Marico Harsh Mariwala 49 52x
Dabur Amit Burman 0 nm
Pidilite MB Parekh 40 77x
Asian Paints Ashwin Dani 5 6x

• Wadias have a reputation of being tough people to work with. There have been a few high profile exits recently.
• Venkat Shankar (formerly PepsiCo) who joined in mid-2018 to run the diary business quit within a year and has joined Parag Milk as
the CEO.
• Long time marketing spear head Ali Harris left Britannia in Sep 2019 to join as the COO for ITC’s biscuits division.

• Key man risk

• Varun Berry has been credited by the investment community with the accelerated distribution expansion and improved profitability at
Britannia. He is usually the primary front for investors in Britannia.
• His potential departure remains a key man risk for the company (his term ends in FY24).

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Price

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 Margin expansion was the key earnings driver; unlikely to sustain

1. Britannia's earnings grew strongly FY13-16 as margins expanded from near low levels. Over FY06-FY12, Britannia’s margins were
dealt heavy blows by an aggressive ITC and high input cost inflation. Both these factors abated starting FY13.
2. As can be seen from the figure below, margins deteriorated over FY06-12 and have now recovered to normalised levels.
3. There is a common perception and narrative that Varun Berry has been in instrumental in controlling other costs sitting in ‘other
expenses’. However, its worth noting that all the savings over the last five years on the other expenses line has come from cut in
‘conversion costs’ and some cut in ad spends. The second figure below plots other expenses % sales but excluding ad spends and
‘conversion costs’. Conversion costs are ‘outsourcing costs’ which have naturally gone down has Britannia has insourced more.
4. There are more downside risks to margins from current levels given a) low economies of scale and higher ad spends and distribution
costs to support new categories b) any spike in input cost inflation or rise in competitive intensity.
5. In my view, Britannia’s earnings can grow at ~12 to 13% on a normalised basis i.e. largely in line or marginally ahead of revenue
growth.
6. I am go be wrong either if Britannia manages to gain substantial share versus others in biscuits over the medium term and/or is able
to meaningfully scale up in one of the new categories it has entered.

42% 20%
Other costs (ex ad & conversion costs)
40%
15% 15%
38%
14%
36% 10% 13% 12.6%
12.1% 12.2%
11.7%
34% 12% 11.3%
11.5%
11.3% 11.2%
11.2%
5% 11.0%
10.7% 10.7% 10.7%
32% 11% 10.4%

30% 0% 10%

9%

8%
Gross margin (LHS) EBITDA margin (RHS) FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

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 Arriving at Duro Capital TP

Key points to consider while DCF based TP

Upside/ (downside)
FY21E
2,102
-27%
FY22E
2,331
-18%
FY23E
2,585
-10%

valuing Britannia Basis CMP FY19 FY20E FY21E FY22E FY23E

PE 44x 37x 37x 32x 28x
P/FCF 92x 88x 53x 49x 38x
• One of India’s strongest brands and leading FMCG companies. Typical FMCG – solid Mcap/Sales 4.6x 4.4x 4.2x 3.8x 3.3x
EV/EBITDA 29x 28x 27x 24x 21x
cash conversion, net cash, less impacted by slowdown in discretionary consumption. EV/EBIT 33x 32x 30x 26x 23x
Market leadership in of the largest FMCG categories in India. EV/Sales 4.4x 4.2x 4.0x 3.6x 3.2x

• Low pricing power compared to other FMCG categories. Margins lower and thus
lower ROCE versus some of the peers. Per share value WACC -->
2,102 9.9% 10.4% 11% 11.2% 11.5% 11.8%
• Single category company – biscuits the business which is highly penetrated. Growth 3.0% 2,237 2,036 1,863 1,771 1,686 1,608
profile will be average (~10 to 12%) and operating n a single category can always 4.0% 2,401 2,165 1,965 1,860 1,765 1,677

growth rate
Terminal
5.0% 2,632 2,341 2,102 1,978 1,867 1,766
prove to be risk – loss of category salience (GSK, Marico), sudden rise in competition 5.5% 2,786 2,456 2,189 2,053 1,931 1,821
(Colgate, Britannia in the past) 6.0% 2,980 2,597 2,294 2,142 2,007 1,886

• Some questions around corporate governance given inter-group lending and

exposure.
• Britannia thus deserves to trade at a healthy discount (30-40%) to whatever fair
multiple one assigns for Nestle and HUL. These are multi-category, higher pricing
power, high cultural standard companies. Parts of their business is also in lower
penetration categories such as Nestle (infant foods), HUL (personal care).

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Britannia’s stock price seems a factor in a lot (really!)

1. I use a DCF with steady 10% revenue CAGR over the next 15 years with a 5% terminal growth rate and steady 15% EBITDA margins. A
WACC of ~11% gives a FY21 fair value of Rs2102per share (~37x FY21). This is about 25% below the current market price.
2. Do the get the current market price, I would have to change our margins assume to reflect consistent margin gains such that EBITDA
margins reach high teens (18-19%) over the next 15 years from FY20 exit margin of 15%. Additionally we would have to assume a
15% revenue CAGR versus 10% over the next 15 years.
3. The common supporting argument to assume margin expansion in consumer companies is the ‘recent evidence’. The water table of
profitability has moved up across consumer companies and keeps surprisingly positively. I concur – however, as argued earlier, that
assumption is easier to digest or extrapolate in business with strong market positions and evidence of strong pricing power – paints,
adhesives, infant foods and many more. I don’t think biscuits as a category and Britannia’s position within that justifies that.
4. As for revenue growth, it seems aggressive to assume that a company which has compounded revenues at a 12% CAGR over the last
10 years can do any better than that. One needs to wait for new categories to scale up, there have been failed attempts in the past.
5. Lastly, I struggle to incorporate a margin of safety into my DCF to account for the ICD issue. If I were to ratchet up my WACC to 12%
from 11%, FV falls to Rs1669 per share (40% below current market price)
6. All said and done, Britannia is worth looking at only below Rs2000 per share if I want to own it i.e..

Britannia 12mnth fwd PE chart

FMCG - relative valuations
70.0

60.0
100x 84x
50.0 80x 70x
65x
56x
40.0 60x 50x 46x
43x
39x 42x
30.0 37x 36x 35x 32x
40x 31x
20.0 19x 16x
20x
10.0

0.0
0x
NEST HUL DABUR BRIT COLG GCPL MRCO JYOTH
FY21 PE FY22 PE
PE (x) Mean +1SD -1SD DC TP
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Thank you

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