Britannia (Buy Commodities, Sell Brands)


(Sandeep Patel) #1

Gave a presentation on Britannia at VP Chintan Baithak Goa July 2016.

Britannia Business Insights v1.pdf (154.5 KB)
Long Term Visibility Template 3.0 - Britannia v2.pdf (440.5 KB)

Sorry for the delay in uploading this. Thought this is a very well known business. Why to waste space here. Somehow was missing a point that without a thread, we won’t be able to discuss incremental business developments (as and when it happens). So here goes few insights on “Ting ting ti-ting”…


Business (Product/Revenue Segments)

  1. Biscuits - Constitute 75-80% of top-line in FY 16.
    Good Day, Crackers, Nutrichoice, Marie Gold, Tiger, Milk Bikis, Jim Jam + Treat, Bourbon, Little Hearts, Pure Magic, Nice Time.
  2. Dairy - constitute 5% of top-line in FY16 (opportunity !!!).
    Cheese (slices, cubes, block, spreadz), Dairy Fresh (dahi, flavored yoghurt, milk), Accompaniments (butter, ghee, dairy whitener)
  3. Others - constitute 15-20% of top-line in FY16.
    Breads (whole wheat, white, assortment), Rusk (premium bake) and Cakes (bar, veg, chunk, nut & raisin, muffills)

Opportunity (Pointers to Addressable Market Sizing)

  1. Biscuits: India Biscuits market size is INR 26,000 cr. Expected to grow at 14% CAGR for next few years. Has grown at 10-14% per annum in the last five years. Britannia has regain market leader position (~28%) and continue to gain share; wafer thin 100 basis point lead over Parle currently.
  2. Dairy: Indian organized dairy industry market size is INR 85,000 cr (~20% of total market size). Has been growing 22% annually for the last five years. Expected to do better over the next three years. Huge opportunity in the unorganized sector to penetrate.
  • Britannia is looking to start fully integrated supply chain for dairy (i.e. from sourcing milk to processing, selling and marketing) in a phased approach.
  • Phase I: Innovation in cheese, milk powder, condensed milk, whey powder. In addition to ~300 cr products
    consumed in the bakery business currently.
  • Phase II: Deserts, drinks, whole lot of other stuff.
  1. Cakes & Rusks: Nascent market currently. Has good potential. Britannia has a first mover advantage. Only Parle is the other organized player.
  2. F&B: The Indian FMCG market size is INR 2,00,000 cr; fourth largest sector in India. Food & Beverages (F&B) constitute over 50% of total market size. Britannia has not-so-hidden desire to be a total foods company.

Longevity (Questions to think about for next 5-10 years ???)

  1. Biscuits: India has per capita consumption of around 2 kg. As against North America and Japan consumption of around 7.5-10.0 kg. Huge runway ahead.
  2. Dairy: A small pie of 85K cr and growing 20% per annum organized dairy industry can put Britannia on different plane. It has brand and platform. Just need to plan, invest and execute.
  3. International Sales: Untapped opportunity. Currently contributes 6% of revenue. Targeting 20% by 2021.
  • Would success in Biscuits/Cookies continue into adjacent categories/new ventures?
  • Would Britannia be market leader in organized dairy industry in next 5-10 years?
  • Would Britannia enjoy Varun Berry’s service for next 5 years (longer the better)?
  • Can Britannia become an international brand in next 5-10 years (is it working on it)?

Unique DNA

  1. Strong brand equity: A more-than-a-century old Britannia brand. One of India’s biggest brands. Stands for quality, trust, taste and innovation. New entrants would have to make sizable investments towards customer acquisition, promotion and branding to challenge Britannia. Britannia can relatively spend lesser towards advertising and promotion activity, resulting in better profitability.
  2. Premiumization strategy: A clear focus on much bigger play at premium end i.e. objective to be leader in premium Cookies segment that is on rise currently. Objective is not to become market leader in the mass/value Glucose segment that has seen deceleration. This long term strategy is providing good tail wind currently as consumer perception is changing. Biscuits no more considered just mass consumption products. Consumers see it as premium products, primarily driven by increasing indulgence, health concerns and familiarity with luxurious taste.
  3. Pulse of Indian consumer: Indian consumer today is looking more-for-less i.e. better products while remaining value conscious. Timely introduction of new innovative products and constant refresh of the existing products shows that Britannia understands the pulse of Indian consumer. Focused in balancing cost, quality and aspiration; consumer affordability at every price point.
  4. New mega factories: Setting a lot efficient new mega factories to change outsourced v/s in-house ratio. More in-house means more scope for R&D and less heads that the profit has to be shared with. Can invest in new product lines to support innovation without having to face new investment reluctance by outsourced manufacturer.

Business Characteristics

  1. Buy commodities and sell brands. Top notch business quality.
  2. Brand creates scale, and scale produces cost advantages. This indirectly is helping Britannia increase the distance with competition.
  3. Varun Berry (jockey), MD Britannia has re-energized the company and is making a huge difference. Ex-PepsiCo. His experience, commitment and attitude has converted delicious brand into healthy financials.
  4. Debt free, Working Capital minimal or negative, Capital Turns >3x, Operating Margin consistent improvement, super RoE/RoCE, decent Sales growth and above average PAT/EPS tells us that it is super special business.
  5. High promoter holding of 50.74% (considering it is more-than-a-century old brand) indirectly indicates conviction and sincerity of the promoters.
  6. 80+ manufacturing units, 2.8cr packs made per day, 51 depots, 3700 stockists, 900 trucks per day, over 36 lakh outlets selling Britannia, ~8 lakh ton per annum production (and growing).

Risks

  1. Negative observation by India’s Food safety administration and/or CSE (Centre for Science and Environment) could hurt business/product sentiments
  2. Competitive pressures from large well established MNCs, particularly Mondelēz (Oreo) that has premium offerings and strong global R&D."

Main Growth planks for next 2-3 years/Visibility

  1. Consumption Growth: OROP, 7th pay commission hikes and falling inflation levels are likely to positively review consumption and thereby consumer demand (top-line growth). This is in addition to usual Indian factors like increasing income, rising urbanization, nuclearisation, as well as growing work force.
  2. Distribution expansion: Britannia has been narrowing distribution gap with closest competitor and plans to do even further. Reached 3.6million outlets and market is almost 6.7million outlets. Still a lot of room to cover that could bring growth in near-mid term.
  3. Premiumization / Product Innovation: Premiumization trend has just started and expected to continue at a healthy pace driving growth for next 2-3 years.
  4. Cost effectiveness: Value creation strategy of Britannia for cost effectiveness would further drive the bottom-line growth; achieved through scale in operations, technology interventions, complexity and wastage reduction in the value chain along with efficient management of working capital.
  5. International business: Very small currently. Contributes 6% of overall revenues. Distributes products in ~75 countries. Hopes to increase international business revenues by improving manufacturing capacities, boosting exports. Also open to making acquisitions or entering into JVs. Looking to set up a facility in Gujarat to boost international sales to 1/5th of overall revenues by 2021.
  6. 900 cr investment planned (70% in greenfield projects).
  7. Dairy expansion (once finalized - 300 cr) could be a strong growth driver ahead.

Main Objections/ Handling

  1. Gross margin sensitive to commodity pricing: True to an extent. Price/volume has to be changed when required. Ability to pass plus/minus to consumer with/without lag. Overall, gross margin has been on rise by continuously improving on productivity and efficiently agenda. Has been working on taking costs out of the systems and making supply chain very-very efficient. A lot has been achieved and still a lot of room to cover.
  2. Patanjali threat: While most of Patanjali’s progress is not into biscuit category, it is in other categories which do not impact Britannia, but Britannia will have to keep an eye out and keep checking how they are doing and what kind of progress they are making in the market and be prepared for a formulation update if required.
  3. Stagnation in category growth if any: Constantly exploring new investment in adjacent business such as breakfast, snacks and chocolates. Nibble into macro snacks market with bridge products that build on the strength of biscuits e.g. Pure Magic Deuce - a biscuit that features a slab of chocolate on it. This is in addition to bigger play in dairy which has huge opportunity size.
  4. Inter-corporate deposits: Hopefully 900cr new investment plan will keep this in control.

Disclosure: Invested. No transactions in last 30 days.


(ankush raghuvanshi) #2

Britannia Investment Note.pdf (1.0 MB)
Hi Sandeep,

I had also done an analysis on it, sometime back ( 1 yr). Attaching the report here. Would be happy to have feedback/comments

Regards

Ankush


(Sandeep Patel) #3

@ankushr

Very good work indeed. Thanks for sharing. Keep it coming.


(Mridul) #4

Great insights @ankushr @lustkills! Taking everything into consideration, what do you guys think would the revenue run rate and pat growth rates going forward (next 5 years) be?

In long run, most of the good investors assign not more than 20 p/e multiples. Ankur has calculated base case of 25, which i think is reasonable in FMCG sector. So, at 25 p/e in 5 years, assuming 10-12% revenue growth (on this higher base), and 18-20% margins (competition kicking in), we are just earning 11% IRR.

So, i completely agree with Ankur here-
Looking at the expected IRRs on relatively conservative exit multiples, they do not exceed minimum of twice
of risk free yields during times of less net margin profile and revenue growth rate… primary because of higher entry multiple-45 PE. Hence there exists valuation risks from opportunity costs point of view.


(Sandeep Patel) #5

@Mridul

Britannia is richly valued currently. Couple of ways to play -

  1. Enter/add in times of sharp correction, primarily resulting from bad news in market. Ex. In May/Jun 2016, CSE found residues of Potassium Bromate and Iodate in some of the bread sold in Delhi. Was a generic finding, not Britannia specifc. However Britannia stock price got impacted. Typically can look for 52 week low level. Waiting for illusive < 25 P/E may not help in consumer centric stocks.

  2. Use it as what Hiteshbhai calls “Parking space”. Basically, in absence of a better idea can buy this or similar high quality stocks with limited downsides even though upsides might be limited.


(Bheeshma Sanghani, PhD) #6

Britannia with a PE of ~47 ( consolidated ) is as rightly pointed out valued at a premium. Unfortunately that premium is not translating to its biscuits. The area marked in red in the chart is a congestion zone and prices will have to find an opening through that congestion to break free. I don’t think its possible with the current valuation, as all growth prospects are baked in ( pun intended). Prices will probably move around in the congestion area sightseeing but finally will head back ( read down ) home.

I would wait for a bad news item to hit the news before plunging in. Its got some solid brands for sure and remains the only pan national pure sliced bread play. Sliced bread is a basic need and i am all for investing in britannia, however would wait for the cows to come home

With the growth in cookery shows it has become ridiculously easy to manufacture high quality biscuits in your own home. Baking is a hobby adopted by many including myself. Brittania will have to move beyond its comfort zone of biscuits. It should transition hopefully.


(Mridul) #7

Even i am planning to shift partially from Nestle to Britannia. Nestle looks overpriced at 63 trailing, though is revamping its business with new products post Maggi fiasco. Britannia is cheaper and is growing much faster if one compares this with market leader Nestle, but is still not cheap at 47 p/e. Waiting for a good dip!


(Bheeshma Sanghani, PhD) #8

Hi mridul , considering the symmetrical triangle in nestle, that seems be a good idea! Thats one mean looking snake :slight_smile:


(Mridul) #9

Hi Bheeshma,

While there are instances when symmetrical triangles mark important trend reversals, they more often mark a continuation of the current trend. Regardless of the nature of the pattern, continuation or reversal, the direction of the next major move can only be determined after a valid breakout.


(Bheeshma Sanghani, PhD) #10

You are completely right. Only after a breakout can we judge where its likely to head. Esp with symmetrical triangles it could be either ways. However the placement of the pattern is a sign. Also it has broken its 200d avg on the downside. Snakes and ladders.


(Sandeep Patel) #11

Interesting developments in last 2-3 months -

  • Britannia signed a JV agreement with Chipita, a Greek co. ( www.chipita.com ). For the purpose of developing, producing and selling ready-to-eat filled croissants, etc. Seems a good combination of technologies, recipes and experience from Chipita’s side and consumer knowledge, distribution and marketing from Britannia’s side. Britannia is looking for similar JV in dairy business. Good to see Britannia is willing to incorporate learning from not so successful JVs of past i.e. i) in 2002, with New Zealand’s Fonterra Dairy and ii) in 2009, ended association with French foods and dairy giant Danone.

  • Britannia has decided to create a fund which would be like a venture cap fund which will invest in some of the interesting food startup and take an early stage stake. Seems this is one of best home for the cash. Should have initiated this earlier in my opinion. Market would have liked Britannia a whole lot more if had done an early stage investing in opportunities like Balaji wafers ( www.balajiwafers.com) and/or iD ( www.idspecial.com and/or Paperboat ( www.paperboatdrinks.com) - isn’t it?

  • Britannia is looking at setting up operations in Nepal.


(Bheeshma Sanghani, PhD) #12

http://www.fnbnews.com/Top-News/fssai-to-widen-fortification-programmes-ambit-to-include-bread-pasta-40608


(Amey Desai) #13

dear bheeshma, do you see this as a red flag for brittannia ?


(Bheeshma Sanghani, PhD) #14

Hi @ameydesai

Not not all, any positive changes in the nutritional profile of bread will help the category and Britannia being the only national player will reap the maximum benefit. I am not tracking britannia closely but i think that bread is a relatively small product category for them in terms of revenues even if there is an adverse impact it wont affect them in a material way.

Best
Bheeshma


(sambandham82) #15

Hi,

Why no one has mentioned about investing in Bombay Burmah trading corporation, the 50.73% stake holding company of Britannia, available at 70% discount to its holding’s mkt value apart from vast real estate and core tea business?


(Sandeep Patel) #16

Here is piece that throws light on this question — particularly in the context of Indian holding companies. The Art of value investing interview by Prof Sanjay Bakshi.

“Buying the operating business is often far more lucrative than buying the whole course…” @ 15 to 20 mins timeline. Awesome podcast.


(sambandham82) #17

Thanks for the link. I agree that instead of buying a business through another investor, we should buy the core business directly as we are unsure about proportion of wealth sharing.

But my point is about discount widening to > 75%. Till 5 months ago BBTC (mkt cap=3000 cr) was available at 83% discount to Brittania’s value (0.5074*40000 cr = 20000 cr) and even today, it is at 72% discount.

Other holding Cos such as Bajaj Holding, Tata Investment corp, BF Investment, Maharastra scooters, Nalwa sons, etc., are trading at 40-60% discount and Pilani investment is the other one with 70% discount but not holding any attractive business.

BBTC has given 85% CAGR whereas Brittania has given 54% in past 3 yr.

Though i agree with the generic thumb rule of owning core business, there is always exceptional cases based on given scenario.


(Sandeep Patel) #18
  • Flattish quarter. Not bad in the face of challenging market environment and de-stocking due to GST.
  • GST is expected to generate a positive momentum going forward as per the co.

  • Planning to set up Britanni’s largest plant (with six lines, along with cake and rusk) at the Ranjangaon food park in Maharashtra.
  • Proposed JV plant with Greek co. Chipita would also be located there; would be on stream from June 2018.
  • Planning to set up a dairy project at the food park with a capacity of seven lakh litres per day.

Source: http://www.bseindia.com/xml-data/corpfiling/AttachLive/ba0c5e96-beea-4a46-9199-8d0d682afff8.pdf


(Amit Aggarwal) #19

Hi Sandeep,

Regards biscuits product category, how do you see competitive intensity shaping up?
Apart from Patanjali, I have seen Unibic doing a very agressive product portfolio and distribution strategy.
I find Unibic biscuits in many shops in Delhi/NCR now a days which was not present sometime back. The feedback on taste from family and friends has been quite positive and it seems many of these people are switching to new brands.

http://unibicindia.com/


(Sandeep Patel) #20

Amit,

More than Unibic I would say Mondelēz is a competition to keep an eye out because of their R&D capabilities, premium product offering and distribution reach. Can hurt where it pains the most i.e. in premium products. Unibic seems to have me too products. A little bit of market heat up on certain categories is natural. Britannia has been quick to match.

Increase R&D, refresh product portfolio, update formulation, set up JV to expand adjacent product offering, acquisitions, etc are some of the steps to increase competitiveness. Britannia has acted on most satisfactorily and has been looking at others (per details shared in earnings conference call).