Business Analysis by Anurag Bhuwania

Overview: The Company

 Headquarters in Bangalore

 Over 120 years old, among India’s ‘most trusted Brands’.

 Involved in 4 major sectors: Biscuits, Dairy, Cakes, Rusk

 8 Major brands with turnovers of 500 Cr each. (Marie, Good Day, Bourbon,
Milk Bikis, Nutri Choice, 50:50, Tiger and Pure Magic)

 Owned by the Wadia Group, Managing Director is Mr. Varun Berry

 Leader in Indian biscuit market, with over 35% estimated market share
The Business Manufacturing

Innovation
and R&D
Business Distribution

Marketing
 Manufacturing
Overview

 46% in house, 54% outsourced, as of 2016

 Since then, 7 new lines built, all across India

 Huge plant set up in Maharashtra, specifically for Dairy goods

 Total production capacity crossed 1m tons

 Focus on shifting to in house manufacturing

Process
(Biscuits): Sugar, Refined Wheat flour, hydrogenated vegetable oil
Raw Material from Suppliers

Random sampling done when received from Suppliers.

Quality Vulnerable to defects/poor quality
Checking

Value adding processes: creaming, mixing, molding, baking,

Processing
cooling

Sent out to Britannia distribution centers after metal

Distribution checking
Cost Control:

 10-15% of fuel used in factories is Biofuel, which is more cost efficient

than regular fuel
 Modern technology and machinery in 7 new factories should reduce
costs by increasing efficiency
 New factories closer to market, to lower transport costs

 Focus on in-house manufacturing should also reduce costs

 “Leveraged fixed costs”

Distribution: Overview
 Reaches over 4.8 million outlets overall, second only to Parle (5.8m)
 However, has double the direct reach of Parle at around 1.8 m
 Separate chains for Dairy and Biscuits to increase efficiency and organization
 Very strong distribution in Urban areas
 Relatively weaker distribution in rural areas, “75% of Urban” per AR
 Lags behind Parle in rural areas
 Huge focus on improving and expanding distribution footprint, especially in
Hindu Belt
Process
Current (1-3 weeks) New System (1 day)

Factory
Factory
Stocked at Distribution center

Wholesale Dealers Distribution center

Distributors

Retailer
Retailers
Marketing
 Heavy advertisement and promotions expenditure
 Big campaigns required for each new product launch or re-launch to
differentiate products as there is little price competition

Advertisement Spending as % of Sales • Consistent between 7-8% over the last 7

7.9
years
7.6
7.5 7.5 7.5
• Similar to Industry average
7.2

7 • Parle has launched massive advertising

6.8

program for its premium brand

2010 2011 2012 2013 2014 2015 2016 2017 ‘Platina’, advertising in the IPL etc.
Innovation & R&D
 New R&D center established in Bangalore
 Traditionally, never known for innovation
 Largely stuck to same brands for years: Marie, Good Day, Bourbon, Tiger, etc
 Lot of new product categories such as Nutri Choice, Good Day Cookies, Cake
biscotti, etc.
 By end of this year, plan on launching 50 new products, new brands as well as
under existing brands
 Croissant manufacturing through JV with a Greek baker in new Dairy Plant
 R&D work underway for Cakes, Rusk and Dairy category, as efforts are underway
to develop non-biscuit portfolio and convert to whole foods
 Heavy R&D expenditure could indicate optimistic outlook of management,
however also shows increase in competition in Industry
Economic Moat
Sources

Network Switching Intangible Efficient Cost

Effect Costs Assets Scale Advantage

• Britannia primarily benefits from ’Intangibles’, through its Brand power.

Consumers who buy Britannia biscuits for years are unlikely to switch to
competitors.
• Has a strong distribution network. However, distributors sell competitor
products as well
• No switching costs, cost advantage, etc. compared to competitors.
A closer look at all 3 Financial Statements
Topline, Profitability, Expenditure Patterns
Topline
Gross Sales
Gross Sales growth
100000
25
90000

80000 20
70000

60000 15

50000

40000 10

30000
5
20000

10000
0
0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Gross Sales CAGR 14.5%

• Topline increased at a CAGR of 14.5% last • Growth has gradually reduced last 6 years
10 years
• Industry is now growing faster than the Company
• Increased competition from Parle and ITC in premium
sector is expected to further impact growth
 TTM -

Profitability 5YA

38.1% 37.8%

15.1
13.6 11.4 13.1
10.1 8.89
Historical Data PAT MARGINS
12

9.6
PAT 10
9.5
8.6
10000
9000 8
8000 6.3
7000 5.6
6
6000 4.4
4.1 4.1
5000 3.6
4
4000 2.7 2.9
3000
2
2000
1000
0 0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Profit After Tax CAGR 21%

• Margins have had huge improvement in the

• PAT has consistently grown at CAGR of 20.5% last 5 years.
over the last 10 years • Impact of increased focus on premiumization
• Shows huge impact of cost efficiency
measures undertaken
• Ability to maintain despite RM inflation is a
positive sign
Expenditure Pattern
• Biggest costs are Raw Materials,
10%
around 63%

• Thus margins are very dependent

13%
on ability to negotiate with

3% suppliers

63% • 10% marketing costs are high, this

11%
can be cut first if RM rises

• Relatively low Manpower costs

RM conversion Manpower Others Advertising
Degree of Operating Leverage
Degree of Operating Leverage
6

0
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
-1

-2

-3

-4

-5

• Difficult to arrive at any conclusion as a lot of variation

• 2010 is an anomaly: mix of heavy competition and commodity inflation
Capital Allocation, Efficiency, Indebtedness,
Capital Allocation
Capital Employed
30000

81.6
25000

67.8
20000 61.3
51.9
15000
40.9
10000
28.4 31.5
23.9 24.5
5000
17.7
13.8

0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

• Constant till 2014 • Returns growing at a strong annual rate till 15, high
• Has more than doubled last 3 years, showing of 81.6%
rapid expansion • Fall due to huge increase in capital expenditure in
• Could reflect optimistic outlook of management 16 and 17.
in terms of market demand • Returns are expected to improve again once all new
• Could reflect heightened competition as well factories are operational
Indebtedness
Debt to Equity Ratio Dividend Payout Ratio
2.5 70

60
2
50

1.5
40

1 30

20
0.5
10

0
0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

• Britannia is virtually debt free

• Healthy dividend payout of 29% being maintained by management currently
Operating, Investing and Free Cash Flow in relation to PAT
Cash Flow
Cash Flow
12000

10000

8000

6000

4000

2000

0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
-2000

-4000

-6000

-8000

OCF FCF PAT ICF

Analysis
 Drop in OCF and FCF as a result of demonetization causing cash
crunch.
 Additional credit given to distributors and partners to minimize impact
 This caused divergence between PAT and Cash flow.
 Sharp drop in cash flow from investments reflects rapid expansion and
cash spent on building new factories
 In general until 2017, cash flow and PAT are fairly consistent; almost all
OCF was being converted to PAT
Management
 Varun Berry took over in 2014. Big change in top level leadership (i.e
Directors and Managers)
 Start up culture. Divided Biscuits, Dairy, and Cake/Rusk to separate
individual businesses.
 Emphasis on cost control, improving margins. Consistent increase in net
profits since change
 Market Share has increased, overtaken Parle to become the largest
player
 Focused on rapidly improving distribution. Fast growth annually in
rural areas, catching up with Parle.
 Overall, strong management, with no questions about Integrity, and a
solid history of hard-work and performance.