4QFY06 Results Update SECTOR: FMCG

Britannia Industries STOCK INFO.

BLOOMBERG

1 June 2006

BSE Sensex: 10,071 BRIT IN

Buy

REUTERS CODE

S&P CNX: 2,962

Equity Shares (m) 52-Week Range 1,6,12 Rel. Perf. (%)

Rs1,417

Previous Recommendation:Buy

BRIT.BO

23.9

YEAR

NET SALES

PAT

EPS

EPS

P/E

P/ B V

ROE

ROCE

EV/

EV/

END

(RS M)

(RS M)

(RS)

GROWTH (%)

(X)

(x)

( %)

( %)

SALES

EBITDA

-4/0/13

03/06A

17,133

1,464

61.3

-14.2

23.1

6.1

25.4

34.0

1.7

14.6

33.9

03/07E

20,085

1,873

81.3

32.7

17.4

4.9

27.9

36.3

1.3

10.7

0.8

03/08E

22,452

2,340

100.9

24.0

14.0

3.9

27.7

37.1

1.1

8.0

1,955/804

M.Cap. (Rs b) M.Cap. (US$ b)

?

Britannia Industries’4QFY06 results were below our expectations. Though sales grew 24.6% YoY, EBITDA margins were 300bp lower, leading to a 31.4% decline in PBIT. For the full year, FY06, sales grew 13.5% while PBIT increased by 6.8% as EBITDA margins declined 60bp.

?

Strong sales growth for the quarter was partly aided by lower base effect due to impending VAT implementation in 4QFY05. EBITDA margin declined primarily due to a 210bp increase in raw material costs. However, the company benefited from lower excise duty and income tax (manufacturing facility at Baddi gets backward area benefits), as also reduced outsourcing.

?

The operating environment continues to be competitive, with ITC emerging as a major competitor, powered by 5% lower cost of raw material. Margins in ‘glucose’ biscuits remain a concern – this is the largest but a highly price sensitive segment.

?

We expect profit margins to improve in the coming year due to benefits of reduction in excise duty, full production at Baddi, as also strong mid-teen volume growth in the industry. We expect the company to strive for richer product mix to improve margins.

?

We are revising our EPS estimate for FY07 down from Rs87.1 to Rs81.3 to reflect the high raw material costs. However, we maintain our EPS estimate for FY08 unchanged at Rs100.9. The stock trades at 17.4x FY07E and 14x FY08E EPS. We maintain Buy.

QUARTERLY PERFORMANCE

(Rs Million) FY05

Y/E MARCH

Net Sales YoY Change (%) Total Exp EBITDA Margins (%) Depreciation Interest Other Income PBT Tax Rate (%) PAT YoY Change (%) Extraordinary Expenses Reported PAT E: MOSt Estimates

FY06

FY05

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

3,947 17.2 3,466 481 12.2 -48 -5 373 801 -157 -19.6 644 125.2 -38 606

4,271 12.6 3,716 555 13.0 -48 -5 227 729 -210 -28.8 519 52.2 -33 486

3,828 6.1 3,311 517 13.5 -47 -6 30 494 -165 -33.4 329 13.8 -32 297

3,644 5.6 3,352 292 8.0 -47 -4 125 366 -144 -39.3 222 -43.6 -114 108

4,054 2.7 3,474 580 14.3 -53 -8 24 543 -186 34.3 357 -44.6 34 391

4,630 9.5 3,985 645 13.9 -50 -9 54 640 -201 31.4 439 -15.4 -1 438

4,498 17.5 3,956 542 12.0 -57 -11 17 491 -101 20.6 390 18.5 -33 357

4,540 24.6 4,315 225 5.0 -57 -6 122 284 -55 19.4 229 3.2 49 278

Amnish Aggarwal ([email protected])Tel:+91 22 3982 5404

© Motilal Oswal Securities Ltd., 3 Floor, Hoechst House Nariman Point, Mumbai 400 021 Tel:+91 22 39825500 Fax: 2281 6161

15,095 4.9 13,255 1,840 12.2 -190 -21 791 2,420 -714 29.5 1,706 30.2 -218 1,488

FY06

17,133 13.5 15,154 1,979 11.6 -217 -21 217 1,958 -543 27.7 1,415 -17.1 49 1,464

Britannia Industries

Higher raw material costs adversely impact profitability Britannia reported sales growth of 24.6% YoY during 4QFY06, significantly higher than our estimate of 12.2% growth. EBITDA margins declined by 300bp, mainly because raw material and other expenses as a percentage of sales increased by 210bp and 200bp, respectively. EBITDA declined by 22.9% while PBT declined by 22.4%. Sharp decline in tax rate from 39.3% to 19.4% enabled the company to post 3.2% increase in net profit. The company posted 13.5% increase in sales and 7.6% increase in EBITDA for FY06. EBITDA margins declined by 60bp. Sharp increase in other expenditure was the chief reason for the decline in margins. PBT declined from Rs2.4b in FY05 to Rs2b due to 72.6% decline in other income to Rs217m. The decline in net profit was lower at 17.1%, as tax rate declined by 180bp. Profit margins were adversely impacted mainly due to rising raw material costs. Prices of sugar and milk have been rising for sometime. Even wheat prices have started rising. Competition intensifying; ITC the chief contender Britannia has been witnessing competition from both regional players like PriyaGold and national players like ITC. PriyaGold has products across segments, but with prices that are 15-20% lower. On the other hand, ITC is trying to reinvent the biscuit market, with the launch of new flavors. At the same time, it has launched all the popular products in family sizes, at a small discount to ward-off players like PriyaGold. We expect ITC to emerge as a major competitor to Britannia in the coming years. The competitive strength of ITC lies in its cheaper sourcing of raw material from E Choupal and the cuisine expertise of its hotel chain in developing new variants. ITC has launched variants like Butterscotch Cream, Pineapple and Strawberry Cream, Chili Flake Cookies, etc., which have evoked good response. Intensifying competition has forced Britannia to innovate

1 June 2006

and launch new variants quicker. It has revamped its Cream Biscuit range and has recently launched MarieGold Orange Chocolate Dips under the MarieGold umbrella. Attempting to enrich product mix The biscuit industry derives more than 60% sales from ‘glucose’ biscuits – a highly price sensitive segment. Britannia derives 40% of its sales from Tiger – its ‘glucose’ brand, which is driving growth in rural areas. The company has been taking various initiatives to enrich its product mix and expand margins. It is focusing on mega-brands like MarieGold, GoodDay, CreamTreat, NiceTime and FiftyFifty. The company has tried to innovate the Tiger brand itself by the launch of cream and coconut variants, aimed at graduating the consumer to slightly higher value-added products. Excise benefit to help boost margins We expect Britannia to report an increase in profit margins despite firm raw material prices. The company should benefit significantly going forward, as it realizes full benefits of the excise-free Baddi unit. Also, like all other biscuit producers, it would benefit from the reduction in excise duty on biscuits from 16% to 8%. We expect Britannia’s profit margins to revert to FY05 levels of over 12%. We maintain Buy Despite intensifying competition, double-digit industry growth and rising clout of the organized sector would ensure that there is ample scope for at 2-3 big players to not only survive but also to grow profitably. We expect Britannia and ITC to emerge as the two key competitors in the higher value-added biscuits segment. Britannia continues to be one of the cheapest FMCG stocks. The company has well entrenched brands, strong cash position and presence in an industry growing in double-digits, consistently. The stock trades at 17.4x FY07E and 14x FY08E EPS. We maintain Buy.

2

Britannia Industries

Britannia Industries: an investment profile Company description Britannia Industries Ltd. is the market leader in the biscuits category with a value market share of 38%. Biscuits are one of the fastest growing categories in the FMCG segment with annual volume growth rate of 12% over the past two years. The company has restructured its top management by including experienced officials with good credentials like CEO, Ms Vinita Bali. Key investment arguments ? Biscuits have one of the highest sensitivity to income levels and the increase in disposable income should result in expansion in demand for biscuits, particularly in rural areas. ? The company has a large cash surplus on its books and a history of buybacks. With the cash on its books, more buyback announcements cannot be ruled out. Key investment risks ? Britannia is facing increasing competition from ITC on the one hand and regional players such as Priyagold on the other, non-biscuit forays of the company have been unsuccessful. ? Biscuits are a highly elastic category with high sensitivity to any price increase. Intense competition and price sensitivity makes it difficult to pass on any price increase to consumers, particularly in the Glucose segment. BRITANNIA

P/BV (x) EV/Sales (x) EV/EBITDA (x)

Valuation and view ? We have an EPS forecast of Rs81.3 for FY07 and Rs100.9 for FY08. ? The stock trades at 17.4x FY07E and 14x FY08E EPS. We maintain Buy. Sector view ? We are positive on the sector. The sector is showing strong volume growth across product categories with improving pricing power for leading players. ? Companies with low competitive pressures and brought product portfolios will be able to better with stand any slowdown in a particular segment. ? Longer term prospects bright, given rising incomes and low penetration.

EPS: MOST FORECAST VS CONSENSUS (RS)

COMPARATIVE VALUATIONS

P/E (x)

Recent developments ? Britannia is increasing the pace of innovation and launch of variants to counter competition. Recent launches include MarieGold orange chocolate dips.

DABUR

COLGATE

MOST

CONSENSUS

VARIATION

FORECAST

FORECAST

(%)

FY07E

17.4

25.8

23.2

FY08E

14.0

21.4

19.6

FY07

81.3

80.0

1.9

FY07E

4.9

12.7

18.1

FY08

100.9

90.2

11.9

FY80E

1.2

10.0

15.3

FY07E

1.3

3.2

3.5

TARGET PRICE AND RECOMMENDATION

FY08E

10.7

2.7

3.1

CURRENT

RECO.

FY07E

10.7

20.2

14.7

PRICE (RS)

FY08E

3.9

17.0

12.4

1,417

TARGET

UPSIDE

PRICE (RS)

(%)

1,800

27.0

Buy

STOCK PERFORMANCE (1 YEAR) SHAREHOLDING PATTERN (%)

Promoters

MAR.06

DEC.05

MAR.05

2,000

Britannia (Rs) - LHS

Rel. to Sensex (%) - RHS 50

51.0

51.0

51.0

1,700

35 20 5

Domestic Institutions

16.4

16.9

20.9

1,400

FIIs/FDIs

12.9

11.8

6.4

1,100

Others

19.7

20.3

21.8

1 June 2006

800 Jun-05

Aug-05

Nov-05

Feb-06

-10 May-06

3

Britannia Industries

INCOME STATEMENT Y / E M arch Net Sales Change (%) Total Expenditure

(Rs Million)

R A T IOS

2004

2005

2006

2007E

2008E

Y / E M arch

14,396

15,095

17,133

20,085

22,452

Basic (Rs)

11.1 -12,692

10.3

13.5

17.2

11.8

-13,255

-15,537

-17,572

-19,330

EPS

1,704

1,840

1,979

2,514

3,122

Change (%)

15.5

7.9

20.8

13.1

24.2

M argin (%)

11.8

12.2

11.6

12.5

13.9

-217

-225

Depreciation

-224

-190

-231

2005

2006

2007E

2008E

52.2

100.9

7 1.4

6 1.3

8 1.3

61.1

79.4

70.4

90.7

110.5

171.6

185.6

233.2

291.7

364.7

Cash EPS BV/Share

EBITDA

2004

DPS

11.0

14.0

15.0

17.6

22.0

Payout (%)

21.1

19.6

24.5

21.7

21.8

Valuation (x)

Int. and Fin. Charges

-60

-21

-21

-36

-30

P/E

19.8

23.1

17.4

14.0

Other Income-rec.

546

792

217

373

486

Cash P/E

17.9

20.1

15.6

12.8

EV/Sales

2.0

1.7

1.3

1.1

16.6

14.6

10.7

8.0

PBT Change (%) M argin (%) Tax Deferred Tax Tax Rate (%)

EV/EBITDA

1,966

2,421

1,958

2,625

3,347

37.1

23.1

-7.1

16.8

27.5

P/BV

7.6

6.1

4.9

3.9

Dividend Yield

1.0

1.1

1.2

1.6

13.7

16.0

11.4

13.1

14.9

-698

-732

-545

-735

-1,004

42

17

2

53

67

-33.4

-29.5

-27.7

-26.0

-28.0

1,310

1,706

1,4 15

1,943

2,410

37.6

30.2

-6.5

21.7

24.0

9.1

11.3

8.3

9.7

10.7

-241

-218

49

-70

-70

1,069

1,488

1,464

1,873

2,340

2004

2005

2006

2007E

Return Ratios (%) RoE

30.4

38.5

25.4

27.9

27.7

RoCE

39.9

53.0

34.0

36.3

37.1

Working Capital Ratios

PAT Change (%) M argin (%) Non-rec. (Exp.)/Income Reported PAT

BALANCE SHEET Y / E M arch Share Capital Reserves Networth Loans Deferred Liability Capital Employed

(Rs Million) 2008E

251

239

239

239

239

4,059

4,196

5,334

6,730

8,473

4,310

4,435

6,968

8,712

5,573

392

61

61

62

63

71

34

56

109

175

4,530

5,690

7,139

8,951

4,773

Debtor (Days) Asset Turnover (x)

Less: Accum. Depn. Net Fixed Assets Capital WIP Investments M isc Expenditure not w/off Currents Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liab. & Prov.

2,735

2,503

-1,460

-1,543

2,903

3,078

-1,987

-2,217

1,275

960

1,142

1,017

861

9

317

50

50

50

2,913

3,301

4,854

6,670

8,777

463 2,268

342 2,644

-1,761

3,003

274

205

137

2,796

3,018

3,305

Debt/Equity (x)

Y / E M arch OP/(Loss) before Tax

416

190

217

225

231

Interest Paid

-60

-21

-21

-36

-30

-656

-715

-652

-683

-937

747

926

330

159

88

1,843

2,257

2,659

Direct Taxes Paid

CF from Operations

(Inc)/Dec in FA

33

-77

-133

-100

-75

55

-388

-1,553

-1,816

-2,107

CF from Investments

88

- 1,686

- 1,916

-2,182

0

Issue of Shares (Inc)/Dec in Debt

784

711

719

724

745

Dividend Paid

4,178

934

976

1,021

389

477

596

Net Current Assets

114

-803

-873

-390

-630

Other Item CF from Fin. Activity

Inc/Dec of Cash Add: Beginning Balance

Net Assets

4,774

4,531

5,690

7,139

8,951

2,604

(Pur.)/Sale of Investments

256

381

2,041

Extraordinary Items

432

789

2008E

224

238

307

2007E

Depreciation and Amort.

252

485

2006

2,891

163

Provisions

2005

303

71

Other Liabilities

(Rs Million)

2004

207

1,871

2,561

0.0

574

381

2,368

0.0

305

1,674

3,821

0.0

Int./Div. Received

345

2,104

0.0

2,288

1,480

3,426

0.1

1,762

428

1,863

7 2.5

1,650

1,342

3,033

7 2.8

1,480

191

2,154

7 3.0

CASH FLOW STATEMENT

1,222

1,362

Account Payables

10 3.3

Leverage Ratio

(Inc)/Dec in WC

Gross Block

5 3.0

Closing Balance

-464

-8

-12

0

0

-1,153

-330

0

1

1

-276

-334

-343

-421

-526

66

66

-2,765

-1,328

-985

-67

-354

-459

-636

1,155

89

- 14

18

163

252

238

252

239

256

708 71

-308

71 1,226

276

E: M OSt Estimates

1 June 2006

4

Britannia Industries

N O T E S

1 June 2006

5

Britannia Industries

Rated - The Best Local Brokerage House in India by

For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah, Mihir Kothari Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: [email protected] This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Group/Directors ownership of the stock 3. Broking relationship with company covered 4. Investment Banking relationship with company covered

Britannia Industries No No No No

This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries.

1 June 2006

6