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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 .

54% outsourced. 7 new lines built. all across India  Huge plant set up in Maharashtra. as of 2016  Since then. Manufacturing Overview  46% in house. specifically for Dairy goods  Total production capacity crossed 1m tons  Focus on shifting to in house manufacturing .

hydrogenated vegetable oil Raw Material from Suppliers Random sampling done when received from Suppliers. molding. Quality Vulnerable to defects/poor quality Checking Value adding processes: creaming.Process (Biscuits): Sugar. mixing. baking. Refined Wheat flour. Processing cooling Sent out to Britannia distribution centers after metal Distribution checking .

to lower transport costs  Focus on in-house manufacturing should also reduce costs  “Leveraged fixed costs” .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.

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. has double the direct reach of Parle at around 1. second only to Parle (5.Distribution: Overview  Reaches over 4.8m)  However.8 million outlets overall. “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 .

5 7.5 7.8 program for its premium brand 2010 2011 2012 2013 2014 2015 2016 2017 ‘Platina’.2 7 • Parle has launched massive advertising 6.5 • Similar to Industry average 7.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. advertising in the IPL etc.

etc  Lot of new product categories such as Nutri Choice. never known for innovation  Largely stuck to same brands for years: Marie. Rusk and Dairy category. plan on launching 50 new products. Cake biscotti. 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. Bourbon.Innovation & R&D  New R&D center established in Bangalore  Traditionally.  By end of this year. however also shows increase in competition in Industry . as efforts are underway to develop non-biscuit portfolio and convert to whole foods  Heavy R&D expenditure could indicate optimistic outlook of management. Good Day. etc. Tiger. Good Day Cookies.

etc. cost advantage. through its Brand power. However. • Has a strong distribution network. compared to competitors. distributors sell competitor products as well • No switching costs.Economic Moat Sources Network Switching Intangible Efficient Cost Effect Costs Assets Scale Advantage • Britannia primarily benefits from ’Intangibles’. Consumers who buy Britannia biscuits for years are unlikely to switch to competitors. .

A closer look at all 3 Financial Statements .

Expenditure Patterns . Profitability.Topline.

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 .

89 .1 13. TTM - Profitability 5YA 38.4 13.1 10.6 11.1 8.1% 37.8% 15.

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 .1 4.6 4 4000 2.Historical Data PAT MARGINS 12 9.6 PAT 10 9.5 8.4 4.6 10000 9000 8 8000 6.6 6 6000 4.1 5000 3.9 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.3 7000 5.7 2.

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 .Expenditure Pattern • Biggest costs are Raw Materials.

Degree of Operating Leverage Degree of Operating Leverage 6 5 4 3 2 1 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 .

. Indebtedness.Capital Allocation. Efficiency.

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. in terms of market demand • Returns are expected to improve again once all new • Could reflect heightened competition as well factories are operational . showing of 81.4 31.5 5000 17.9 24.8 20000 61.5 23.9 15000 40.9 10000 28.Capital Allocation Capital Employed 30000 81.6% rapid expansion • Fall due to huge increase in capital expenditure in • Could reflect optimistic outlook of management 16 and 17.6 25000 67.3 51.7 13. high • Has more than doubled last 3 years.

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 .5 70 60 2 50 1.Indebtedness Debt to Equity Ratio Dividend Payout Ratio 2.5 40 1 30 20 0.

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. almost all OCF was being converted to PAT .  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.

and Cake/Rusk to separate individual businesses. Big change in top level leadership (i.e Directors and Managers)  Start up culture. Consistent increase in net profits since change  Market Share has increased. and a solid history of hard-work and performance.Management  Varun Berry took over in 2014. Dairy. Divided Biscuits. improving margins. Fast growth annually in rural areas. strong management.  Emphasis on cost control.  Overall. . overtaken Parle to become the largest player  Focused on rapidly improving distribution. catching up with Parle. with no questions about Integrity.

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