>BRITANNIA INDUSTRIES (MOTILAL OSWAL)

We analyzed the FY09 annual report of Britannia Industries. Following are the key takeaways:

■ Britannia cautious about growth; devises multi-pronged strategy: Biscuits category sales growth declined in 2HFY09 to 11.7% from 14.4% in 1HFY09. Britannia's management believes growth in the biscuits category will be more sedate in FY10 than FY09. Competition in the biscuits category is intensifying because of the resurgence of local players and the entry of new international players. Britannia has devised a multi-pronged strategy, including focus on two broad portfolios-delight & lifestyle and health & nutrition-which encompass key power brands, commercializing the growing trend of 'out-of-home' consumption, offering more value at affordable price points and introducing channel initiatives in distribution.

■ Britannia biscuits grow 7.9% by volume in FY09; volume growth to tend lower in FY10: Britannia's biscuit volume (tonnage) grew 7.9% in FY09 from 2.8% in FY08, rising 510bp. We believe reduced pack sizes impacted volume growth by 8-10%. Our estimates factor-in a 6.8% and 7.5% increase in biscuit volumes in FY10 and FY11 respectively. We believe a 10% increase in biscuit prices by regional players can increase growth of larger players.

■ Sugar prices on a boil; margins to contract 40bp in FY10; 100bp rebound likely in FY11: We estimate a 13% rise in raw-material costs in FY10 with sugar accounting for 75% of the cost increase (sugar prices are up 40% YoY). We expect an 80bp decline in gross margins and a 40bp decline in EBITDA margins. Margins are expected to rebound by 100bp in FY11 due to cost-control measures and as input prices turn benign.

■ Valuations attractive; maintain Buy: We believe an increase in payout ratio from 23.5% to 47% is a positive. The issue of bonus debentures will increase the interest burden and affect EPS till FY13. We are downgrading FY10 EPS estimates to Rs92.3 from Rs107.7 and for FY11 to Rs114.1 from Rs120.3. The stock trades at 18.2x FY10E and 14.7x FY11E excluding the value of bonus debentures. Maintain Buy.

To see full report: BRITANNIA INDUSTRIES