Readers of this blog might have doubts as to why a site dedicated to corporate finance should now focus its thoughts on "religion"...Well I think this is the most opportune time when we need to have a sneak peek into our religious faiths, especially at a point in time when the basic fundamentals and the foundation of the majority community of this country (can we still call ourselves the majority..im not sure) is being put to a litmus test by the so called intelligentsia who consider it their patrimony to question anything associated with "hinduism". On top of the anti hindu pecking order is our grand old man MK who has asked the most ludicrous questions of this century "Which college did Lord Rama go and study engineering..does he have a degree certificate..Can the Sangh Parivar and other Hindu organisations show a copy of Lord rama's degree certificate".. Well lets now pay him back by flipping the same question at him. During 96-2001 (the previous tenure of the DMK government..most readers would be aware that in Tamilnadu its always an alternating game for power between the DMK and ADMK..we have no choice u see!!!), a lot of bridges, subways and flyovers were constructed at all inappropriate places in Chennai. Now wont i sound featherbrained if i ask MK "Thatha ..Thatha..Which college did u study engineering...Did u graduate at IIT Madras or Anna University as u have constructed so many unwanted flyovers within the city...Where did u gain all this engineering prowess??". Mankind has evolved at its own steady pace and each stage of evolution has had its own scientific and technological advancements at that given point in time. Therefore, when Lord Rama had existed he must have had his own group of architects and technocrats who had the requisite skills to construct Rama Sethu. Mere logical reasoning on how our temples all across the country would have been built ages ago with tremendous designs and eye catching splendor that cant even be replicated by the L&T engineers of today stands testimony enough to prove that Rama Sethu could have also been man made or to rather summate, build under the guidance and supervision of Lord Rama.
The interests of our religion are quite safe in the hands of the Lord in spite of the several attacks that are being made on it from both within and without. But as adherents to a particular religion, we must atleast perform the basic functions and practices that our faith entrusts and endows upon us. A religion can thrive only if it regulates the activities of its followers by channelising their free will into fruitful, productive activities. It is here that our scriptures have a major role to play. There is absolutely no need to find fault with our scriptures or seek to alter them. We keep searching for evidence on certain beliefs and customs and in the absence of such corroborating evidence we are only too happy to dismiss them as myths or embellishment of glorified faith. For eg: If a stranger standing by the road directs you, at ur request, to a house you are searching for, do u ask him for evidence or proof that he's right in his directions. Dont u place implicit reliance on him and proceed as directed by him. Its only when u reach the wrong house that you start finding fault with that person. Similarly we should have faith in the proclamations of our ancient sages (the guru parampara) and firmly believe that their dictates are leading us in the right direction. In today's materialistic world, none of us(me included) follow any of the rigours prescribed by the vedas and other scriptures. So speaking for myself, atleast i can definitely say that i dont have any right to question or blame the scriptures for the writings enshrined therein unless and until i reach a point when i feel misled or wronged having followed the vedas and its teachings. Guess thats never gonna happen!!
About Me
- dharma
- I believe in "Baptism by fire" that will transform me from an average joe to a true blue bee's knees in corporate finance and investment banking
Sunday, September 30, 2007
Wednesday, September 26, 2007
BRITANNIA RESEARCH REPORT
BRITANNIA INDUSTRIES: A FAST FOOTED FMCG: Healthy investment to better your wealth….
Britannia Industries (Britannia) is one of the leading producers of biscuits and other bakery products in India. The company’s major brands in biscuits include Tiger, Good Day, Mari Gold, 50-50, Treat, Milk Bikis and Nutrichoice Sugar Out. Each of these power brands are estimated to be valued at around 250-300 crore constituting around 92% of the topline of the company for the year ended FY 07. The company is the market leader in the biscuits segment with a market share of 40% followed by the Parle group at 33% in value terms. Surya Food Agro, ITC and the vast league of unorganized players make up the rest of the market.
Group Ownership Pattern:France’s leading cookies and dairy products firm “Group Danone” and India’s Wadia group (with interests in textiles, aviation and agro processing) control a majority stake in Britannia Ltd. through a holding company Associated Biscuits International Ltd. (ABI) which owns 51% stake in Britannia. Group Danone and the Wadia’s hold equal stakes in ABI. Relations between the two stakeholders have turned sour over the recent months, the details of which are discussed separately in this article. The way this ownership tussle pans out can have a telling impact on the valuations of Britannia Ltd and assumes paramount significance to investors and traders alike. LIC, HDFC, and HSBC mutual funds have also been accumulating positions in Britannia over the last few quarters.
Business Profile:
The primary business segment of the company is bakery, which consists of Biscuits, cakes, bread and rusk. Overall sales of the company has grown at a brisk pace of 20% and above in the last one year due to greater buoyancy in the biscuit market reflected from growing consumerism in India and increased market penetration efforts by the company into rural areas. The company has identified each brand as a profit center and the role of these brands are clearly delineated. The company has also been working on new variants, product innovations and in line with its strategy a slew of new launches have been made to widen the product profile in a highly competitive business environment. The company has been rated the No.1 most trusted food brand in India as per a recent survey conducted across all metros (Source: AC Nielsen ORG – Marg) and has a tremendous brand recall among the general public at large. The company is the market leader in all biscuit categories except the glucose segment where Parle has its nose slightly ahead. All the categories and brands of Britannia are growing at double-digit rate. The key to unlock business potential and opportunities in this industry lies in keeping a tab on the changing consumer tastes and preferences and addressing multiple taste preferences of various sections of consumers. Food business being a fickle category, adequate branding and advertising for all its products, pioneering efforts to migrate consumption patterns from unbranded to branded products, addressing nutritional, health and wellness issues and establishing an emotional connect with the customer is of utmost necessity to stay ahead of competition and take a larger share of the consumer’s wallet.
Business Risk Profile:
Britannia until FY 2006 can be best described as a sleeping giant of the packaged food segment. The company had lost its sales growth momentum from FY 02-06 and its operating margins had almost halved during this period due to the unprecedented rise in input commodity prices, under investment in core brands and weak product innovation. The company did not embark on major capacity expansion plans during this period inspite of robust internal accruals. The company had to take on competition from aggressive players like ITC (Sunfeast) and Surya Agro (Priya Gold), which resulted in pricing pressures across product categories, and led to substantial erosion in its market share coupled with a downward spiral in it’s profitability margins. The company was also affected by frequent changes in the top management and high attrition levels among the top level executives leading to a lack of clarity on policy matters. But ever since 2005 when Ms.Vinita Bali took over the reins, the company has been clawing back to retain its pre-eminent position in the market through a spate of multiple launches under the six umbrella brands, various brand restructuring initiatives and improved sales promotion and distribution efforts in rural areas.
The company has launched new packaging formats with reduced weights at attractive price points. The company has also effected marginal price hikes in certain power brands which have shown robust sales growth on a sequential basis QoQ (quarter on quarter). The government in its recent budget has also reduced the excise duty on biscuits from 8% to Nil on products where the MRP (Maximum retail price) is less than Rs.50 per kg. The company has also commissioned its manufacturing plants at Uttranchal towards the end of 2005 and this being a tax free facility will definitely have a positive impact on the margins of the entity over the medium to long term horizon. However a rationalization of the VAT structure for the biscuits industry may be required as the sector pays a higher rate of 12.5% compared to other food segments. The cumulative tax incidence for the industry including the import duties on wheat and fats works out to 25% and a decrease in VAT rates can go a long way in reducing prices and increasing consumption trends among the rural masses and low income groups of our country.
During the current financial year, the company has embarked on an Rs.100 crore expansion plan to develop new products for the rural markets where the penetration levels are pretty low. This should trigger the earnings growth rate at a faster clip going forward. Capex plans have been steady over the last few years.
Increased and intense competition both at the national and regional level has stimulated the biscuits market growth. Most of the organized industry players are bunching up their capacities following it up with an aggressive pricing and sales promotion policy thereby depressing the industry margins overall. Managing profitable growth in such a scenario will be contingent upon continuous brand investment, improving supply chain efficiencies and effective cost management.
Financial Risk profile:
The company has a fairly strong financial profile characterized by its leadership in the biscuits business, substantially free cash flows, high liquidity cushion and comfortable debt protection ratios. Sales growth and profit growth has witnessed lumpiness over a five-year period (FY 02-07) with the topline growing at a moderate CAGR of 11.3% and bottomline at a meagre 3%. But the financial metrics have shown a remarkable improvement since FY 06-07 as a result of the restructuring of the business model with sales showing a robust increment of 28% YoY and margins indicating a recovery from the fourth quarter. Margins have sustained the rising trend well into the June Quarter (Q1’08).
Over the years, the major dampener for the financials of the company has been high input costs of edible oil, sugar, Wheat flour and baking fuel. However the fall in headline inflation in primary products and the global meltdown in sugar prices due to supply glut augurs well for the company. The recent rise in crude oil prices is a major concern that can have a spill over effect on the price of baking fuels and logistics costs. The prices of these input commodities are forecasted to be stable and firm for the rest of the year. The company also has also resorted to hedging in the commodities market to mitigate the impact of spikes in input prices to protect its margins.
Export revenues for the company form a very minuscule portion of the total turnover at less than 10% for FY07 albeit growing at more than 50% in the last couple of years. The interest expressed by Kraft foods Inc of the US to pick up Group Danone’s stake in the company assumes high significance. If the deal materializes, the company can ramp up its exports and set foot into the global arena leveraging on Kraft foods multiple distribution networks all across UK and US.
Britannia has huge surplus cash reserves that are currently invested in Mutual funds and marketable securities and can be drawn upon for pursuing inorganic growth opportunities. The company has also been buying back shares from open market until 2005 using its idle cash and has been doling out liberal dividends at 150% over the last three years. However the dividend yield has much scope to improve going forward. The balance sheet of the company is lowly geared with a modest short-term debt and zero long-term debt.
Dispute with Group Danone:
As discussed above, Group Danone and Wadia’s together hold controlling stake in Britannia through a holding company Associated Biscuit International (ABI). The dispute between the two stakeholders arose over the alleged misuse of “Tiger” Brand By Danone in several countries. Group Danone has registered the tiger brand as its own brand in several countries without obtaining the consent of the Britannia board. The standoff has now resulted in Britannia initiating legal action against Group Danone and demanding compensation to the tune of 15 crore. In certain circles, this act is also being seen as a form of takeover defence to prevent Danone from selling its stake in Britannia to Kraft Foods albeit the Wadia’s have the first right of refusal on Danone’s stake sale in Britannia.
Share Performance: The stalemate between the two stakeholders over solving their differences has been a major constraint on the growth prospects of the company and is also one of the main reasons for the underperformance of the scrip on the bourses. The scrip has moved up by 22% ever since the market crash witnessed in May –June 06 as compared to the BSE sensex up move by more than 80%. The scrip has clearly been a laggard on the bourses despite strong fundamentals
Recent developments and implications for Britannia
The management of Group Danone has made a policy decision to exit its global biscuit and cereals business to focus on its core business of dairy products and beverages. Group Danone is in exclusive talks with American Kraft Foods Inc, the worlds largest cookie maker, to sell its global biscuits business though the deal doesn’t include the company’s stake in Britannia. But the management of the company has recently made its intentions clear to exit Britannia too and is waiting for the no objection certificate from Wadias for selling its stake to Kraft foods Inc. Danone wants to set up its dairy products and beverages business in India separately and unlocking its investment in Britannia will provide the necessary funds for setting up its shop in India.
This complex situation throws up interesting scenarios for traders and Investors. Lets have an insight into the various possible scenarios:
Scenario 1:
Danone selling its stake to Wadias:
This event, if it materializes will prove to be favourable to the Wadias who are negotiating with Danone for a possible acquisition of their 25.5% stake at a discount to the current market valuations. This will give the Wadias a majority control over Britannia.
Scenario 2:
Danone and Wadia both selling their stake in Britannai to Kraft Foods Inc:
This scenario though a possibility in the long term seems highly unlikely at the moment. American Kraft Foods Inc has expressed its interest to pick up Danone’s stake in Britannia. The advantage to Kraft Foods Inc will lie in tapping the huge consumption market and reaping the benefits of the country’s diverse demographic profile. Wadias have however remained tight lipped on selling their stake to Kraft foods Inc. They would not prefer to exit a cash rich company and lose out on the long-term growth story that this sector offers.
Scenario 3:
Three-way agreement between Kraft foods, Danone and Britannia
A three-way workable agreement between the Wadias, Danone and Kraft may not only mean an end to litigation but could also add synergy and firepower to Britannia’s portfolio of brands. Kraft’s arsenal boasts of brands such as Toblerone (chocolates), Tang (fresh drink concentrate), Fresh (beverage) and Oreo, the world’s largest selling cookie brand. For Danone, such an agreement along with annulment of the Wadia joint venture could mean freedom to enter the dairy and beverages business in the country independently, which it is keen on. This scenario seems a highly likely possibility in the next few months, as Danone does not prefer to sell its stake to the Wadias at a discount to the fair value for Britannia.
Valuation:
Now coming to the most important aspect that has high implications for shareholders and investors - At what price will Danone possibly exit Britannia?As discussed above already, Group Danone is in exclusive talks with Kraft Foods Inc to sell its global biscuits business (excluding its stake in Britannia). The global biscuits business of Danone has generated sales of 2.2 Billion euros last year and the business has been valued by Kraft foods at 5.3 billion euros. The offer price is almost 2.4 times the annual sales generated last year. The valuation has been arrived at taking into account the fact that the European markets where Group Danone has a major presence are growing at less than 3%. With the Indian biscuits market registering double-digit growth rates and with Britannia outperforming the market by growing at 28% last year, the valuation multiple should be much higher than 2.4 times. Even on a conservative estimate applying the proxy valuation to Britannia, the valuation per share comes to Rs.2200.
But since the Indian market has high growth rates, Danone will demand a much higher valuation than the enterprise value arrived above. Britannia’s high Cash EPS and cash reserves also pushes up its valuation parameters. In all the three scenarios discussed above there has to be a compulsory open offer by the purchaser (whether Kraft foods or Wadia group) at a much higher rate than the price paid for acquisition of Danone’s stake as per SEBI guidelines. This is to protect the interest of minority shareholders in Britannia, as it would help them unlock their investments at fair valuations.
Whichever way the control flows, Britannia would do well to have a single promoter or two friendly promoters who can concentrate their efforts in growing the business and capitalizing on the opportunities in the food processing industry rather than engage in mud slinging matches and long drawn legal battles with one another to the detriment of the hapless investor.
Britannia is expected to post an EPS of 72 for the year ended FY 08. The share price is currently trading at 1470 which discounts its forward EPS by a PE of 20 times. The share price looks attractive at current levels given the fact that most FMCG players are trading at much higher valuations and Britannia is on a fast track growth trajectory. Also adding pepper to the undervalued story is the possibility of the changes in ownership and shareholding pattern that can throw up many positive surprises in the near term.
Last but not the least, as the old adage goes “One must buy when everyone is selling and sell when everyone is buying.” Biscuits are a small part of people’s lives and Britannia is one such brand that has found its way into every Indian household over the past few decades. So what’s stopping u from allocating a small portion for this scrip in your portfolio? Take a calculated bet on this stock at current levels and wait for these interesting developments to pan out in a positive manner.
Safe Harbor Statement: This report should not be construed as a recommendation to invest in the scrip/company discussed above. Investments are subject to market risk. Informed judgment and discretion of the individual investor is of utmost importance while taking positions in any stock.
Britannia Industries (Britannia) is one of the leading producers of biscuits and other bakery products in India. The company’s major brands in biscuits include Tiger, Good Day, Mari Gold, 50-50, Treat, Milk Bikis and Nutrichoice Sugar Out. Each of these power brands are estimated to be valued at around 250-300 crore constituting around 92% of the topline of the company for the year ended FY 07. The company is the market leader in the biscuits segment with a market share of 40% followed by the Parle group at 33% in value terms. Surya Food Agro, ITC and the vast league of unorganized players make up the rest of the market.
Group Ownership Pattern:France’s leading cookies and dairy products firm “Group Danone” and India’s Wadia group (with interests in textiles, aviation and agro processing) control a majority stake in Britannia Ltd. through a holding company Associated Biscuits International Ltd. (ABI) which owns 51% stake in Britannia. Group Danone and the Wadia’s hold equal stakes in ABI. Relations between the two stakeholders have turned sour over the recent months, the details of which are discussed separately in this article. The way this ownership tussle pans out can have a telling impact on the valuations of Britannia Ltd and assumes paramount significance to investors and traders alike. LIC, HDFC, and HSBC mutual funds have also been accumulating positions in Britannia over the last few quarters.
Business Profile:
The primary business segment of the company is bakery, which consists of Biscuits, cakes, bread and rusk. Overall sales of the company has grown at a brisk pace of 20% and above in the last one year due to greater buoyancy in the biscuit market reflected from growing consumerism in India and increased market penetration efforts by the company into rural areas. The company has identified each brand as a profit center and the role of these brands are clearly delineated. The company has also been working on new variants, product innovations and in line with its strategy a slew of new launches have been made to widen the product profile in a highly competitive business environment. The company has been rated the No.1 most trusted food brand in India as per a recent survey conducted across all metros (Source: AC Nielsen ORG – Marg) and has a tremendous brand recall among the general public at large. The company is the market leader in all biscuit categories except the glucose segment where Parle has its nose slightly ahead. All the categories and brands of Britannia are growing at double-digit rate. The key to unlock business potential and opportunities in this industry lies in keeping a tab on the changing consumer tastes and preferences and addressing multiple taste preferences of various sections of consumers. Food business being a fickle category, adequate branding and advertising for all its products, pioneering efforts to migrate consumption patterns from unbranded to branded products, addressing nutritional, health and wellness issues and establishing an emotional connect with the customer is of utmost necessity to stay ahead of competition and take a larger share of the consumer’s wallet.
Business Risk Profile:
Britannia until FY 2006 can be best described as a sleeping giant of the packaged food segment. The company had lost its sales growth momentum from FY 02-06 and its operating margins had almost halved during this period due to the unprecedented rise in input commodity prices, under investment in core brands and weak product innovation. The company did not embark on major capacity expansion plans during this period inspite of robust internal accruals. The company had to take on competition from aggressive players like ITC (Sunfeast) and Surya Agro (Priya Gold), which resulted in pricing pressures across product categories, and led to substantial erosion in its market share coupled with a downward spiral in it’s profitability margins. The company was also affected by frequent changes in the top management and high attrition levels among the top level executives leading to a lack of clarity on policy matters. But ever since 2005 when Ms.Vinita Bali took over the reins, the company has been clawing back to retain its pre-eminent position in the market through a spate of multiple launches under the six umbrella brands, various brand restructuring initiatives and improved sales promotion and distribution efforts in rural areas.
The company has launched new packaging formats with reduced weights at attractive price points. The company has also effected marginal price hikes in certain power brands which have shown robust sales growth on a sequential basis QoQ (quarter on quarter). The government in its recent budget has also reduced the excise duty on biscuits from 8% to Nil on products where the MRP (Maximum retail price) is less than Rs.50 per kg. The company has also commissioned its manufacturing plants at Uttranchal towards the end of 2005 and this being a tax free facility will definitely have a positive impact on the margins of the entity over the medium to long term horizon. However a rationalization of the VAT structure for the biscuits industry may be required as the sector pays a higher rate of 12.5% compared to other food segments. The cumulative tax incidence for the industry including the import duties on wheat and fats works out to 25% and a decrease in VAT rates can go a long way in reducing prices and increasing consumption trends among the rural masses and low income groups of our country.
During the current financial year, the company has embarked on an Rs.100 crore expansion plan to develop new products for the rural markets where the penetration levels are pretty low. This should trigger the earnings growth rate at a faster clip going forward. Capex plans have been steady over the last few years.
Increased and intense competition both at the national and regional level has stimulated the biscuits market growth. Most of the organized industry players are bunching up their capacities following it up with an aggressive pricing and sales promotion policy thereby depressing the industry margins overall. Managing profitable growth in such a scenario will be contingent upon continuous brand investment, improving supply chain efficiencies and effective cost management.
Financial Risk profile:
The company has a fairly strong financial profile characterized by its leadership in the biscuits business, substantially free cash flows, high liquidity cushion and comfortable debt protection ratios. Sales growth and profit growth has witnessed lumpiness over a five-year period (FY 02-07) with the topline growing at a moderate CAGR of 11.3% and bottomline at a meagre 3%. But the financial metrics have shown a remarkable improvement since FY 06-07 as a result of the restructuring of the business model with sales showing a robust increment of 28% YoY and margins indicating a recovery from the fourth quarter. Margins have sustained the rising trend well into the June Quarter (Q1’08).
Over the years, the major dampener for the financials of the company has been high input costs of edible oil, sugar, Wheat flour and baking fuel. However the fall in headline inflation in primary products and the global meltdown in sugar prices due to supply glut augurs well for the company. The recent rise in crude oil prices is a major concern that can have a spill over effect on the price of baking fuels and logistics costs. The prices of these input commodities are forecasted to be stable and firm for the rest of the year. The company also has also resorted to hedging in the commodities market to mitigate the impact of spikes in input prices to protect its margins.
Export revenues for the company form a very minuscule portion of the total turnover at less than 10% for FY07 albeit growing at more than 50% in the last couple of years. The interest expressed by Kraft foods Inc of the US to pick up Group Danone’s stake in the company assumes high significance. If the deal materializes, the company can ramp up its exports and set foot into the global arena leveraging on Kraft foods multiple distribution networks all across UK and US.
Britannia has huge surplus cash reserves that are currently invested in Mutual funds and marketable securities and can be drawn upon for pursuing inorganic growth opportunities. The company has also been buying back shares from open market until 2005 using its idle cash and has been doling out liberal dividends at 150% over the last three years. However the dividend yield has much scope to improve going forward. The balance sheet of the company is lowly geared with a modest short-term debt and zero long-term debt.
Dispute with Group Danone:
As discussed above, Group Danone and Wadia’s together hold controlling stake in Britannia through a holding company Associated Biscuit International (ABI). The dispute between the two stakeholders arose over the alleged misuse of “Tiger” Brand By Danone in several countries. Group Danone has registered the tiger brand as its own brand in several countries without obtaining the consent of the Britannia board. The standoff has now resulted in Britannia initiating legal action against Group Danone and demanding compensation to the tune of 15 crore. In certain circles, this act is also being seen as a form of takeover defence to prevent Danone from selling its stake in Britannia to Kraft Foods albeit the Wadia’s have the first right of refusal on Danone’s stake sale in Britannia.
Share Performance: The stalemate between the two stakeholders over solving their differences has been a major constraint on the growth prospects of the company and is also one of the main reasons for the underperformance of the scrip on the bourses. The scrip has moved up by 22% ever since the market crash witnessed in May –June 06 as compared to the BSE sensex up move by more than 80%. The scrip has clearly been a laggard on the bourses despite strong fundamentals
Recent developments and implications for Britannia
The management of Group Danone has made a policy decision to exit its global biscuit and cereals business to focus on its core business of dairy products and beverages. Group Danone is in exclusive talks with American Kraft Foods Inc, the worlds largest cookie maker, to sell its global biscuits business though the deal doesn’t include the company’s stake in Britannia. But the management of the company has recently made its intentions clear to exit Britannia too and is waiting for the no objection certificate from Wadias for selling its stake to Kraft foods Inc. Danone wants to set up its dairy products and beverages business in India separately and unlocking its investment in Britannia will provide the necessary funds for setting up its shop in India.
This complex situation throws up interesting scenarios for traders and Investors. Lets have an insight into the various possible scenarios:
Scenario 1:
Danone selling its stake to Wadias:
This event, if it materializes will prove to be favourable to the Wadias who are negotiating with Danone for a possible acquisition of their 25.5% stake at a discount to the current market valuations. This will give the Wadias a majority control over Britannia.
Scenario 2:
Danone and Wadia both selling their stake in Britannai to Kraft Foods Inc:
This scenario though a possibility in the long term seems highly unlikely at the moment. American Kraft Foods Inc has expressed its interest to pick up Danone’s stake in Britannia. The advantage to Kraft Foods Inc will lie in tapping the huge consumption market and reaping the benefits of the country’s diverse demographic profile. Wadias have however remained tight lipped on selling their stake to Kraft foods Inc. They would not prefer to exit a cash rich company and lose out on the long-term growth story that this sector offers.
Scenario 3:
Three-way agreement between Kraft foods, Danone and Britannia
A three-way workable agreement between the Wadias, Danone and Kraft may not only mean an end to litigation but could also add synergy and firepower to Britannia’s portfolio of brands. Kraft’s arsenal boasts of brands such as Toblerone (chocolates), Tang (fresh drink concentrate), Fresh (beverage) and Oreo, the world’s largest selling cookie brand. For Danone, such an agreement along with annulment of the Wadia joint venture could mean freedom to enter the dairy and beverages business in the country independently, which it is keen on. This scenario seems a highly likely possibility in the next few months, as Danone does not prefer to sell its stake to the Wadias at a discount to the fair value for Britannia.
Valuation:
Now coming to the most important aspect that has high implications for shareholders and investors - At what price will Danone possibly exit Britannia?As discussed above already, Group Danone is in exclusive talks with Kraft Foods Inc to sell its global biscuits business (excluding its stake in Britannia). The global biscuits business of Danone has generated sales of 2.2 Billion euros last year and the business has been valued by Kraft foods at 5.3 billion euros. The offer price is almost 2.4 times the annual sales generated last year. The valuation has been arrived at taking into account the fact that the European markets where Group Danone has a major presence are growing at less than 3%. With the Indian biscuits market registering double-digit growth rates and with Britannia outperforming the market by growing at 28% last year, the valuation multiple should be much higher than 2.4 times. Even on a conservative estimate applying the proxy valuation to Britannia, the valuation per share comes to Rs.2200.
But since the Indian market has high growth rates, Danone will demand a much higher valuation than the enterprise value arrived above. Britannia’s high Cash EPS and cash reserves also pushes up its valuation parameters. In all the three scenarios discussed above there has to be a compulsory open offer by the purchaser (whether Kraft foods or Wadia group) at a much higher rate than the price paid for acquisition of Danone’s stake as per SEBI guidelines. This is to protect the interest of minority shareholders in Britannia, as it would help them unlock their investments at fair valuations.
Whichever way the control flows, Britannia would do well to have a single promoter or two friendly promoters who can concentrate their efforts in growing the business and capitalizing on the opportunities in the food processing industry rather than engage in mud slinging matches and long drawn legal battles with one another to the detriment of the hapless investor.
Britannia is expected to post an EPS of 72 for the year ended FY 08. The share price is currently trading at 1470 which discounts its forward EPS by a PE of 20 times. The share price looks attractive at current levels given the fact that most FMCG players are trading at much higher valuations and Britannia is on a fast track growth trajectory. Also adding pepper to the undervalued story is the possibility of the changes in ownership and shareholding pattern that can throw up many positive surprises in the near term.
Last but not the least, as the old adage goes “One must buy when everyone is selling and sell when everyone is buying.” Biscuits are a small part of people’s lives and Britannia is one such brand that has found its way into every Indian household over the past few decades. So what’s stopping u from allocating a small portion for this scrip in your portfolio? Take a calculated bet on this stock at current levels and wait for these interesting developments to pan out in a positive manner.
Safe Harbor Statement: This report should not be construed as a recommendation to invest in the scrip/company discussed above. Investments are subject to market risk. Informed judgment and discretion of the individual investor is of utmost importance while taking positions in any stock.
Wednesday, September 05, 2007
Is Education a service or an industry
Education sector should be declared an “Industry” and should be opened up to attract venture capital funding with the government providing the right sops and benefits. At the current rate of budgetary allocations being made by the government which can best be termed a “pittance” the country will never be able to make the grade of a developed nation. Nobody in India bothers about the utilization of funds collected in the form of “education cess” by the government. There has been no transparency or disclosure as to how the funds have been utilized for providing higher education. Last year alone as per the budgetary documents, funds to the tune of Rs.8000 crore have been collected as “higher and secondary” education cess. Only the finance minister can answer the question as to what has been done with the corpus accumulated so far to improve the quality of education within the country.
With India already facing a talent crunch with more and more graduates produced by the current system being increasingly found unemployable in the IT &ITES sector, the time has arisen to conduct a reality check. We face the risk of a downturn in the outsourcing space as no amount of tub-thumping or projecting our country as a low cost destination will help if the quality of work rendered takes a backseat. China and South East Asian economies are not far behind to replace us in the services industry, which has contributed to 67% of the GDP growth and has been the backbone of our economy in recent times.
The reason why the skill levels of graduates churned out by our education system are below par is due to of the lack of adequate investment in infrastructure by our educational institutions. Though the private institutions have been doing their bit to ramp up their infrastructure by creating a huge corpus of funds supported by high fee structures and capitation fees, the government has been subsidizing the cost of education with a service motto and is under a social obligation to do so. But the flipside of this policy is that most government colleges have dilapidated infrastructure and poor faculty due to lack of adequate funding support.
The solution to this conundrum lies in the government continuing to support primary education in the country through subsidies and low fee structures whilst opening up higher education to private players and venture capitalists who shall all the more be eager and naturally disposed to provide adequate funding to these institutions given the demographic dividend that our country has in store. The government can decide on policy matters and frame the necessary regulations in this regard. For the higher portals of learning like IIT’s, IIM’s and various government supported institutions like Anna University, they must be given a free hand to approach the capital markets for funding support. Given the tremendous goodwill and popularity enjoyed by these institutions, they would no longer need to depend on the government for annual grants. Already a number of educational institutions have been getting themselves graded by rating agencies under “Maritime Grading” policy of the government. This grading which acts a quality certification for the institution can be an added advantage to secure access to funds from various investors both within the country and abroad.
Moves like these can unlock significant capital for the government that can be more gainfully employed to strengthen elementary education within the country and bring more tiny tots under the wings of education. The government must also speedup the implementation of technology driven education, infrastructure support and teachers training programs across all primary and secondary schools with the help of
educational software companies like Educomp Solutions and Everonn systems.
To sum up, education is the most potent force for radical thinking and social change and must be made more effective using better infrastructure and technology. Vision 2020 may not seem a distant dream if the government carries out educational reforms in a phased manner.
With India already facing a talent crunch with more and more graduates produced by the current system being increasingly found unemployable in the IT &ITES sector, the time has arisen to conduct a reality check. We face the risk of a downturn in the outsourcing space as no amount of tub-thumping or projecting our country as a low cost destination will help if the quality of work rendered takes a backseat. China and South East Asian economies are not far behind to replace us in the services industry, which has contributed to 67% of the GDP growth and has been the backbone of our economy in recent times.
The reason why the skill levels of graduates churned out by our education system are below par is due to of the lack of adequate investment in infrastructure by our educational institutions. Though the private institutions have been doing their bit to ramp up their infrastructure by creating a huge corpus of funds supported by high fee structures and capitation fees, the government has been subsidizing the cost of education with a service motto and is under a social obligation to do so. But the flipside of this policy is that most government colleges have dilapidated infrastructure and poor faculty due to lack of adequate funding support.
The solution to this conundrum lies in the government continuing to support primary education in the country through subsidies and low fee structures whilst opening up higher education to private players and venture capitalists who shall all the more be eager and naturally disposed to provide adequate funding to these institutions given the demographic dividend that our country has in store. The government can decide on policy matters and frame the necessary regulations in this regard. For the higher portals of learning like IIT’s, IIM’s and various government supported institutions like Anna University, they must be given a free hand to approach the capital markets for funding support. Given the tremendous goodwill and popularity enjoyed by these institutions, they would no longer need to depend on the government for annual grants. Already a number of educational institutions have been getting themselves graded by rating agencies under “Maritime Grading” policy of the government. This grading which acts a quality certification for the institution can be an added advantage to secure access to funds from various investors both within the country and abroad.
Moves like these can unlock significant capital for the government that can be more gainfully employed to strengthen elementary education within the country and bring more tiny tots under the wings of education. The government must also speedup the implementation of technology driven education, infrastructure support and teachers training programs across all primary and secondary schools with the help of
educational software companies like Educomp Solutions and Everonn systems.
To sum up, education is the most potent force for radical thinking and social change and must be made more effective using better infrastructure and technology. Vision 2020 may not seem a distant dream if the government carries out educational reforms in a phased manner.
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