Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of Britannia Industries Limited (Britannia). The rating on the non-convertible debentures of Rs 720 crore has been withdrawn (see 'Annexure - Details of Rating Withdrawn' for details) on confirmation from the debenture trustee that these bonds have been fully redeemed. The rating withdrawal is in line with the policy of CRISIL Ratings.

 

The ratings continue to reflect the leading position of the company in the biscuits segment, strong operating efficiency and comfortable financial risk profile. These strengths are partially offset by susceptibility of profitability to intense competition and fluctuations in raw material prices.

 

Operating performance in fiscal 2024 will be supported by higher volumes as price hikes are expected to be reversed supported by moderating raw material prices, continued traction from new product launches and expansion in distribution network; thereby ensuring healthy revenue growth and sustenance of operating margin. In fiscal 2023, despite muted volume growths, sales grew ~15% to Rs 16,301 crore. Margin improved to 17.4% from 15.6% in fiscal 2022, supported by price hikes, internal cost efficiency programmes, growth in market share and focus on geographical expansion.

 

Financial risk profile should remain robust, aided by healthy net cash accrual and strong debt protection metrics. Despite paying dividend of Rs 1,351 crore in fiscal 2023, liquidity remained strong. Increase in long-term debt to Rs 1,552 crore as on March 31, 2023 from Rs. 707 crores a year ago, to fund the ongoing capital expenditure (capex) resulted in a gearing of 0.87 time against 1.01 times a year ago, healthy accretion to reserves improved networth to Rs 3,422 crore from Rs 2,430 crore in the previous fiscal. The company has a strong treasury with cash and investments of over Rs 2,000 crore as of May 2023, including inter-corporate deposits (ICDs) of Rs 710 crore. These ICDs are extended to The Bombay Burmah Trading Corporation Ltd (BBTCL, ultimate holding company of Britannia) and Bombay Dyeing & Manufacturing Company Ltd (Bombay Dyeing).

 

CRISIL Ratings notes the ongoing developments in the group companies of Britannia, Go Airlines Pvt Ltd (GAPL) and Bombay Dyeing, whose credit risk profiles have moderated considerably, with GAPL also filing for insolvency. Both GAPL and Bombay Dyeing also have sizeable debt obligation in fiscal 2024 and beyond. While Britannia has no significant direct exposure to GAPL, except receivables of Rs 7 lakhs pertaining to business transactions, it has extended ICDs of Rs 335 crore to Bombay Dyeing as on March 31, 2023. CRISIL Ratings does not envisage any increase in direct exposure of Britannia to these entities over the medium term to support their repayment, though the same will be a monitorable. CRISIL Ratings also believes the ICDs to Bombay Dyeing may remain for a considerable period, until cash flows from Bombay Dyeing’s ongoing real estate projects or asset monetisation gather pace. 

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Britannia and its subsidiaries given their operational and financial linkages.

 

Please refer Annexure - List of entities consolidated, which highlights entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Established market position in the domestic fast-moving consumer goods (FMCG) industry

Britannia is a leading player in the Indian biscuit industry, with a market share of over a third in value terms. Revenue has registered a compound annual growth rate of 10% over the five fiscals through March 2023. The company has a diversified portfolio of biscuits across all seven categories (glucose, Marie, cookies, crackers, cream, milk and health) under strong brands such as Good Day, Tiger, Marie, Nutrichoice and Milk Bikis. Market position is further supported by a wide distribution network in both rural and urban areas. Direct reach has grown substantially to 26.8 lakh outlets in fiscal 2023 from 7.3 lakh in fiscal 2014. The company also launched several new products recently, such as Milk Bikis Classic in Tamil Nadu and an orange-flavoured croissant. It has also added coconut water under its new brand, Come Alive. Britannia aims to build this brand by adding more healthy products under it.

 

Healthy operating efficiency:

The company has efficient supply chain management, regular cost engineering and a judicious mix of contract-own manufacturing model, thereby ensuring healthy capacity utilisation. This led to a healthy operating margin of 17.4% in fiscal 2023, strong return on capital employed of 50.5% and efficient working capital management over the past few fiscals. A judicious mix of outsourced and in-house facilities has limited dependence on third parties. However, in the last few years, Britannia has increased the proportion of its in-house manufacturing, which has improved proximity to consumption markets and reduced overheads, apart from ensuring product freshness and enhancing shelf life (because of the time saved in transportation). Despite rise in the price of key raw material, performance was steady due to price hikes, internal cost efficiency programmes, growth in the market share and focus on geographical expansion. Margin is likely to remain above 17%, led by better distribution reach, product launches and premiumisation.

 

Strong financial risk profile:

Gearing improved to 0.87 time as on March 31, 2023, from over 1 time earlier due to healthy cash generation, and despite total debt increasing to Rs 2,981 crore. Interest coverage ratio was healthy at over 16 times in fiscal 2023. Due to high dividend payout, net cash accrual is expected at only Rs 400-700 crore annually over the medium term, which will be used primarily (along with external debt) to fund capex plans of ~Rs 600 crore.

 

Britannia has exposure of Rs 710 crore (equivalent to a third of its current cash surplus) to group companies, of which ICDs worth Rs 375 crore are towards BBTCL and Rs 335 crore are towards Bombay Dyeing. CRISIL Ratings does not envisage any increase in direct exposure to these entities over the medium term, and this will remain a key monitorable.

 

Weaknesses:

Exposure to intense competition in the FMCG industry:

Intense competition has reduced the scope for FMCG players to pass on any hike in raw material prices to end users. Multiple price hikes that Britannia took in fiscal 2023 had to be reversed to maintain market share. Though the company has further strengthened its competitive position and pricing, competition will remain high with fresh product launches from players, especially in the premium segment.

 

Susceptibility of profitability to fluctuations in raw material prices:

Prices of key raw materials such as wheat, sugar, milk, and refined palm oil depend on geo-climatic conditions, international prices and domestic demand-supply situation. In the first-half of fiscal 2023, overall commodity inflation was high with year-on-year cumulative inflation of 32% for Britannia’s basket. Cumulative inflation reduced significantly in the second-half as prices of refined palm oil (-14%), laminates (-9%) and corrugated boxes (-16%) cooled. The management has also taken sufficient pricing actions in the form of absolute price hikes and grammage cuts to offset cost inflation. Continued focus on cost efficiency and price leadership will help the company mitigate the impact of volatility in raw material prices on operating margin. However, the ability to pass on the increased cost, while maintaining market share, is a key rating sensitivity factor.

Liquidity: Superior

Cash surplus was estimated at around Rs 2,000 crore as on May 31, 2023. Working capital limit of Rs 1,500 crore had average utilisation of 55-60% for the 12 months through March 2023. Capex spend is expected at Rs 600 crore over the medium term, while debt obligations were Rs 100 crore and Rs 800 crore in fiscals 2024 and 2025, respectively. These are expected to be met through a combination of debt and cash accrual as the likely high dividend payout will substantially moderate accrual. 

 

ESG (environmental, social and governance) profile

The ESG profile of Britannia supports its strong credit risk profile.

The FMCG sector has a moderate environmental and social impact, primarily driven by its raw material sourcing strategies, waste intensive process, and direct impact on the health and wellbeing of its customers.

 

Key ESG highlights:

• Britannia is a ‘plastic-waste neutral’ company, collecting and processing 100% plastic waste it creates across India. The company processed more than 35,000 tonne of plastic waste in fiscal 2022
• Britannia is increasing the share of renewable energy in the mix through PPAs (power purchase agreements) with renewable electricity providers, and by using biomass at select plants
• The CSR (corporate social responsibility) projects it undertakes are focused on promoting health, growth and development of children from lower socio-economic sections of the society. These projects are linked not just to the national agenda but also to the United Nations sustainable development goals
• Governance structure is characterised by 67% of the board comprising independent directors, and split in chairman and CEO positions. The company has made adequate financial disclosures

 

There is growing importance of ESG among investors and lenders. The continued commitment of the company to ESG principles will play a key role in enhancing stakeholder confidence.

Outlook: Stable

Britannia will maintain its established market position in the biscuit industry over the medium term, backed by strong brands and a wide distribution network. The company is also expected to sustain healthy operating profitability and robust financial risk profile, notwithstanding high dividend payout.

Rating Sensitivity Factors

Downward factors

• Substantial decline in operating margin impacting cash generation
• Large, debt-funded capital spend or acquisitions affecting debt metrics; for instance, gearing in excess of 1 time on a sustained basis
• Substantial drop in liquid surpluses to fund acquisitions, capex, or support to group companies; or higher-than-anticipated dividend payout or buyback

About the Company

Established in 1892, Britannia is one of the largest players in the Indian biscuit industry. Over the years, the company has expanded its offerings significantly by adding new products such as dairy items, cakes and rusk. It has expanded overseas by acquiring Strategic Foods International LLC in the United Arab Emirates and Al Sallan Food Industries Co SAOG in Oman. These two companies are regional players in the biscuit and cookies segment in the Middle East. The Mumbai-based Wadia group held more than 50% stake in Britannia as on March 31, 2022.

Key Financial Indicators (Consolidated)

	Unit	2023	2022
Revenue from operations	Rs.Cr.	16,301	14,136
Profit after tax (PAT)	Rs.Cr.	2316	1,516
PAT margin	%	14.2	10.7
Adjusted debt/adjusted networth	Times	0.87	1.01
Interest coverage (OPBDIT / interest cost)	Times	16.74	15.32

CRISIL Ratings adjusted

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with Outlook
NA	Working capital demand loan#	NA	NA	NA	1500	NA	CRISIL AAA/Stable
NA	Proposed working capital facility	NA	NA	NA	420	NA	CRISIL AAA/Stable
NA	Letter of Credit & Bank Guarantee	NA	NA	NA	80	NA	CRISIL AAA/Stable
NA	Commercial paper	NA	NA	7-365 days	1,279	Simple	CRISIL A1+
NA	Non-convertible debenture*	NA	NA	NA	301.48	Simple	CRISIL AAA/Stable
INE216A08027	Non-convertible debenture	03-Jun-21	5.5%	03-Jun-24	698.52	Simple	CRISIL AAA/Stable

#Interchangeable with bank guarantees, working capital demand loan, overdraft and/or cash credit facility

*Yet to be issued

 

Annexure - Details of Rating Withdrawn

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with Outlook
INE216A07052	Non-convertible debenture	28-Aug-19	8%	28-Aug-22	720	Simple	Withdrawn