britannia industries brit.ns brit in -...

Rating Starts at Buy

Target price Starts at INR 2560

Closing price 21 April 2015 INR 2070

Potential upside +23.7%

Anchor themes Britannia is the market leader in the biscuits segment in India. Management's strategy of growing the company's presence in the premium segment and strong control over costs should translate into 32% EPS CAGR over FY14-17F. In our opinion, Britannia is one of the best 'self help' stories in India's consumer sector.

Nomura vs consensus Our FY17F EPS is 4.3% ahead of consensus.

Research analysts India Consumer Related

Manish Jain - NFASL [email protected] +91 22 4037 4186

Anup Sudhendranath - NFASL [email protected] +91 22 4037 5406

Key company data: See page 2 for company data and detailed price/index chart

Britannia Industries BRIT.NS BRIT IN

EQUITY: CONSUMER RELATED

Plenty of bite left Initiate at Buy with 24% implied upside: solid top line, rising margins to lead to 32% EPS CAGR Action: Strong top-line growth outlook with TP of INR2,560 We look for growth to revive within the FMCG sector over 2016F, led by improving GDP. The biscuits segment should be an early beneficiary of this revival as urban discretionary spends are already rebounding after a challenging 2014. Britannia is the domestic market leader in the segment with ~35% share (source: Euromonitor) and has managed to outperform the category growth rate of 12% during the slowdown in 2014. We estimate Britannia to deliver a 16% revenue CAGR and 280bps rise in EBITDA margins, leading to 32% EPS CAGR over FY14-17F. We initiate coverage at Buy with a TP of INR2,560, implying 24% potential upside.

Catalysts: Premiumisation of portfolio and cost cuts to be key catalysts; strong FCF generation to translate into higher dividend payout The transition of the company’s portfolio is likely to continue from plain biscuits into premium cookies over the next three to five years. This, along with the improvement in gross margins, should continue to be a key revenue growth driver. Management is also very focused on cost cutting initiatives, which are likely to continue to boost EBITDA margins. With a net cash balance sheet and strong FCF generation over the next three years, Britannia should see further room for increased dividend payout or value-accretive acquisitions. Valuation: The valuation discount to the sector average seems unwarranted as earnings growth is towards the top-end Britannia trades at 28.3x FY17F (EPS: INR73.2) vs. the sector average of 32x and is likely to deliver higher-than-sector average growth over the next three years. We also believe that EBITDA margins will rise to the FMCG sector average of mid-teens over the medium term (five to seven years), implying the higher-than-sector average net income growth will continue over the medium term and support its current high valuations over the long term. We initiate at Buy with a TP of INR2,560, implying 24% potential upside.

Year-end 31 Mar FY14

FY15F

FY16F

FY17F Currency (INR) Actual Old New Old New Old New

Revenue (mn) 69,127 N/A 79,496 N/A 92,613 N/A 109,283

Reported net profit (mn) 3,959 N/A 6,903 N/A 6,860 N/A 8,776

Normalised net profit (mn) 3,837 N/A 5,304 N/A 6,860 N/A 8,776

FD normalised EPS 32.12 N/A 44.36 N/A 57.19 N/A 73.16

FD norm. EPS growth (%) 54.1 N/A 38.1 N/A 28.9 N/A 27.9

FD normalised P/E (x) 64.4 N/A 46.6 N/A 36.2 N/A 28.3

EV/EBITDA (x) 39.6 N/A 30.2 N/A 23.6 N/A 18.6

Price/book (x) 31.3 N/A 23.4 N/A 17.7 N/A 13.5

Dividend yield (%) 0.7 N/A 1.1 N/A 1.4 N/A 1.8

ROE (%) 58.9 N/A 74.5 N/A 55.7 N/A 54.1

Net debt/equity (%) 4.9 N/A net cash N/A net cash N/A net cash Source: Company data, Nomura estimates

Global Markets Research 23 April 2015

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Britannia Industries 23 April 2015

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Key data on Britannia Industries Relative performance chart

Source: Thomson Reuters, Nomura research Notes:

Performance (%) 1M 3M 12M

Absolute (INR) -3.0 8.1 131.7 M cap (USDmn) 3,952.0 Absolute (USD) -3.6 6.0 122.9 Free float (%) 49.3 Rel to MSCI India -1.8 6.4 106.8 3-mth ADT (USDmn) 7.3 Income statement (INRmn) Year-end 31 Mar FY13 FY14 FY15F FY16F FY17F Revenue 61,854 69,127 79,496 92,613 109,283 Cost of goods sold -38,614 -41,710 -47,449 -54,573 -63,725 Gross profit 23,241 27,417 32,047 38,040 45,559 SG&A -17,495 -19,339 -21,891 -25,336 -29,653 Employee share expense -2,268 -2,627 -2,984 -3,477 -4,103 Operating profit 3,478 5,451 7,172 9,227 11,803 EBITDA 4,210 6,283 8,172 10,317 12,953 Depreciation -732 -832 -1,000 -1,090 -1,150 Amortisation 0 0 0 0 0 EBIT 3,478 5,451 7,172 9,227 11,803 Net interest expense -413 -83 -85 -85 -85 Associates & JCEs 0 0 0 0 0 Other income 407 200 600 800 1,000 Earnings before tax 3,472 5,568 7,687 9,942 12,718 Income tax -986 -1,736 -2,383 -3,082 -3,943 Net profit after tax 2,486 3,833 5,304 6,860 8,776 Minority interests 1 1 0 0 0 Other items 3 3 0 0 0 Preferred dividends 0 0 0 0 0 Normalised NPAT 2,490 3,837 5,304 6,860 8,776 Extraordinary items 111 122 1,599 0 0 Reported NPAT 2,601 3,959 6,903 6,860 8,776 Dividends -1,189 -1,686 -2,652 -3,430 -4,388 Transfer to reserves 1,412 2,273 4,251 3,430 4,388 Valuations and ratios

Reported P/E (x) 95.0 62.4 35.8 36.2 28.3 Normalised P/E (x) 99.3 64.4 46.6 36.2 28.3 FD normalised P/E (x) 99.3 64.4 46.6 36.2 28.3 Dividend yield (%) 0.5 0.7 1.1 1.4 1.8 Price/cashflow (x) 115.1 40.7 34.4 28.9 23.1 Price/book (x) 45.1 31.3 23.4 17.7 13.5 EV/EBITDA (x) 59.5 39.6 30.2 23.6 18.6 EV/EBIT (x) 72.1 45.6 34.4 26.4 20.4 Gross margin (%) 37.6 39.7 40.3 41.1 41.7 EBITDA margin (%) 6.8 9.1 10.3 11.1 11.9 EBIT margin (%) 5.6 7.9 9.0 10.0 10.8 Net margin (%) 4.2 5.7 8.7 7.4 8.0 Effective tax rate (%) 28.4 31.2 31.0 31.0 31.0 Dividend payout (%) 45.7 42.6 38.4 50.0 50.0 ROE (%) 54.2 58.9 74.5 55.7 54.1 ROA (pretax %) 19.5 28.9 33.6 38.4 43.5 Growth (%)

Revenue 12.8 11.8 15.0 16.5 18.0 EBITDA 35.2 49.3 30.1 26.3 25.6 Normalised EPS 35.7 54.1 38.1 28.9 27.9 Normalised FDEPS 35.7 54.1 38.1 28.9 27.9 Source: Company data, Nomura estimates

Cashflow statement (INRmn) Year-end 31 Mar FY13 FY14 FY15F FY16F FY17F EBITDA 4,210 6,283 8,172 10,317 12,953 Change in working capital -2,668 1,231 886 648 823 Other operating cashflow 606 -1,440 -1,868 -2,367 -3,028 Cashflow from operations 2,147 6,073 7,190 8,598 10,749 Capital expenditure -2,168 -1,460 -2,271 -1,000 -1,000 Free cashflow -21 4,614 4,919 7,598 9,749 Reduction in investments

-897 -500 -1,000 -2,000 Net acquisitions

Dec in other LT assets

0 0 0 0 Inc in other LT liabilities

-39 0 0 0 Adjustments

CF after investing acts -21 3,678 4,419 6,598 7,749 Cash dividends -1,189 -1,686 -2,652 -3,430 -4,388 Equity issue 0 1 0 0 0 Debt issue 1,626 -1,932 -500 0 0 Convertible debt issue 0 0 0 0 0 Others 0 0 0 0 0 CF from financial acts 437 -3,617 -3,152 -3,430 -4,388 Net cashflow 416 61 1,267 3,168 3,361 Beginning cash 613 1,029 1,091 2,358 5,526 Ending cash 1,029 1,091 2,358 5,526 8,887 Ending net debt 2,384 391 -1,376 -4,544 -7,905 Balance sheet (INRmn) As at 31 Mar FY13 FY14 FY15F FY16F FY17F Cash & equivalents 1,029 1,091 2,358 5,526 8,887 Marketable securities 0 0 0 0 0 Accounts receivable 1,349 1,208 1,291 1,504 1,775 Inventories 3,747 4,203 4,734 5,515 6,507 Other current assets 2,786 3,042 3,443 4,011 4,733 Total current assets 8,912 9,543 11,825 16,555 21,902 LT investments 1,082 1,979 2,479 3,479 5,479 Fixed assets 7,849 8,477 9,748 9,658 9,508 Goodwill 992 1,070 1,070 1,070 1,070 Other intangible assets 0 0 0 0 0 Other LT assets 0 0 0 0 0 Total assets 18,835 21,069 25,122 30,762 37,958 Short-term debt 3,142 1,198 698 698 698 Accounts payable 6,906 8,173 9,467 11,030 13,015 Other current liabilities 2,786 3,321 3,927 4,575 5,398 Total current liabilities 12,834 12,691 14,092 16,302 19,111 Long-term debt 272 284 284 284 284 Convertible debt

Other LT liabilities 128 89 89 89 89 Total liabilities 13,233 13,064 14,465 16,675 19,484 Minority interest 94 67 67 67 67 Preferred stock 0 0 0 0 0 Common stock 239 240 240 240 240 Retained earnings 5,269 7,698 10,350 13,780 18,168 Proposed dividends

Other equity and reserves

Total shareholders' equity 5,508 7,938 10,590 14,020 18,408 Total equity & liabilities 18,835 21,069 25,122 30,762 37,958

Liquidity (x)

Current ratio 0.69 0.75 0.84 1.02 1.15 Interest cover 8.4 65.8 84.4 108.6 138.9 Leverage

Net debt/EBITDA (x) 0.57 0.06 net cash net cash net cash Net debt/equity (%) 43.3 4.9 net cash net cash net cash

Per share

Reported EPS (INR) 21.77 33.14 57.74 57.19 73.16 Norm EPS (INR) 20.85 32.12 44.36 57.19 73.16 FD norm EPS (INR) 20.85 32.12 44.36 57.19 73.16 BVPS (INR) 45.92 66.18 88.29 116.88 153.46 DPS (INR) 9.92 14.06 22.11 28.59 36.58 Activity (days)

Days receivable 7.7 6.8 5.7 5.5 5.5 Days inventory 38.1 34.8 34.4 34.4 34.4 Days payable 79.8 66.0 67.8 68.7 68.9 Cash cycle -34.0 -24.4 -27.7 -28.8 -29.0 Source: Company data, Nomura estimates


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Contents

Executive summary ................................................................................ 4

Key charts .............................................................................................. 5

Biscuits: one of the largest domestic segments within FMCG ........................ 6

Opportunity to take share from unbranded segment ....................................... 7

As in other FMCG categories .......................................................................... 8

Distribution expansion to continue as a growth driver ..................................... 8

Britannia: the domestic largest player in the biscuits segment ........................ 8

Products at the premium end have helped maintain value share ................... 9

Category mix has undergone a big change ..................................................... 9

Significant cost efficiencies driving margins higher ....................................... 11

Product portfolio dominated by Biscuits category .......................................... 13

Biscuits: highly competitive segment ............................................................. 14

Portfolio of Top 2 players is vastly different ................................................... 14

New management has been a big driver of change ...................................... 16

Financials ....................................................................................................... 17

Valuation: re-rating a combination of factors ................................................. 21

Initiate with a Buy and TP of INR2,560 .......................................................... 23

How does Britannia compare to global food companies? ............................. 24

Appendix A-1 ........................................................................................ 25


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Executive summary According to Euromonitor, Britannia is the domestic market leader in the biscuits segment. In our opinion management’s strategy of moving the company’s portfolio towards the premium-end will continue to drive both revenues (mix improvement) as well as gross margins. The company has already seen the benefits of this strategy reflected in its performance over the past four years (revenue growth of 16% and gross margins of +490bps), but we think plenty of juice remains to this story going forward as well.

Market share of cookies in the overall biscuits segment improved from 12% in 2005 to 33.6% in 2014, while the contribution of plain biscuits declined to 30.7% from 63.3%. Despite having a large presence in the plain segment in 2005, management’s strategy of moving into the premium segment has meant its market share has remained stable, despite one of the large sub segments losing share over the past decade.

The other gross margin drivers are cost efficiency and rationalisation of the production process, which we believe still has legs and will continue to help drive EBITDA margins higher in the medium term. Over FY14-17F, we estimate Britannia will deliver 16.5% revenue growth, 25% EBITDA growth and 32% net income growth, which will be among the highest in our coverage universe.

Our assumptions build in operating margins of 12% in FY17F. Over the medium term (five years), we forecast the company to record 15% EBITDA margins, which will continue to support net income growth of ~20% in the medium term. Britannia is one of the few stocks within our coverage universe whose medium term top-line growth is also supported by improving profitability. We initiate coverage of Britannia with a TP of INR2,560, implying 24% potential upside from current levels.


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Key charts Fig. 1: Market leader in the biscuits segment by value (2014)

Source: Euromonitor

Fig. 2: Large part of the market is unorganised (2014)

Source: Federation of Biscuit Manufacturers’ of India

Fig. 3: Premiumisation in the domestic biscuits market Share by segment 2007 2014 Chg (%) Savory biscuits and crackers 10.6% 13.3% 2.7% Cookies 13.8% 33.6% 19.9% Filled biscuits 0.8% 1.0% 0.2% Plain biscuits 61.1% 30.7% -30.4% Sandwich biscuits 13.7% 21.3% 7.6%

Source: Euromonitor

Fig. 4: Britannia: market share is largely flat

2007 2014

Britannia 36.5% 35.3%

Parle 34.3% 29.5%

ITC 10.0% 14.8%

Surya Foods 4.3% 5.8%

Anmol 3.6% 2.4%

Others 11.3% 12.2%

Source: Euromonitor

Fig. 5: Britannia: Strong revenue CAGR to continue

Source: Company data, Nomura estimates

Fig. 6: Britannia: Gross margins still have room for improvement


Britannia, 35.3%

Parle, 29.5%

ITC, 14.8%

Surya Foods, 5.8%

Anmol, 2.4%

Others, 12%

Unbranded, 40%

Branded, 60%

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GM +210bps


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Fig. 7: Britannia: Strong cash generation (INRmn)


Fig. 8: Britannia: Potential for higher dividend payout ratio (%)


Biscuits: one of the largest domestic segments within FMCG Biscuits are one of the largest segments within the fast moving consumer goods (FMCG) space in India. In India, while dairy is the largest segment, biscuits are certainly one of the top 5 categories within the FMCG space. Market share of biscuits within the FMCG space is ~12% (as of 2014) and this has largely remained constant over the past five to seven years. Growth in the biscuits segment has largely paralleled the broader FMCG space and hence market share of biscuits within the overall FMCG space has remained fairly stable.

Fig. 9: Biscuits is a large category within the FMCG space (2014)

Source: Euromonitor

The overall biscuits market was worth more than INR200bn in FY14 (source: Euromonitor) and grew consistently t 17% in 2009-13. However, as a result of slower GDP expansion in FY14, growth the segment also declined to 12% from the 19% level seen in 2013.

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Fig. 10: Biscuits segment has seen a steady growth period

Source: Euromonitor

Opportunity to take share from unbranded segment Apart from GDP growth, one key driver for the industry is the opportunity to take share from the unbranded segment. According to the Federation of Biscuit Manufacturers’ of India (FBMI), nearly 40% of the market is still part of the unbranded segment, which we believe will continue to see a downwards slide from these levels as consumers become more aware of brands from organised players such as Britannia.

We believe this driver will continue to remain relevant in the medium term, as the shift will be a slow and gradual process. However, over the next five years, we think there will be an inflection point which can accelerate the shift towards organised (branded) companies, which will aid industry growth rate. Britannia as the market leader will be one of the key beneficiaries of this change.

Fig. 11: Unorganised segment continues to be a large part of biscuits market (2014)

Source: Federation of Biscuit Manufacturers’ of India

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As in other FMCG categories Even if we look at other FMCG categories such as hair oils, oral care, edible oils, etc. over the past decade the market leader has been able to gain share at the expense of smaller unbranded companies that are more regional in nature. Marico’s Parachute and Saffola brand has gained share despite already having a significant presence over the past five years from smaller unbranded players. Similarly, even in oral care, companies such as Colgate, HUL and Dabur (top 3 players) have gained share from the unorganised segment over the last decade.

This phenomenon is true across most of the sector with consumers’ preferences moving towards branded packaged products, particularly as distribution has expended meaningfully into smaller cities and towns where historically the share of unbranded smaller companies was much larger than in major metro cities. With nearly 40% of the biscuits segment still in the unbranded segment, we believe the shift away to branded players will be another key driver of revenues for Britannia over the medium term.

Distribution expansion to continue as a growth driver Over the past five years companies across the FMCG industry have invested significant resources in expanding their direct distribution reach. This has been a growth driver across the sector, as servicing several new towns with their own distribution network rather than relying on wholesalers to get their products to consumers in these areas has driven a better and deeper availability of products. While the market for products existed in many of these areas, availability was previously a major concern. Companies addressed and corrected this issue, and thus have made significant progress in these areas. We expect this lever to continue as a growth driver for companies across the sector with Britannia benefitting as well.

Biscuits as a product have a ready acceptance among consumers in these markets and the company should be able to add to top-line growth purely on account of making the products more widely available. Britannia serves nearly 6mn outlets now vs. 3mn a few years ago. This should continue to drive growth as the company keeps adding more depth to its distribution network via the direct route.

Britannia: the domestic largest player in the biscuits segment Britannia is the largest payer in the biscuits market in India with a ~35% value share of the market (Fig 12). Parle is the second-largest player with nearly a 30% share and ITC has delivered the best growth rate over the last decade and now has a 15% market share in the segment, which we believe is quite commendable considering it was a late entrant and Parle and Britannia have always had a strong presence in the market.

Fig. 12: Britannia: India’s largest company in the biscuits market (2014)

Source: Euromonitor

Britannia, 35%

Parle, 30%

ITC, 15%

Surya Foods, 6%

Anmol, 2%

Others, 12%


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Market share has remained stable – despite strong competition Over the past decade, Britannia’s market share has largely remained stable, despite the category being very competitive. The second-biggest competitor (Parle Products Pvt Ltd) has been losing share in the biscuits segment to several other smaller players. However, Britannia has been able to maintain share despite significant competition from both organised and unorganised players over the past decade. The company’s brand strength has helped it to sustain maintain more than one-third of the market across business cycles and through the company’s own transition across segments within the biscuits category.

Fig. 13: Market share for the top players in the segment

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Britannia Industries Ltd 36.3 36.1 36.5 36.3 34.2 35.4 34.6 34.6 35.1 35.3

Parle Products Pvt Ltd 36.6 35.8 34.3 33.2 34.3 33.4 32.5 31.3 30 29.5

ITC Group 5.3 7.9 10 11.8 12.4 13.6 13.8 14.4 14.8 14.8

Surya Food & Agro Pvt Ltd 4.1 4.2 4.3 4.9 5.2 4.9 5 5.2 5.5 5.8

Anmol Biscuits (P) Ltd 3.5 3.5 3.6 3.4 3.5 3 2.7 2.6 2.4 2.4

Source: Euromonitor

Products at the premium end have helped maintain value share The company’s portfolio has undergone a significant change over the past decade with higher priced biscuits now forming a larger part of the portfolio. The plain biscuits segment, which declined significantly in value terms out of the overall biscuits segment, has also become a smaller part of Britannia’s portfolio. However, Britannia has over the past 2 years launched several new products in the premium cookies segment which has meant the value share has largely remained constant. This is a key differentiator vs. the competition as Parle, which is also one of India’s biggest players in the biscuits segment, lost share given its over-reliance on products priced in the sub INR15/100 gms category.

Category mix has undergone a big change While the biscuits category has seen steady growth, it has not been across the various sub segments. The premium segment within the category (eg, cream biscuits, cookies and filled biscuits) have all seen growth rates that were much higher over the past few years. While Britannia’s market share has largely remained stable, the mix within the segment has changed markedly. From plain biscuits being the single-largest segment and contributing 61% in 2007, contribution fell to 31% in 2014. This has been a big positive for industry profitability and the mix seems to have changed for the better. The reduction in share of plain biscuits has been made up by filled biscuits and sandwich biscuits – both segments which have gained significant share in the past few years.

Fig. 14: Share of sub segments within the biscuits industry

2005 2010 2011 2012 2013 2014 Cookies 12.0% 22.0% 25.9% 29.7% 33.2% 33.6% Filled Biscuits 0.7% 0.9% 1.0% 1.0% 1.0% 1.0% Plain Biscuits 63.3% 48.8% 43.3% 37.9% 32.7% 30.7% Sandwich Biscuits 13.4% 16.2% 17.3% 18.6% 19.9% 21.3%

Source: Euromonitor

Mix improvement to continue long term – positive for Industry profitability We believe this phenomenon of mix in the industry changing from plain biscuits to filled and sandwich biscuits will continue to remain relevant for at least the next decade or so. As consumers’ incomes grow and aspirations improve, we believe demand for premium


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biscuits will outgrow category growth and hence over the next decade there remains an opportunity for the industry to improve profitability from current levels. .

While plain biscuits should continue to remain a sizeable part of the market, organised (branded) players will likely slowly transition from this segment and into the more profitable ones.

Positive for revenue growth and gross margins Mix improvement will be a major positive for revenue expansion (with contribution of mix on revenue growth being key). We believe this will continue as the portfolio shift towards more premium biscuits continues over the next few years.

Gross margins have already seen an improvement Britannia’s gross margins have already seen a sharp improvement in the past four years. We believe this is due in part to price increases (a strong brand provides the company with an opportunity to take price increases) and mix improvement (which is a result of premiumisation of the portfolio).

Over the past four years gross margins have improved by nearly 500bps, which is a significant achievement. Management’s focus on delivering this mix improvement and continually looking to improve gross margins continues to remain strong.

Fig. 15: Gross margins have seen a 500bps improvement, FY11-14

Source: Company data, Nomura research

Also reflected in EBITDA margin performance Britannia’s gross margin improvement has also been reflected in its EBITDA margin performance, which has seen a sharp improvement.

Fig. 16: EBITDA margins have seen improvement


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Significant cost efficiencies driving margins higher Over the past five years, Britannia has invested significant effort in improving cost efficiencies across manufacturing, supply chain and distribution. These changes have already yielded results with manufacturing costs having dropped by more than 200bps over the past few years.

Fig. 17: Operational efficiency have helped drive EBITDA margins


Fig. 18: Improvement to sustain; upside surprise possible


Below we highlight some changes that Britannia has made across key business processes which have helped to improve profitability.

Improvement in distribution Britannia has invested a significant amount behind beefing up its distribution and direct coverage over the past three years. Management stated that it will look to add more strength to distribution and sales coverage over the next year which should also drive top-line growth. Split route strategy in the urban markets has yielded good results with the number of lines sold +25%. The number of cities implementing this strategy has increased to 25 in FY14 from 11 in FY13 and is expected to touch 50 cities in FY15 (as per management).

Focus on cost containment Management’s continued focus on driving cost containment has been crucial in driving operating margins higher for the past five years. This focus has picked up over the past 18 months as management has been working diligently to drive costs lower to build long-term levers for delivering higher profitability.

Some specific examples which management has shared include:

• Britannia has been using biomass as a fuel to conserve energy. It is also using more energy-efficient ovens and has even patented some of them. We believe this will continue to deliver longer-term benefits in terms of driving operational costs lower.

• Waste reduction has been a big theme which the operations teams have consistently been working on, which has had a significant benefit in terms of reductions of both food and packaging items which are consumed in the manufacturing process.

• Driving manufacturing efficiency through automation and several productivity enhancing tools like Kaizen, TQM. These techniques have helped drive operational efficiencies higher. Management insists that these are ongoing programmes which can help drive further benefits in the coming years.

• Moved manufacturing units closer to consumption clusters and reduced the overall distance travelled by over 20% in three years. While this may seem like a simple process, it does involve changes across the supply chain. However, management has

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taken a longer-term approach to these issues, which have helped to reduce supply chain and transportation related costs.

Improvement in stock freshness Management has been able to extend the freshness of the stock on the shelves, with stock now having more than two-thirds of its useful life remaining when it gets to the shelf. This is a key initiative which management said provides the company with a competitive edge as compared to the competition. While having a strong product portfolio is important, the quality of product when it reaches the point of consumption is equally important as it is a key ingredient with regard to the consumer making a repeat purchase.

SKU rationalisation The company has rationalised nearly 100 SKUs (60 in biscuits, 40 in dairy) to drive a sharper focus on a profitable and scalable portfolio. The idea behind this move as with others highlighted above is to take a longer-term approach across costs lines with a view to making the entire operations more focused and driving manufacturing costs lower.

As is clearly visible below, the company had a long tail of products four years ago although the five key mother brands continued to drive the majority of revenues. This has now been rationalised significantly with management having more focus on key brands and new innovations are aimed at significantly improving the mix. Premium cookies is the fastest growing sub segment within the biscuits category and the company’s newest additions to the portfolio (Nutrichoice Heavens and Chunkies) both placed at the very premium end of the market.

Fig. 19: Portfolio has been rationalised to have a shorter tail 2011 2015

Marie Gold Marie Gold

Good Day Good Day

Bourbon Bourbon

50-50 50-50

Treat Choco Decker Tiger

Treat Jim Jam Nutrichoice Heavens

Treat Choco Nutrichoice Chunkies

Tiger Strawberry Tiger Orange Tiger Pineapple Britannia Cookies butter Elaichi Britannia Cookies fruit dhamaka Tiger Krunch chocochips Tiger Krunch Fruit & Nut Healthy start multigrain porridge Healthy start chinese poha Healthy start veg poha Britannia Timepass

Source: Company data

Share of in house manufacturing increasing In 2010, Britannia outsourced ~65% of biscuit manufacturing to contract manufacturers. While this saved the company resources to set up its own production lines, it had less control over the production process and hence costs involved in manufacturing. Management believed that by moving more of the manufacturing in house, it could explore a variety of ways to cut costs over the medium term, which would help drive


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gross margins. Although in the near term this would entail investment in newer manufacturing facilities, it would also upgrade existing facilities.

This ratio has slowly moved and currently ~60% of Britannia’s products are manufactured in house and 40% are outsourced. Management has stated that it will continue to move more manufacturing in house, although a part of production will continue to remain with contract manufacturers. The idea behind this move is that where Britannia believes it can do a better job of manufacturing a particular product in-house and save costs, it will do so, but for some of the more mass market brands the production will continue to remain with contract manufacturers.

Investment in new manufacturing facilities Britannia presently operates 12 factories and two more are scheduled to be operational in the next 12-14 months. Britannia is investing nearly INR3bn over a three-year period into these new facilities. The company currently has capacity to manufacture ~900,000 tonnes of products which will be increased by ~150,000 tonnes over the next 12-15 months. Britannia is also investing in setting up a R&D facility in Karnataka which it believes will provide more focus on product innovation over the medium term.

Product portfolio dominated by Biscuits category Britannia has seen an evolving business model over the past decade with newer categories contributing more to revenues. In FY05, the company received more than 92% of its revenues from biscuits, with bread and rusk contributing ~5% of revenues. Over the past decade this portfolio mix has changed and Britannia now derives 84% of revenues from biscuits (still the largest segment by far) and 11% from the bread and rusk segment (as of FY14).

Cake, which previously contributed 2%, has moved up to 5% within the overall revenue mix. This diversification away from biscuits only is a positive for Britannia in the long term as it reduces reliance on one category. While it will likely be a decade more before contribution from biscuits declines, given management’s initiatives of further diversifying the portfolio, the declining trend of contribution from biscuits segment is likely to continue.

Fig. 20: Product portfolio, FY05


Fig. 21: Product portfolio, FY14


Biscuits and high protein

food, 92%

Bread and rusk, 5%

Cake, 2% Others, 1%

Biscuits and high protein

food, 84%

Bread and rusk, 11%

Cake, 5% Others, 1%


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Biscuits: highly competitive segment For Britannia, management’s focus will likely continue to be on the biscuits segment as it remains the largest contributor to revenues despite some diversification away from this segment. As highlighted above, it is also a large segment within the FMCG space, which means there are a number of players operating within this segment. While Britannia and Parle are the most recognised companies operating in the segment, there are a number of players which are present and can be categorised as the unorganised segment.

Parle has been the most important competitor in the segment over the past couple of decades and continues to remain so. However, newer entrants such as ITC and Mondelez India have also had a period of very strong growth, which has meant that competition across the sub segments has only grown more intense over the past five years.

Parle has been the biggest loser in the last decade or so with value share declining significantly to 30% in 2014 from nearly 37% in 2005. The decline in value share can be attributed to:

a) Management has maintained its strong focus on plain biscuits, which has seen a significant slowdown over the past decade.

b) With focus on more premium biscuits across other players increasing, the value growth in the category has been led by price/mix where Parle has not benefitted as much over the last decade.

While Parle has also branched out into other segments (eg, creams and cookies), their price points are much lower than that of the competition (with focus on driving volume market share) which has meant that value share has not seen as much of a rise as other players.

This is reflected in Parle’s profitability which has declined significantly (in PBDIT margin terms) over the past decade. From a high of 18% in March 2005 it declined to 7% in March 2014. However, over the past couple of years margins have held steady as the company started to focus on growing premium segments. Parle PBDIT margins though are significantly lower than Britannia’s, which has seen a sharp upwards move in profitability terms over the past four to five years.

Fig. 22: Parle: PBDIT margins declined significantly over FY05-14

Source: Ace Equity

Portfolio of Top 2 players is vastly different Looking at the portfolio of the Top 2 players in India’s biscuits segment (Britannia and Parle), we find that both companies have taken a different approach to capturing growth. Parle’s portfolio is over-indexed in the sub INR15/100gms category, while Britannia has a significant part of the portfolio now in the above INR15/100gms category. We believe as market growth in the segment will continue to be driven the higher priced biscuits as

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consumers shift preferences to creams/cookies, Britannia is in a much better position to leverage from this shift from plain to creams/cookies segment. This has already been the case in the past few years, but with the recent launch of the premium Good Day Chunkies and Nutrichoice Heavens at INR50/100gms we believe Britannia has perfected its strategy to drive growth in the premium segment.

Parle has entered the premium cookie (>INR30/100gms) category over the past year, although it is unclear how successful it will be in this segment as consumers associate the company more with plain segment biscuits. Even if Parle is successful it will mean the entire market moves away from plain segment and hence the premiumisation trend will continue to benefit all the players in the segment.

Fig. 23: Pricing in INR of biscuits portfolio for Britannia Brand Per 100 Gms

Tiger Glucose 7.5

Marie Gold 10.8

50-50 salted biscuits 12.5

Bourbon Cream 12.8

Nice Time 13.8

Vita Marie Gold 14.7

Nutrichoice Crackers 15.0

Good Day rich butter cookies 15.2

Jim Jam 15.8

Nutrichoice Hi Fibre 20.0

Pure Magic Chocolate Biscuits 20.0

Good Day Chocochips cookies 26.7

Nutrichoice Essentials Oats 36.7

Good Day Chunkies 50.0

Nutrichoice Heavens 50.0

Source: Bigbasket.com

Fig. 24: Pricing in INR of biscuits portfolio for Parle Brand Per 100 Gms

Parle G 7.5

Marie 10.0

Coconut 10.0

Buttery Crackers 11.1

Monaco 12.5

KrackJack 12.5

Bourbon 16.7

Hide & Seek bourbon 25.0

Hide & Seek 30.3

Digestive Apple & Cinnamon 50.0

Source: Bigbasket.com

ITC and International players present tough competition over the long term ITC entered the biscuits segment in 2006 and, as of 2014, it is a strong player with 15% share of the market. The company has had a clear strategy to concentrate its portfolio in the premium end which has meant that it has a strong presence in profitable segments in the category.

ITC’s performance in other segments of the FMCG market clearly indicates that while it is comfortable with operating at breakeven level or even with small losses, in terms of sales growth and value share – it is very aggressive. The 15% market share clearly indicates ITC has been successful in making itself a very serious player in the biscuit segment, in our view.

Over the past couple of years competition has also come from international players such as Unibic and Mondelez, which has further heightened competitive activity in the segment.

While increasing competition is a reality for the biscuit segment, it is also fair to point out that most of this competition is in the premium end of the market. We believe this is a positive as the market at the top end of the segment is likely to see more products and investment, which will likely help drive overall growth.

Other segments also delivering solid growth The other key segments for the company – Bread and Rusk and Cakes – have also increased at 19%/25% CAGR over the past five years (FY09-14). Given the opportunity to take share from the unorganised segment in both these segments, we believe the company will continue to grow faster than the industry growth rate. Competition exists


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from organised players including HUVR as well as several regional players which have limited distribution and hence have always stayed as regional players.

Growth rate across segments has seen some slowdown but this is on account of overall slowdown in revenues across these categories as GDP growth slowed in the past couple of years. However, given the low share of organised players in these segments the medium term growth rates should still be attractive.

Fig. 25: Segment wise revenue growth


New management has been a big driver of change The company’s current CEO joined as Chief Operating Officer in January 2013 and was elevated to the position of CEO in March 2014. This was a significant turning point for the company. Focus shifted from having a large portfolio of brands across several product categories including breakfast cereals and snacks to a few core brands and categories which have helped improve the focus of the company. In addition, there was renewed focus on driving cost efficiency across the company including in manufacturing, sales, distribution and advertising which have together helped it to deliver a consistent and sustainable improvement in operating profit margins.

In 2005-10, operating margins declined to 4.5% from 12.4%. In that period, despite strong volume growth, pricing remained largely stable. Given the sharp increase in input prices in that period, Britannia’s gross margins declined by ~500bps. FY11-12 saw a reversal of this decline with margins showing some improvement. However, FY13 and FY14 have seen the company take significant strides in rebounding to its historical levels of operating margins (12-12.5%) which was the case nearly a decade ago.

We believe management continues to see an opportunity to drive further cuts in costs over the medium term and hence that will continue to be a lever for driving margin improvement.

There have also been several changes to the top management team after the new CEO came in including head of sales/ marketing and HR via external hiring as well as promoting from within the company. One key message that current management has sent over the past year or so has been about employees of the company being more focused and motivated, which has had a positive impact across all functions. We believe Britannia now has a very strong management team in place which can continue to deliver solid top-line growth as well as improvement in operating margins over the next five years.

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Financials Strong top-line growth Over the past five years, the company has delivered a top-line CAGR of 16% driven by both volume and price/mix. We believe this trajectory should continue over the next few years as volume growth should be supported by mix improvement and some pricing gains.

Fig. 26: Steady topline growth


Revenue growth momentum to pick up starting FY16F We expect growth to pick up starting FY16F as GDP recovery starts to take shape and lower inflation begins to help put money into the pockets of urban consumers. There are some initial signs of improved consumer confidence certainly in the urban areas but transformation of this improved confidence into pick up in revenue growth is probably a couple of quarters away. We expect FY16F to see a pick-up in growth rate vs. FY15F and for FY17F to see a further improvement for the company.

Fig. 27: Recovery in top-line growth over the next three years


Margins have seen an improvement…still below historical levels As a result of focus on driving gross margins higher as well as improving operational efficiencies, the company has been able to slowly and steadily improve EBITDA margins from mid-single digit levels in FY10/11 to ~10% in FY14.

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Fig. 28: Britannia: EBITDA margins seeing a steady and sustained improvement


Britannia is now a net cash company As profitability has improved over the past three to four years, the company has been able to generate high free cash flows and pay down debt. Britannia ended FY14 as a net cash company and we expect its cash position to improve significantly over the next few years.

Fig. 29: Britannia: Net (debt)/cash in INR mn


Strong FCF generation over the next few years We expect Britannia to generate ~INR20bn of free cash flow over FY15-17F which will help make the balance sheet strong enough for it to start looking at inorganic growth opportunities.

Packaged food presents several niche opportunities which management may decide to either enter organically or via the inorganic route. Britannia has in the past been an acquirer and we believe if the target is available at the right valuation and fits the right boxes in terms of the long term opportunity, management will be open to look at such opportunities.

There could also be cash returned to shareholders with dividend payout ratio improving from current levels over the next two to three years.

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Fig. 30: Britannia: Strong Free cash flow generation over FY15-17F


Pick up in revenue growth over the next three years While FY14 marked a low in terms of revenue growth trajectory (11.3%), we believe growth has already pick up with 1HFY15 already delivering a 13.8% growth, which we believe will continue to trend higher for the rest of the year. As GDP improves over the next two to three years, growth for Britannia will likely also see a pick-up and our expectation is for FY16/17F to deliver 16.5%/18% revenue growth. This will be a mix of volume growth as well as price/mix contribution.

Fig. 31: Britannia: Revenue growth to pick up gradually over the next 2-3 years


Net income growth of 32% over FY14-17F We are building in an average 32% net income CAGR over FY14-17F. This is primarily led by steady 16% revenue growth (we see upside risk to this number from mix improvement) and a 280bps margin improvement over the same period. Even after building in a steady margin improvement our assumption for FY17F is at 11.9% which is less than what the company used to make in the FY05-06 period.

We believe management is much more focused on improving profitability in the long term. The recent changes across several cost lines have already meant margins have moved up in the past few years significantly. Over FY16-17F we expect the company to deliver 32% net income growth driven largely by improvement in margins and stable earnings growth. As highlighted above, we see upside risks to both these numbers based on how quickly the market recovers.

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Long-term opportunity to get to FMCG business margins can add significant value Although we are confident that the company will continue to deliver improvement in margins over the next couple of years, we see potential for it to match FMCG sector margins in the long term. Looking at EBITDA margin profiles for HPC companies we believe the domestic businesses generate EBITDA margins at 15-18% across companies. The food companies are more profitable with Nestle and GSK consumer both able to generate EBITDA margins in the low 20% range.

While Britannia has delivered significant margin improvement over the past 5 years (470bps over 4 years from FY10-14), we believe it can over the longer term aim for FMCG margins. This will ensure that the net income growth profile for the company remains consistently higher than the revenue growth trajectory it is able to deliver over the next few years. In the past the company used to operate at 12-12.5% EBITDA margins and with increased scale and focus on cutting costs, we believe in the medium term FMCG sector margins of mid-teens is a possibility.

Fig. 32: Comparison of EBITDA margins across the sector (2014)


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HMN NEST SKB HUVR DABUR MRCO GCPL JUBI BRIT


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Valuation: re-rating a combination of factors Valuation multiples have seen a significant re rating over the past couple of years. One-year forward P/E multiples which were in the mid to high teens at the start of 2013, are now up to 34x – nearly doubling of valuation multiple. This has been driven by a) consistent improvement in profitability b) higher valuation multiples across the sector and c) improvement in return ratios.

Fig. 33: Britannia one year forward P/E

Source: Bloomberg, Nomura research

Fig. 34: Consumer sector one year forward P/E

Source: Bloomberg, Nomura research

Near-term delivering on improvement in profitability Over the past 7 quarters, Britannia has consistently delivered an improvement in y-y EBITDA margins which has helped drive long term expectations of where margins can go to. While there have been expectations that Britannia’s margins can improve over a longer time period, we think consistent delivery has provided investors with confidence that the company will be able to deliver on those expectations.

Fig. 35: Consistent improvement in profitability on a quarterly basis


Return ratios have seen a marked improvement Over the past 4-5 years, Britannia has consistently delivered an improvement in profitability and along with paying down debt has helped make the balance sheet stronger which has helped driver RoEs higher. The improvement now puts Britannia closer to the FMCG average in terms of RoE profile which has helped drive valuations higher for the company.

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Fig. 36: Return on Equity (RoE) profile has seen a significant improvement


Historical multiples no longer relevant Looking at the valuation multiples, the long-term average one-year forward P/E is closer to 25x for the company. However, we believe the period where Britannia used to generate low double digit EBITDA margins also coincided with a much higher valuation multiple.

Valuations have seen a significant increase over the past year and one key reason is investors’ confidence that Britannia will be able to deliver consistent margin improvement from current levels which will help boost return ratios over the long term.

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Initiate with a Buy and TP of INR2,560 We initiate coverage at Buy with a TP of INR2,560 – 24% potential upside from current levels. We believe Britannia is one of the best self-help (ability to drive margin improvement via significant cost cutting initiatives) stories across our coverage universe. We value Britannia at 35x FY17F EPS of INR73.2. This is slightly more than the 32x we assign to mid-cap HPC companies where long-term growth prospects are lower, on our forecasts. We believe the valuation multiples are justified as we expect the company to deliver higher growth than the consumer average universe over the next 3 years.

Fig. 37: Consumer valuations

Company Ticker Rating Price INR TP INR EPS growth (%) P/E (x) PEG (x) Market Cap

(USDmn) FY16F FY17F FY16F FY17F FY16F FY17F Nestle * NEST IN Neutral 6,888 4,680 18% 20% 43.3x 36.1x 2.4x 1.8x 10,711

GSK Consumer SKB IN Reduce 6,365 4,097 17% 20% 35.5x 29.5x 2.0x 1.5x 4,322

Jubilant Foodworks JUBI IN Reduce 1,434 984 26% 29% 57.7x 44.9x 2.2x 1.6x 1,510

United Spirits UNSP IN Buy 3,585 2,775 123% 63% 87.8x 54.0x 0.7x 0.9x 7,563

Britannia BRIT IN Buy 2,068 2,560 29% 28% 36.2x 28.3x 1.2x 1.0x 4,001

F&B Average 56.7x 41.1x

Colgate Palmolive CLGT IN Reduce 1,982 1,526 14% 18% 43.9x 37.2x 3.1x 2.1x 4,347

Dabur DABUR IN Buy 269 296 25% 20% 34.8x 29.1x 1.4x 1.5x 7,540

Godrej Consumer GCPL IN Buy 1,151 1,133 25% 21% 32.5x 26.9x 1.3x 1.3x 6,316

Hindustan Unilever HUVR IN Reduce 873 785 14% 15% 41.3x 35.8x 2.9x 2.3x 30,446

Marico MRCO IN Buy 398 425 19% 24% 36.0x 29.1x 1.8x 1.2x 3,945

Emami HMN IN Buy 1,010 1,010 19% 23% 41.4x 33.7x 2.2x 1.5x 3,697

HPC Average 39.3x 33.4x

ITC ITC IN Neutral 342 372 15% 13% 24.0x 21.3x 1.6x 1.7x 43,863

Asian Paints APNT IN BUY 797 870 33% 30% 36.4x 27.9x 1.1x 0.9x 12,323

Pidilite Industries PIDI IN Buy 578 328 17% 16% 42.5x 36.6x 2.5x 2.3x 4,347

Titan Industries TTAN IN Buy 392 350 21% 21% 31.9x 26.3x 1.5x 1.2x 5,617

Bata India * BATA IN Buy 1,010 1,320 21% 21% 23.7x 19.5x 1.1x 0.9x 1,047

Retail Average 30.6x 25.3x

Source: Bloomberg, Nomura estimates. Note: * denotes calendar year based valuation; prices are as of 21 April 2015 close; we are reviewing our target prices for NEST IN, UNSP IN, HMN IN, PIDI IN and TTAN IN


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How does Britannia compare to global food companies? Looking at global food players, we find that valuations are relatively high for the growth provided by these companies. In Europe, eg, organic growth rates for profits over the next 2-3 years are in 3-4% while valuations are nearly 21.5x CY16F. Even in the US, where companies are likely to generate organic profit growth of 3-4%, valuations are nearly 20x 2016F.

For Britannia which is likely to deliver 20%+ profit growth over the next 4-5 years, we believe valuation at 28.3x FY17F is undemanding even in the context of global food companies.

Fig. 38: Global valuations

Market P/E Organic Growth Price TP Rating cap. ($m) 2015E 2016E 2015E 2016E Food Producers - Europe

Danone (EUR) 66.2 65.0 Neutral 43,010 22.8x 21.5x 4.8% 4.9%

Nestle (Parent) (CHF) 74.3 72.0 Reduce 243,002 22.0x 20.5x 4.8% 4.7%

Unilever (EUR) 41.6 29.5 Reduce 127,680 23.1x 22.4x 2.2% 3.5% European Average 22.6x 21.5x 3.9% 3.2% Food Producers - US

Hershey (USD) 98.0 88.0 Reduce 21,639 22.8x 21.6x 3.3% 3.5%

Kellogg (USD) 63.9 63.0 Buy 22,612 17.8x 17.1x -0.2% 1.3%

Mondelez International (USD) 36.5 29.0 Reduce 63,014 21.7x 19.6x 2.3% 3.5%

Mead Johnson (USD) 99.9 122.0 Buy 20,326 25.4x 23.0x 7.2% 9.3%

Campbell Soup* (USD) 46.1 NA Not Rated 14,358 19.2x 18.3x N/A N/A

General Mills* (USD) 56.1 NA Not Rated 33,447 19.2x 18.1x N/A N/A US Average 21.0x 19.6x 3.1% 4.4%

Source: * Bloomberg consensus for not-rated stocks, Nomura European Consumer team estimates for others. Note: Share prices are as of 21 April 2015 close.


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Appendix A-1 Analyst Certification We, Manish Jain and Anup Sudhendranath, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Britannia Industries BRIT IN INR 2070 21-Apr-2015 Buy N/A

Britannia Industries (BRIT IN) INR 2070 (21-Apr-2015)

Buy (Sector rating: N/A) Chart Not Available

Valuation Methodology We value Britannia at 35x FY17F EPS of INR73.2 to arrive at our TP of INR2,560. This is slightly more than the 32x we assign to mid-cap HPC companies where long-term growth prospects are lower, on our estimates. The benchmark index for this stock is MSCI India. Risks that may impede the achievement of the target price Key risks include: 1) sharp rise in commodity costs will put pressure on gross margins for the company; 2) if urban growth does not see a pick-up, our revenue growth assumptions can be at risk. Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Nomura Global Financial Products Inc. (“NGFP”) Nomura Derivative Products Inc. (“NDPI”) and Nomura International plc. (“NIplc”) are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report. Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 48% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 43% of companies with this rating are investment banking clients of the Nomura Group*. 44% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 53% of companies with this rating are investment banking clients of the Nomura Group*. 8% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 25% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2015. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and Japan and Asia ex-Japan from 21 October 2013

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The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current price)/current price. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned. Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates. 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