Cocoa prices: The blip on Cadbury? - Views on News from Equitymaster

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Cocoa prices: The blip on Cadbury?

Feb 21, 2001

The chocolate king, Cadbury is witnessing a selling pressure in its stock price since the last one month. The stock has come down to a current level of Rs 469 from Rs 600 on December 22, ’00, a drop of 22%. The reasons for a weakness in the stock price are dismal outlook for the company’s future earnings apart from its relatively high valuations among its peers in the sector. The bottomline of Cadbury in the year 2001 is likely to be affected by high cocoa prices if it fails to pass on the rise to final consumers. Cocoa accounts for more than 40% of its total raw material consumption and 15% of sales. The company imports around 40% of its cocoa requirement and the rest is sourced domestically. Cocoa prices in the international market are hitting new highs every month as reflected from the following table.

Prices scaling new highs
Particulars Unit Nov-00 Dec-00 Jan-01
International
cocoa price
US $/MT 880 893 996
Landed cost Rs / MT 63,251 64,186 71,589

However, Cadbury’s fourth quarter results are unlikely to be affects by high cocoa prices. The company has already sourced cocoa from global markets at relatively lower prices during the beginning of the second half (July-Sept ’00). Its bottomline growth in the current year would be driven by cost efficiencies and topline growth.

Raw material mix
Particulars FY97 FY98 FY99 FY00
Cocoa 44.9% 44.9% 42.4% 47.8%
Milk Powder
& Daily Butter
25.6% 24.7% 22.0% 20.7%
Malt Extract 6.9% 6.6% 7.1% 6.4%
Sugar/Liquid Glucose 14.4% 18.1% 17.8% 16.2%
Vanaspati 2.5% 2.5% 2.1% 2.4%
Dry Fruits 3.0% 2.1% 2.9% 2.3%
Others 2.6% 1.2% 5.6% 4.1%
Total 100.0% 100.0% 100.0% 100.0%

During the year 2001, to improve its operating margins from the current 16%, the company has undertaken a price rise on its flagship brand Cadbury Dairy Milk (CDM). The price of CDM has been increased from Rs 16 for 44 gms to Rs 18 for 46 gms, a net rise of 8%. Also, its Fruit-n-Nut price has been hiked from Rs 20 for 44 gms to Rs 22 for 45 gms, a net increase of 7%. CDM being the largest contributor to its FY01 expected turnover of Rs 6 bn, could also compensate for escalating cocoa prices. With its established position in the markets the company could hike the prices of other brands including ‘Perk’, ‘Crackle’, ‘Five Star’,’ Picnic’ and ‘Gems’.

Cadbury aims to make chocolate consumption a regular habit instead of it being considered as an impulse product. The long-term growth and sustainability in chocolate confectionery market will come, if chocolate as a category grows on the back of increased adult consumption. Currently, the urban per capita consumption of chocolate is only 160 grams per year compared to 8.7 kgs per year in UK. Thus, the potential for growth is high and the company is well placed to capitalize on the latent demand with its superior brands and distribution network.

At the current market price of Rs 469, Cadbury is trading at a P/E of 31 times its December ’00 projected earnings with a market cap to sales ratio of 2.8 times.

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