Cadbury: Bidding adieu? - Views on News from Equitymaster

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Cadbury: Bidding adieu?

Mar 11, 2002

Cadbury India finally made up for the missing Diwali sweetness during the Christmas quarter. It logged a 17% growth in topline, as against a staid 5% topline growth in the September quarter. Consequent to the resurgent 4QFY02, Cadbury India ended the year with a near 10% topline growth YoY.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Net Sales 1,380 1,615 17.0% 5,711 6,263 9.7%
Other Income 77 25 -67.7% 121 90 -25.1%
Expenditure 1,124 1,300 15.6% 4,763 5,170 8.5%
Operating Profit (EBDIT) 256 315 23.1% 949 1,094 15.3%
Operating Profit Margin (%) 18.5% 19.5%   16.6% 17.5%  
Interest 10 4 -55.2% 31 21 -33.8%
Depreciation 57 56 -1.2% 219 238 8.9%
Profit before Tax 266 280 5.0% 820 926 12.9%
Exceptional items -22 -22 - -3 -23 -
Tax 93 92 -1.0% 297 328 10.7%
Profit after Tax/(Loss) 151 166 9.9% 520 574 10.3%
Net profit margin (%) 11.0% 10.3%   9.1% 9.2%  
No. of Shares (eoy) (m) 35.7 35.7   35.7 35.7  
Diluted Earnings per share* 16.9 18.6   14.6 16.1  
Current P/e ratio   26.2     30.4  

However, in 4QFY02 its expenses too shot up by nearly 16%, eating into any benefits the company may have achieved on the margins front. Its operating margins improved by a 100 basis points during the quarter to 19.5%, but its net margins fell by nearly 70 basis points to 10.3%. The company finished 4QFY02 with a 10% bottomline growth.

In FY02, Cadbury operating margins improved to 17.5%. However, it was not able to carry this benefit to its bottomline. This was largely due to higher extraordinary expenses YoY. In FY02 as well the company logged a 10% bottomline growth.

The company continues its endeavor to reduce raw material costs. As a percentage of sales, raw material costs went down by a significant 220 basis points to 37.2% in FY02. However, the company's advertising costs went up by 22% during the year as against a 10% growth in topline during the period. Advertising to sales ratio stood at 11.2% in FY02, up from 10.1% in FY01.

Cost break-up
(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Raw material 522 620 18.8% 2,248 2,328 3.6%
Staff 128 136 6.2% 539 598 10.9%
Advertising/marketing 98 178 81.5% 578 702 21.5%
Others 375 365 -2.8% 1,398 1,542 10.3%
Total expenditure 1,124 1,300 15.6% 4,763 5,170 8.5%

Cadbury commands a sizeable 68%-70% of the chocolate market share. However, in recent times Nestle India seems to have upped its ante in this segment, much to Cadbury's discomfiture. Going forward, Cadbury India will have to work much harder in order to hold onto its commanding market share, which could result in higher advertising costs for the company.

Cadbury Schweppes Plc. along with Cadbury Scheweppes Overseas Ltd. and Cadbury Schweppes Mauritius Ltd. had made a voluntary offer to the public shareholders of Cadbury India for purchase of up to 49% of their equity shares at Rs 500 a share. The voluntary offer opened on January 21, 2002 and closed on February 22, 2002. A press release issued by Cadbury Schweppes Plc. announced that approximately 14 m shares were tendered in the open offer, taking Cadbury Schweppes holding above 90% of the paid up capital of Cadbury India Ltd.

With the success of the open offer, Cadbury seems set to delist from the Indian bourses in the not too distant future. The success of the open offer has also meant that the liquidity in the stock has dried up. It is no wonder then that Cadbury is now thinly traded and its stock price shows range bound movement.

At Rs 488 the stock trades at a P/E of 30x FY02 earnings. Though the company's long term prospects are quite promising, its illiquidity and the proposition of delisting soon will serve as a barrier to investor interest.

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