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Cadbury – Ready for challenges in the new millennium - Views on News from Equitymaster
 
 
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  • Apr 28, 2000

    Cadbury – Ready for challenges in the new millennium

    A Cadbury in every pocket. That’s what Cadbury India Ltd. (CIL) hopes to achieve. Its strong brand equity, wide distribution and strong backing from its parent will probably enable it to achieve its vision. There are however a few hurdles that the company may encounter in coming years.

    CIL a 52% subsidiary of Cadbury Schweppes (CS) contributes a mere 2% to CS’ total revenue and 1% of profits. In FY99, while CIL’s PAT jumped up by 52% to Rs 383 million, CS’ profit witnessed a 5% growth to Rs 32.8 bn.

    Business Breakup
    Confectionery

    • CIL’s confectionery segment including chocolates business, which is growing at the rate of 16% per annum, contributes to more than 75% of its total turnover. This compare well with the growth rate of 3% achieved by CS in its confectionery business (53% of sales). It has a strong presence in both the chocolate and sugar confectionery markets through a mixture of regional and local brands.
    • CIL has been able to maintain its dominant 70% market share in the confectionery business due to the fact that there is a limited competition in the domestic markets, with Nestle being the main competitor in the branded chocolate market. Other factors that have helped the company in maintaining its market share are its unmatched brand quality, continuous new product introduction and wide distribution network. In the international market CS is the leader due to its vast product portfolio. This has enabled the company to sustain its growth despite increasing competition.
    • Internationally CS owns various brands such as Piasten, Trebor, Bassett, Pascall, Cadbury’s crème egg, Miniature Heroes and Cadbury Land Yowie. In the domestic market, CIL owns brands like Dairy Milk, Perk, Picnic, Cadbury Gold, Gems, Frutus, Googly, Gollum etc.

    Beverages

    • Although beverages business contributes 24% to CIL’s total revenue, it is growing at the rate of 31% per annum as compared to 9% at CS. The growing beverage market is estimated to be worth around $165 billion worldwide. CS is the third largest soft drink company selling its brands in 160 markets with strong international, regional and local brands.
    • CIL operates through its brand Bournvita, which controls 24% of the brown drink market. Globally CS owns many successful brands like Dr. Pepper, Schweppes, Seven Up, Squirt, Oasis, Sunkist, A&W, Clamato, Canada Dry, Fruitsations etc.

    India is currently witnessing a scenario in which trade barriers are being brought down dramatically. As a matter of fact, by 2001, India needs to remove all quantitative restrictions on imports. This is likely to stimulate competition in, among others, the confectionery and chocolate market. As CIL is highly leveraged in this market, it would witness increased competitive pressures, thus having implications for growth and margins. However, it must be mentioned that the company could choose to exploit this situation by importing products from its parent. This could minimise the impact on the business.

    CIL’s beverage business is completely dependent on one brand. Introduction of new product from parent’s portfolio will help it to diversify the risk of being dependent on a single product. It will also help the company to gain share in the beverage market.

    Valuations:

    Particulars CIL CS
    Current Market Price (Rs) 830.5 1,860.3
    P/E (x) 51.7 33.3
    Market Cap/Sales (x) 3.9 1.2

    At current market price of Rs 831, CIL is available at a P/E of 52 times its FY99 earnings. Its market cap to sales ratio of 3.9x is higher compared to other FMCG companies like Nestle, which enjoys the ratio of 2.3x. Premium valuation given to CIL is due to its royal brand equity, excellent quarter over quarter performance and strong technological support from parent. Internationally CS enjoys the P/E of 33.3 times its FY 99 earnings. The valuations enjoyed by CS are comparatively higher than its past valuations, which is due to its dominant position in the international beverages and chocolate market.

    The financials and composition of sales are different and impressive for both the companies. What is of higher interest is the fact that CIL could witness higher growth in both confectionery and beverages given the low per capita consumption. Also the increasing disposable incomes of Indians and the increased exposure to media ads could drive the growth of the overall market for chocolates and beverages. On the other hand CS is situated in a developed country where the per capita consumption is comparatively higher. Also due to intense competition in the International market the growth rate is slower than the developing country. This leads to a conclusion that CIL offers more growth opportunity in future.

     

     

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