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Coffee market Untapped growth opportunity

May 9, 2000

In the past few years, coffee consumption in India is showing a downtrend due to rising coffee prices. This has led to shift in consumption trend towards the relatively cheaper beverage, tea. Besides, lower advertising and media support have also kept awareness levels low. Lower consumption provides good growth opportunity
The per capita consumption of coffee in India is just 58 gms, which is comparatively lower than 8 kg in Germany and 11 kg in Switzerland. In comparison to tea, penetration of coffee is also significantly low, at 8.8% at all India level. Coffee penetration is relatively high at 17.1% in urban areas as compared to only 5.6% in rural areas. A lower per capita consumption of coffee provides a huge untapped potential for the coffee majors like Nestle to grow organically.

Increasing Exports
While domestic consumption has declined, exports of coffee from India have been on the rise during the last few years. Only one-third of the coffee produced in India is consumed in the domestic markets and the balance is exported. Indian coffee is perceived as a high quality product in the international market and has enough varieties to satisfy the needs of all major coffee consuming countries. In the month of March 2000, India exported 48,209 tonnes of coffee registering a growth of 36% on a year on year basis as against negative growth rate of 8% in the world coffee exports. Major players like Nestle derive a large part of its revenues from exports and therefore its margins are largely depended on international trends in coffee prices and production. In the 1QFY00, Nestle reported 14% value and 40% volume growth in its export sales. This has boosted up its profits by 37% to Rs 281 m. A wider product portfolio coupled with revival of exports to Russia is expected to improve Nestle's profit growth.

Valuations
Nestle India is the leader in the domestic coffee market. The company with its strong brand image and significant backward integration will be at an advantage with the improvement in the international coffee prices and production. At current market price of Rs 321, Nestle is trading at a P/E of 29 times its FY99 earnings with market cap to sales ratio of 2 times. Its valuations are comparatively lower than Cadbury, which trades at a P/E of 51 times. The concern for the lower valuations are declining topline growth, which is, expected to grow with the improvement in domestic coffee prices.

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