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Culinary products - Intensifying competition - Views on News from Equitymaster
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  • May 15, 2000

    Culinary products - Intensifying competition

    Indian food industry comprising organised and unorganised players is dominated by small-scale players. The Indian market for ready to eat or packaged food products is very small in size, but is growing at a fast pace with increasing urbanization and changing life styles.

    Many brands have strong regional presence and there are only one or two leading national brands in each product segment. The Government encourages export as it brings invaluable foreign exchange. Many local companies therefore focus on international markets rather than the domestic market as export market is more lucrative. Imported food products are unable to compete with domestically produced food products, as the market is highly taste sensitive.

    Unlimited opportunity
    The tomato sauce market in India is at a nascent stage and offers good growth opportunity. The penetration of tomato ketchup/sauce in urban areas is 9.2% whereas in rural areas, it is a negligible 0.7%. At an all India level, the penetration is as low as 3%. Nestle with its brand Maggi enjoys a market share of 52% in the Rs 1 bn tomato ketchup market. However the company is facing cutthroat competition from HLL's Kisan and Heinz and has been losing its market control sharply. New product introduction with renewed brand promotion thrust will help Nestle to sustain market share in the scenario of increasing competition from domestic and international players.

    The Indian soup market is estimated to be Rs 300 m with packed soups having a miniscule share. Nestle with its Maggi brand and International Bestfoods (IBL) with its Knorr brand controls more than 80% of the market. Knorr is a leader with 60% market share in spite of its premium pricing. The brand has garnered significant market share in the last two years by developing product variants that suit Indian tastes. It has also launched Chinese flavour soups, which are very popular, and account for almost half of its soup sales. IBL is becoming very aggressive with its Knorr brand and has been giving tough competition to Nestle's Maggi.

    Nestle has launched Buitoni and Sasso, culinary brands from parent's portfolio during FY99, in order to diversify its products basket and to regain its market share in the culinary product market. These products are imported from Europe and are currently available in up-market stores in metros. The company is likely to benefit from the removal of quantitative restrictions, as this will permit imports of other brands (in larger quantities) from Nestle SA.

    IBL enjoys comparatively higher valuation in terns of P/E as compared to Nestle. However its market cap to sales ratio is among the lowest in the FMCG industry. New product introductions from its parent's product basket will help the company in diversifying its product portfolio. This may result in increasing turnover growth, giving a boost to its bottomline.

    Particulars Nestle IBL
    Market Price (Rs) 330.0 152.0
    Market Cap/Sales (x) 2.1 1.0
    P/E (x) 32.3 35.8*

    * based on projected cash earnings of FY2000



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