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Nestle - Cadbury – SmithKline – Who’s the leader? - Views on News from Equitymaster
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  • Jun 5, 2000

    Nestle - Cadbury – SmithKline – Who’s the leader?

    The food product majors have shown excellent financial performance during the year 1999. However their valuations are not reflecting their topline and bottomline growth. The mismatch in valuations is likely to be solved with the investors buying interest shifting towards FMCG stocks.

    The table below reflects the financial performance of Nestle, Cadbury and SmithKline Beecham Consumer Healthcare (SBCH). While Cadbury and SBCH posted more than 10% growth in their topline, Nestle’s revenue growth in the current year declined, due to reduction in its exports by more than 35%. Nestle’s exports contributes over 20% to its total revenue. Due to pressure on Russian coffee prices, its sales realisation witnessed reduction during the year. On the other hand Cadbury’s and SBCH’s topline is driven by the volume growth and less dependent on export markets.

    Comparative financial performance
    Year End Dec 31 1999 Nestle Cadbury SBCH
    Sales 15,439.0 5,110.8 7,056.6
    Other Income 83.0 79.3 318.9
    Total Income 15,522.0 5,190.1 7,375.5
    Operating Profit 2,432.1 824.6 1,496.0
    Interest 265.0 37.7 -
    Gross Profit 2,167.1 786.9 1,496.0
    Depreciation 319.0 199.5 112.7
    Profit before tax 1,848.1 587.4 1,383.3
    Profit after tax 1,070.1 385.6 976.1
    Equity 964.0 238.0 453.8

    SBCH enjoys comparatively higher profit margins than Cadbury and Nestle. SBCH’s debt free status and increase in the sales realisation along with volume growth have enabled it to maintain the higher profit margins. On the other hand margins of Nestle and Cadbury are thin due to intensifying competition in chocolate market where the revenue growth is volume driven.

    Key ratios
    Particulars Nestle Cadbury SBCH
    Operating profit margins 15.2% 14.6% 16.7%
    Gross profit margins 14.0% 15.2% 20.3%
    Net profit margins 6.9% 7.4% 13.2%
    Cash EPS (Rs) 14.41 24.58 23.99
    EPS (Rs) 11.10 16.20 21.51

    The premium valuations enjoyed by Cadbury is due to its aggressiveness in launching new products, world famous brand identity and excellent growth in financial performance. SBCH enjoys comparatively lower valuations due to the fear of its parent’s 100% subsidiary, which currently has brands like Aquafresh in the oral care market and Crocin. Till the acquisition of Maltova and Viva brand the company’s over dependence on two products was also a key concern. The re-rating of the stock in future will depend on its ability to show shinning financial results and frequent new product launches.

    Comparative valuations
    Particulars Nestle Cadbury SBCH
    Market Price (Rs) 386.0 845.0 345.0
    P/E (x) 34.8 52.2 16.0
    Market Cap/Sales (x) 2.4 3.9 2.2

    Who’s the best? On valuation basis, SBCH would look attractive, but then there are other concerns. Cadbury and Nestle are domestic leaders, but they have comparatively lower margins and higher valuations. There seems to be no clear-cut winner. But if one were to pin point one stock, it would be Cadbury.



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