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Cadbury: Competition takes toll - Views on News from Equitymaster
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  • Jul 12, 2002

    Cadbury: Competition takes toll

    Chocolate major Cadbury India is showing signs of pressure going by its 2QFY03 numbers. The company reported a staid 4.3% topline growth during the quarter. However, aided by extraordinary income it posted a 101% rise in net profit YoY.

    (Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
    Net Sales 1,185 1,236 4.3% 2,684 2,833 5.5%
    Other Income 22 20 -8.7% 41 43 6.4%
    Expenditure 1,010 1,088 7.6% 2,258 2,413 6.9%
    Operating Profit (EBDIT) 175 148 -15.1% 426 420 -1.5%
    Operating Profit Margin (%) 14.7% 12.0%   15.9% 14.8%  
    Interest 4 3 -39.5% 10 7 -34.3%
    Depreciation 51 57 10.5% 109 121 11.3%
    Profit before Tax 141 109 -22.7% 348 335 -3.6%
    Exceptional items 7 102 - 7 94 -
    Tax 53 21 -60.3% 137 104 -24.0%
    Profit after Tax/(Loss) 95 190 100.8% 219 325 48.7%
    Net profit margin (%) 8.0% 15.4%   8.1% 11.5%  
    No. of Shares (eoy) (m) 35.7 35.7   35.7 35.7  
    Diluted Earnings per share* 10.6 21.3   12.2 18.2  
    Current P/e ratio   23.3     27.2  

    Historically, this chocolate major has grown at a CAGR of 17% in terms of topline in the last decade. The company has been the undisputed king of the Indian chocolate market with a 70% share. However, over the last few quarters, not only the growth in chocolate market has slowed down, but Nestle India has emerged as a keen competitor to Cadbury. Infact, in 1QFY03, Nestle reported nearly 40% growth in its chocolates division.

    Cost break-up...
    (Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
    Material costs 396 487 23.1% 967 1,052 8.7%
    Staff costs 132 132 0.1% 281 293 4.0%
    Advertising & Marketing 125 164 31.3% 295 355 20.2%
    Other expenditure 358 305 -14.9% 714 713 -0.1%
    Total expenditure 1,010 1,088 7.6% 2,258 2,413 6.9%

    As a consequence of this, Cadbury's topline growth has come under pressure and competitive pressures seem to have forced the company to abstain from price hike of its products. It is not surprising that Cadbury's operating margins have come under pressure. The company that used to earn margins between 15-16% earned 12% operating margins in 2QFY03. Its advertising costs to sales have increased from 12.3% in 1QFY02 to 15% in 1QFY03.

    The company's profit before tax shows a decline of 23% YoY. Extraordinary income in the form of profit on sale of excess immovable property at Thane raked in Rs 108 m for Cadbury, consequently helping the company report a 101% growth in 2QFY03 net profit. The company's consolidated first half numbers indicate a 5.5% topline growth and a worrying 4% drop in profit before tax YoY.

    At the current price of Rs 495 the stock trades at 27x its annualised 1HFY03 earnings. The stock has been range bound ever since the parent company's open offer at Rs 500 per share. The offer was a success and currently the promoters' hold 90.2% stake in Cadbury India. Due to this, liquidity in the stock has dried up. We do not forsee any significant movement in the stock price. The management is likely to delist the company going forward.



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