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Lower cocoa prices to benefit Cadbury - Views on News from Equitymaster
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  • Aug 4, 2000

    Lower cocoa prices to benefit Cadbury

    Chocolate king Cadbury India Ltd. has reported excellent growth of 17% in profits during the first half of 2001. The growth in the profits was led by 17% increase in its turnover. However there has been a marginal growth in the profit margins of the company during this period.

    Nevertheless the company is expected to benefit substantially in the second half of the year 2001, due to lower cocoa prices. Cocoa forms about 35% of Cadbury’s total material cost including packaging cost. The company imports around 40% of its cocoa requirement and the rest is sourced domestically. CSCE cocoa future prices are down 28% in the last one-year. The new contracts are priced at much lower rates in the 2HFY01.

    Financial performance
    Year End Dec 31 1HFY99 1HFY00 1HFY01
    Sales 1,759 2,105 2,464
    Operating profit 257 331 386
    Interest 30 21 15
    Depreciation 87 88 95
    Profit before tax 140 223 277
    Profit after tax 100 152 178
    Equity (no. of shares) 24 24 36
    Key Ratios      
    OPM (excl. Other Inc.) 13.7% 14.1% 14.8%
    NPM 5.6% 7.1% 7.2%

    Lower cocoa prices, topline growth and manufacturing cost efficiencies will drive company’s bottomline growth in the current year. We expect the company’s profits to increase by 25-30% in FY01. Cadbury is the leader in the India’s chocolate confectionery market with a share of 70%. The chocolate market is estimated to be Rs 6 bn in value terms and 21,000 tonnes in volume terms. The market has grown at compounded annual growth rate (CAGR) of 10-12% in the last five years. In India chocolates are consumed by an estimated 60-m people out of a population of more than 1 bn. This offers good growth opportunity to Cadbury.

    Chocolate forms around 65% of company’s sales, sugar confectionery 12% and the balance comes from food drink. Nestle India the second major player faces strong competition from Cadbury’s leading brands ‘Perk’, ‘Picnic’ and the recently launched ‘MilkTreat’. The company plans to introduce low unit packs, expand distribution network and launch mass market brands to further increase its market share in the chocolate confectionery market.

    Cadbury quotes at a P/E of 58 times its 1HFY01 annualised earnings on a market cap to sales ratio of 4.6 times. While in the past one year, BSE Sensex fall by 7 %, Cadbury’s stock appreciated by 22%.



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