Cadbury: Sweet taste of success - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Cadbury: Sweet taste of success

Oct 13, 2001

Cadbury India has come a very long way since 1948 when it first set up shop in India. In fact, in the last decade the company’s sales have grown at a healthy CAGR (compounded growth) of 17% (FY01: Rs 5.7 bn). Net profit growth during the same period has been nearly 26% (FY01: Rs 523 m). However, the real spurt in the company’s performance has come in the last five years.

The journey...
(Rs m)FY91FY95FY96FY01
Sales1,2231,4492,5015,711
Net Profit5395197523
NPM4.3%6.6%7.9%9.2%
It is since FY96 that the company has really grown. In that fiscal Cadbury launched its ‘Kuch Khaas Hai Hum Sabhi Mein’ ad campaign. The campaign aimed to change the Indian consumer mindset for chocolates from merely an impulse item meant for kids to ‘snack food’ for all age groups. This was the first time Cadbury’s chocolate campaign targeted all age groups; consequently, expanding the Indian chocolate market. As a result, sales CAGR growth during this period has been over 31% and net profits have grown at nearly 41%.

CAGR growth in last decade
Sales16.7%
Net Profit25.7%
CAGR growth in last 5 years
Sales31.6%
Net Profit40.7%

Though Cadbury India’s growth trajectory would make a lot of investors happy, the good thing is that its management has been proactive and does not seem to be sitting on its past laurels. Realising that urban per capita consumption of chocolates in India is only 0.2 kg per year as compared to 8.7 kg per year in UK, the management has constantly endeavored to expand the Indian chocolate market.

Post the ‘Kuch Khaas Hai’ campaign, the management think tank decided to elevate Cadbury chocolates from a ‘snack food’ to ‘something sweet’. The company’s ‘Khaane Walon Ko’ campaign in FY99 basically endeavored to take on the traditional sweet marts and convert ‘mithai’ consumers to chocolates. The idea was to appeal to the Indian sweet tooth and gain acceptance as a ‘sweet’ gift during family celebrations and festivals.

It is this proactive quality of the management that has enabled Cadbury India’s continued dominance of the Indian chocolate market with nearly 70% market share despite the onslaught by several international players like Nestle and Mars. In fact, the Cadbury name has become a synonym for chocolates in India.

Cadbury has not only proved strong on the advertising front but has also been very agile to the competition’s moves. In fact, when Nestle was slated to enter the chocolate scene in India during the mid-nineties with ‘Kit Kat’, Cadbury preempted the move by launching a similar wafer based chocolate ‘Perk’. It was wise move that took the heat away from its mother brand ‘Cadbury’s Dairy Milk’ (CDM). One must remember that CDM is the largest chocolate brand in India. The brand registered a growth of 20% in the year 2000.

In its most recent move to expand the market the company has launched a new brand ‘Temptations’ in the premium chocolate segment covering five flavours. With this the company aims to capture an additional 5% share of the overall chocolate market and the brand is expected to account for about 5%-10% of Cadbury’s revenues in the coming years. Among its other initiatives, Cadbury re-launched some of its key brands including ‘Gems’, ‘5 Star’, ‘Nutties’ and ‘Perk’. The company has also introduced smaller and more affordable packs for these brands. The company is driving for topline growth through higher volumes. Cadbury's 'price point strategy' that was aimed at expanding its product reach to the lower income bracket population has paid off well.

Another major factor that has supported the company’s high growth is its distribution network. In the year 2000, it added 50,000 new outlets taking the total tally to 300,000 outlets. On the operating cost front, its ‘Managing For Value’ program has been successfully implemented. This has helped the company in reducing its raw material, factory and administrative costs resulting in higher profit margins.

SegmentMajor BrandsMarket Share
Chocolate confectioneryDairy Milk, 5 Star, Perk, Picnic, Nutties, Gems,
Milk Treat, Temptations, Break, Relish
70%
Sugar confectioneryGoogly, Frutus, Gollum4%-6%
Food drinksBournvita13%

This has been the chocolate story. However, Cadbury also derives over 20% of its revenues from the health beverage market through its ‘Bournvita’ brand. Bournvita controls 13% of the Rs 13 bn health beverage market. The market share of the company has more or less been stagnant in this segment. The brand has been relaunched quite a few times in the last decade but to no avail. The management has relaunched Bournvita yet again in a bid to increase its share.

Another area for Cadbury’s is confectionery. In this segment it has four brands, which include ‘Googly’, ‘Frutus’, ‘Gollum’ and ‘éclairs’. Though ‘éclairs’ is a highly successful brand, Cadbury’s forays into sugar-based confectionery have not been too successful. In the past, the company has had to discontinue its ‘Mocka’ sugar confectionery owing to unviable realisations and response. However, the ‘Googly’ continues to be steady. Cadbury has time and again said that it would improve its presence in the sugar confectionery pie, considering that its parent is No. 4 in the global confectionery market. However, so far the realisations have not appealed to the company. But the management has said recently that it is looking to acquire local brands and then build on them. This seems like a sound strategy considering Cadbury’s past experience with launching new confectionery brand.

Signs of slowdown?
(Rs m)2QFY012QFY02Change1HFY011HFY02Change
Net Sales1,0711,18510.7%2,4642,6848.9%
Other Income422434.1%214190.6%
Expenditure9091,01011.2%2,0992,2587.5%
Operating Profit (EBDIT)1621757.7%36542616.9%
Operating Profit Margin (%)15.1%14.7% 14.8%15.9% 
Interest 74-36.8%1510-32.5%
Depreciation455114.0%9510914.8%
Profit before Tax11414123.2%27634826.0%
Exceptional items157-51.0%137-43.5%
Tax435323.3%9813739.3%
Profit after Tax/(Loss)869510.5%19121914.3%
Net profit margin (%)8.0%8.0% 7.8%8.1% 
No. of Shares (eoy) (m)23.835.7 23.835.7 
Earnings per share*14.510.7 16.112.2 
Diluted Earnings per share*9.610.7 10.712.2 
*(annualised)      
Current P/e ratio 39.0  33.9 

Despite its exceptional growth record, Cadbury is under pressure owing to the downturn as well as pressure from competition. In 1HFY02, the company’s net sales have gone up by merely 8%. But the positive news is that even then the company's net profit grew by 19% YoY in 1HFY02 (excluding extraordinary income).

Though the short-term horizon is clouded with concerns over the economic downturn, however, in the long run Cadbury is most likely to continue its dominance of the Indian chocolate scene. The urban penetration of chocolates continues to remain low at around 15%-20%. In the long run, as the economy improves and per capita income levels improve, chocolate consumption would also improve. In such a scenario, obviously Cadbury would benefit too, especially in light of the management pro-activity.

The only concern is that competition too would be clued in to this chocolate potential. Till now competitors like Nestle and Mars have not been able to dent Cadbury’s dominance but going forward one can expect them to up their ante. Also, contraband imports are creeping up. Till now it doesn’t seem to have affected Cadbury’s growth, but going forward this could be a headache as it has proved to be for ITC in cigarettes.

Equitymaster requests your view! Post a comment on "Cadbury: Sweet taste of success". Click here!

  

More Views on News

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

What Led to the Massive Surge in the Stock of Jubilant FoodWorks? (Views On News)

Aug 18, 2021

Jubilant FoodWorks hits new high, surges 35% in a month on growth prospects.

Zomato Delivers a Hot Listing. Did You Grab a Bite? (Views On News)

Jul 23, 2021

Zomato scripted history on Friday by becoming India's first unicorn to debut on the stock exchanges.

Jubilant FoodWorks Hits Record High on Strong Sales Recovery in June Quarter (Views On News)

Jul 22, 2021

Jubilant FoodWorks is back in the black, aided by higher revenues despite the second wave disrupting operations.

Varun Beverages Q1 Review: Net Profit Rises Two-Fold; Board Announces 1:2 Bonus Issue (Views On News)

May 4, 2021

Varun Beverages' two-fold jump in profit came on the back of strong volume growth and demand recovery.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

TRACK CADBURY (I)

  • Track your investment in CADBURY (I) with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

MARKET STATS