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Cadbury – The star performer

Nov 15, 2000

Cadbury India Ltd. is the star performer this year in the FMCG Industry in general and the confectionary segment in particular. Worldwide Confectionary market is worth over $ 100 billion It is bigger than the coffee market and bigger than the snacks and biscuits market combined. Confectionary has a universal appeal, covers all markets, demographies and cultures. It is unique in the sense that it can be shared, enjoyed alone and is sold in a wide range of outlets reflecting the impulse and snacking nature of consumers. The confectionary market around the world continues to evolve and is particularly influenced by the fast changing lifestyles in developed markets and long-term growth in consumer spending in developing markets.

However, sugar confectionery is a complicated market where factors such as bulk sugar prices, government policy and mass-market distribution play an important role in driving the volumes.

Cadbury is No. 4 in the global confectionary business with a strong presence in both the chocolate and sugar sectors through a mix of global, regional and local brands. The ‘Cadbury’ brand endorses most of its chocolate products in the world. Its sugar products are internationally sold as ‘Trebor’, ‘Bassett’, ‘Pascall’ and Cadbury’s ‘Eclairs’ brands.

Apart from becoming the fastest growing and 3rd most admired marketing company, Cadbury India had many other achievements in 1999. Importantly, its significance as a part of Cadbury group has grown this year. The Asia Pacific region accounts for just 11-12% of the Group revenues. Cadbury India now accounts for 1.7% of group sales, 1.2% of group assets and 1.4% of group profits before interest and tax. It is ranked 8th worldwide in terms of profits. Given the small size of operations in India, it foresees an immense growth down the line and enjoys excellent support of its parent company for the same.

Other landmarks of the company during 2000 are as under:

    1. 8 million new consumers added
    2. Distributors increased to 2100.
    3. Increased distribution by around 70,000 outlets to 450,000
    4. Substantially increased below the line sales and marketing activities.
    5. Achieved superior marketing mix.
    6. Launched ‘Milk Treat’ and introduced smaller and most affordable packs for its popular brand “Perk’.
    7. Rejuvenated its ‘Bournvita’ brand in the brown drink market.

Justifying the MFV Program of Parent Cadbury is now worldwide running on the ‘Managing For Value’ principle. This is the major guiding principle of the group and it is taking all actions based on that only. Cadbury India has outperformed on this count too. Its operating profit margins improved from 14% to 16% during the nine months ended September 2000. It has successfully reduced material, factory and administration costs. Its interest costs also declined by superior management of operating funds, working capital and tight control over capital expenditure.

One of the reasons for its superior performance during the current year could be the price of its major raw material Cocoa. It constitutes about 48% of total raw material cost and the company imports around 40% of its cocoa requirements. Given the declining trends this year, the company would benefit, as it would not require the reduction to be passed on to the consumers.

Comparative Valuations
Particulars Cadbury Nestle SBCH HLL
Market Price (Rs) 564 501 417 188.75
P/E (x) 43.1 29.4 17.2 35.3
Market Cap/Sales (x) 3.5 2.9 2.3 3.9
* Valuations on 9 months annualized earnings
** SBCH – SmithKline Consumer Healthcare

Cadbury India is one of the few outperforming FMCG companies at present. Currently, Cadbury is quoting at a P/E of 37 times its December 2000 projected earnings. Current valuations of the company are higher compared to most of its FMCG peers. Given this situation, a marginal correction in valuation from this level is not ruled out as comparatively the other stocks become more attractive. However, on a decline it is one of the best investment choices.

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