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Cadbury open offer: Should you bite?

Dec 12, 2001

Cadbury Schweppes has made an open offer of Rs 500 to yesterday to the 49% public shareholders in Cadbury India. The offer is aimed towards taking the company private as Cadbury already own 51% stake in the company. The question is: Should investors bite?

Year Dividend
per share
1988 2.0
1989 2.5
1990 3.5
1991 3.5
1992 3.0
1993 2.0
1994 3.5
1995 3.5
1996 5.5
1997 3.5
1998 3.5
1999 5.5
2000 6.5
2001 5.0
To answer the question let's look at Cadbury India's past track record. 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). Infact, in the last five years the company's growth has been even more attractive. Since FY96 Cadbury's sales CAGR growth over 31% and net profits have grown at nearly 41% CAGR.

Year Bonus/Rights
1988 1:1 B
1993 1:5 R
1996 3:5 B
1998 1:5 R
2000 1:2 B
The growth rates have been pretty good. Now let's take a look at the company as an investment option. Cadbury has come out with 3 bonus issues and 2 rights issues since 1988. If you had invested Rs 1,000 in Cadbury India in 1988 at the peak price of Rs 125 (post bonus), your investment would be worth Rs 9,600 at the current offer price of Rs 500, considering only the bonuses. That's a CAGR growth of 19% in the last 14 years. Add to that the dividends earned (over Rs 600) and the CAGR growth in Cadbury India investment hovers near 20%.

Cadbury India dominates the Indian chocolate scene with a 70% market share. The Cadbury name has become generic to chocolates in India. The 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. Although this comparision may not be completely justified considering the differences in both countries' population demographics, one thing is sure that India's per capita consumption is likely to grow at a brisk rate going forward. And when chocolate market in India will grow, so will Cadbury India.

Segment Major Brands Market Share
Chocolate confectionery Dairy Milk, 5 Star, Perk, Picnic, Nutties, Gems,
Milk Treat, Temptations, Break, Relish
70%
Sugar confectionery Googly, Frutus, Gollum 4%-6%
Food drinks Bournvita 13%

Considering Cadbury's past growth record, even if we assume that Cadbury India will give a conservative return of 10% CAGR in the next 10 years, then your value of investment, which currently stands at Rs 9,600 today will zoom to Rs 24,900 by 2011. Please note this is only a simple calculation and it does not take into account the dividends that may accrue in future.

For more on Cadbury India please read Cadbury: Sweet taste of success

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