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Volume growth for value (creating) strategy - Views on News from Equitymaster
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  • Dec 25, 1999

    Volume growth for value (creating) strategy

    It promises you the real taste of life and has been delivering value to its shareholders too.

    A 51% subsidiary of the Cadbury Schweppes,Cadbury India (Cadbury) is the undisputed chocolate king of the country. The brand name 'Cadbury' is synonymous with chocolates in India and has a strong brand appeal. The company has leading brands in all segments viz. 5 star (countlines), Dairy Milk (bars), Gems (panned confectionery), Eclairs (toffees) and Perk (wafer chocolates).

    The company has a 70 percent bite of the 23,000 tonne Indian chocolate market. It is also a player in the malted food market (Bournvita enjoys a 24 percent share of the 20,000 tonne brown drinks market) and last year it ventured into the 120,000 tonne sugar confectionery market ('Googly').

    Over the past two year's Cadbury has redefined the basic tenets of the chocolate confectionery industry

    • The traditional market position of being a children's product was expanded to include adults.
    • It launched and promoted new varieties, introduced new flavours and tried to change consumption patterns: position for instance, chocolates as a snack food. As a result of these efforts the wafer chocolate category was revived.
    • It developed lower-priced products and focussed on bit-sized chocolates (sachets) to induce trial
    • Aggressive promotion and advertising put chocolate into the consumers buying patterns.

    Although some of these measures were responsive strategies adopted by Cadbury to take on Nestle's onslaught they succeeded in arousing interest in a dormant market.

    Future revenue growth will be through increasingly higher volumes rather than price increases. The management believes that price increase can only be a short term objective. It is volumes, which are very important to achieve the long-term goal of having a wide consumer base. 'Business can't shrink to greatness', that's the management credo. Multinationals such as Hindustan Lever and Nestle India share this philosophy.

    Despite the fact that the company has come off a Rs 1 billion capital expenditure over the last two years there is a possibility that some capex will still be required to take care of the growth over the next two/three year's. This will be so since the company has plans to introduce 1 new product in chocolate confectionery and 2 new products in sugar confectionery at all appropriate price points. (The company has set a target of 12 percent volume growth and 20 percent value growth over the next two year's.) There is no possibility of an equity dilution though.

    (Rs m) 3QFY2000 3QFY1999 Change
    Sales 1,668 1,475 13.1%
    Other Income 31 6 436.8%
    Expenditure 1,424 1,250 14.0%
    Depreciation 63 60 5.3%
    Interest 9 23 -62.2%
    Profit before Tax 202 148 36.7%
    Tax 66 44 48.8%
    Profit after Tax 136 104 31.6%
    Net profit margin 8.2% 7.0%  

    Advertisement expenditure has been rising by 1 percent on an average over the last three year's and will only increase further. Apart from the fact that Cadbury itself would be making rapid fire launches, competition from the likes of Nestle and Mars won't be far behind. That is likely to force the company in raising decibel levels too.

    Raw materials, particularly cocoa, account for 30% of Cadbury's turnover. A perennial cocoa shortage has made Cadbury highly dependent on imports (40% of requirement). International cocoa prices however, have dropped almost 35% in the current year. This should provide a cushion to the company's margins well into the first quarter of next year too.

    Distribution has and will continue to play an important role, in fact more so, in Cadbury's value creating strategy. The company reaches over 300,000 retailers through 27 depots and 1900 distributors. This will only increase in the future as the company's focus increasingly shifts to small towns.

    The stock has almost doubled over the past twelve months and discounts the 1999 performance (estimate sales Rs 5.2 billion, earnings Rs 400 million) adequately. Going forward, one can expect Cadbury to report a turnover of over Rs 6 billion in 2000 and earnings in the range of Rs 465 million.

    It is quite possible that the stock price performance in the short term may not set the market on fire, but it gives the retail investors a great chance to buy into a company which has great brands, an enviable distribution net work, a strong balance sheet and above all a first class management.



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