Cadbury India: A well-run company
The company has mega plans on hand given the ongoing lubrication to its gross block. This expenditure is in tandem with its fond hopes that the company will be able to go completely private by acquiring the balance native stake holding
Going off the stock market radar
This company is intent on going fully private. That alteast was its stated intention when Cadbury India was operating under the orbit of its original proprietors Cadbury Schweppes of the UK. With this intention in mind it did over a period of time come to hold 97.6% of the equity capital through its nominee holding companies, Cadbury Schweppes Overseas Ltd and through Cadbury Mauritius Ltd. However, along the way, Cadbury got swallowed up by Kraft Foods Inc. But the new owners themselves underwent a tectonic shift sometime thereafter by splitting partly into a new operation called Mondelez International Inc. Now Cadbury gets to operate as an integral part of Mondelez till such time as some nutty CEO gets a fancy new brain wave of sorts that is. But the plans to delist fully apparently still stand. The directors' report states that the Bombay High Court is hearing a petition by the company to reduce the voting stock by paying 'recalcitrant' native shareholders Rs 1,340 per share (face value Rs 10 each) as a means of exiting the Indian markets once and for all.
It is also in some spot over its dealings with government agencies. Besides the Central government it is now battling the US government too, over allegations of impropriety. On the one hand the central government has served notice to it on its intent to withdraw excise duty exemption of Rs 2.53 bn as it failed to fulfil the mandatory condition of commencing commercial production of the time limit set. The Securities and Exchanges Commission (SEC) has sent a notice to the parent company Kraft Foods on allegations of improper payments to Indian government officials to obtain approvals for the operation of one of its manufacturing plants. For the matter of record the company operates five manufacturing plants - two in Maharashtra, and one each in MP, Himachal Pradesh and in Bangalore.
The total amount of unbudgeted contingent liabilities against the company at year end amounts to Rs 2.81 bn. Whether this figure is inclusive of the show cause notice issued by the Central government or not is not quite clear. But this company is also quite unique among the many MNCs that I have analysed over the years.
How it earns its living
The company earns its bread by selling a number of branded products including Cadbury's chocolates, Cadbury 5 Star, Bournville Cranberry, Bournvita, Tang, Halls, Eclairs, Oreo, Perk and such like. The company is also seriously forex negative what with forex earnings of Rs 395 m and forex outgoings of Rs 2.02 bn. It also makes do with multiple dealings with group companies in the process of earning its revenues. And what do you know it is pumping large sums into gross block addition. In the last financial years the company has added Rs 5.8 bn into 'gross block including capital advances' that is. This sum amounts to 51.6% of all gross block at year end. (A part of the gross block has been sourced from group companies, which is only to be expected given the octopus like tentacles of the parent). The gross block addition over the past two years and the year end gross block figure are not directly comparable, as the gross block has been added on at different periods of time and therefore infers different value streams- but still. The company generates the bulk of its capex requirements through the cash flow that it ponies up from operations. The total tangible gross block at year end amounted to Rs 11.22 bn. Of this, almost 78% is classified as 'plant and equipment'. In other words, the company generated net revenues equal to 3.6 times the gross block against 3.5 times previously.
The gross revenues were up 21.3% to Rs 42.7 bn from Rs 35.2 bn previously. The net revenues at Rs 40.6 bn were up 20.8% -- thus implying little change in the bite administered by indirect taxes. The gross revenues are largely made up of pickings from sales of 'chocolates and coated wafer biscuits' of Rs 32.4 bn, 'malted foods' which tossed in Rs 6.42 bn, and 'biscuits' which rolled in another Rs 2.12 bn. 'Hard boiled confectionary' and 'gums' brought in the balance. Then there is the ubiquitous 'other income' which amounted to Rs 581 m against a much larger Rs 1.23 bn previously. I may add here that the sharp slide in other income was due to the lesser dexterity of the company in resorting to creating profits through the time tested route of 'write back of provisions' no longer required. It would appear that companies per-se have access to large dollops of such provisioning which awaits a write-back at the opportune time or some such. For the matter of record the other income accounted for 16% of pre-tax profit in 2012 against a very impressive 48.6% of pre-tax profit previously.
The company registered a slightly slower pre-tax profit of Rs 3.66 bn against Rs 3.76 bn previously- but that was partly because of less efficient use of write-backs to get the profit moving. There are other reasons too - but not including the input cost of materials. Material inputs include imported materials amounting to 27.5% of the consumption value of all raw materials consumed. A large slice of the imported material inputs have been sourced from group companies. The input cost of materials consumed as a percentage of sales (including outsourced finished goods) during the year were however marginally lower than previously. But 'other expenses' at Rs 14.9 bn rocketed 27.7%. The biggest single item of expenditure under this head is 'advertising and sales promotion' at Rs 5.1 bn against Rs 4.5 bn previously. It shows the money that flows out in the upkeep of its brands. But the increase in this outflow was well contained showing in a sense that it could well as be a discretionary spend. Other 'selling expenses' and 'power and fuel' however rose very sharply as did 'processing charges'. But there are other culprits too. The charge towards information technology expenses jumped to Rs 881 m from Rs 156 m, while royalty fees rose to Rs 846 m from Rs 710 m. Both these fees went into the kitty of the parent or to its nominees. This appears to be a convenient way of bilking the sibling.
Whatever, the cash flow statement for the year shows up a company in fairly fine fettle. Though it has marginal borrowings of Rs 55 m at year end, the cash and bank balances amounted to a humungous Rs 4.64 bn against Rs 4.9 bn previously. Consequently the company is the beneficiary of large interest receipts on bank deposits. The net cash generation of Rs 2.4 bn from operations was not quite enough to pay for the capex of Rs 3.6 bn, but the timely sale of some debt instruments, and marking down of fixed deposits, and the ample interest receipts helped fill in the gap in financing.
Top flight working capital management
Its working capital management shows a company which has a stranglehold in the market on what it makes and sells. The trade receivables at Rs 527 m compares most favourably with the trade payables of Rs 8.3 bn. The inventories at year end as a percentage of sales however are at a marginally higher level than in the preceding year end. And, if one leaves out the cash and bank balances at year end, then the company is also current liabilities positive (current liabilities of Rs 10.5 bn against current assets of Rs 8.12 bn). The miniscule share capital base of Rs 310 m is backed by humungous reserves and surplus of Rs 12.9 bn.
This company is some sort of a mixed bag. On the one hand is the heavy capex spending which apparently implies that the company sees a nest egg of sorts in the horizon. The sales have shown a commendable increase in rupee terms. On the other hand there is the resort to window dressing of the book profits through the modicum of other income. The profit for the year also took a beating partly due to higher selling expenses, and also due to the pandering of the demands of the parent, and the lesser dexterity of the accountants to create more other income. There is also the large surplus cash on hand which has to put to better use.
The company also makes do with one lackey. A wholly owned sibling called Induri Farms which is not up to much good. It also boats of scores of group companies including an associate by the name of Cadbury Mauritius Ltd, and two fellow siblings going by the unlikely names of CS Business Services India Pvt Ltd, and KJS India Pvt Ltd. They do not appear to have any revenue or capital account dealings with the parent.
The remaining native shareholders will know soon enough whether the company will go fully private using the route of reducing its capital base to achieve its ends. The pittance of a dividend payout policy of Rs 2 per share on Rs 10 per share paid up seems tailored to the dictates of the parent and possibly to drive out the remaining minority shareholders too. Do not expect any bonus issue freebies either.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.
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