Cadbury India: Hold

Recommendation: Hold

B. Krishnakumar

Backed by an array of popular brands and innovative advertisement campaign, Cadbury India has carved a niche for itself in the domestic chocolates market.

At present, it enjoys a dominant share of about 70 per cent in this segment.

The popular brands in its fold include Dairy Milk, Five Star, Eclairs, Gems and Perk. The company also has a presence in the malted food drink business through the Bournvita brand. The chocolate business accounts for the bulk of Cadbury's revenues and the malted-food drink for a little over 20 per cent to the total revenues. About 11-12 per cent flows from the sugar confectionery business.

Aided by a combination of factors, the company has managed to post a steady growth in performance in recent years. Innovative advertisement and promotional campaign, variation in product-cum-price mixes, and expansion of the distribution network are the key factors behind the recent growth in performance. However, the firm trend in the price of cocoa -- the key raw material -- has tended to cap the growth in profitability.

Cocoa accounts for over 40 per cent of the total input cost for Cadbury India. The company imports about 50 per cent of its cocoa requirements. Thus, its profitability tends to be influenced by the fluctuations in cocoa price. After ruling firm, cocoa prices have ruled soft for over 18 months now. The positive impact of this would be fully reflected in this year's performance.

The company has also initiated steps to reduce the usage of cocoa. The recently-launched brands -- Picnic, Perk and Milky Treat -- have relatively lower cocoa content, and this should insulate the company from the vagaries in cocoa price movements.

On the flip side, the recent perk-up in sugar price (another key input) is a spot of bother for Cadbury. This apart, the relatively muted success enjoyed by recent product launches, such as Picnic and variants of Perk (mango, mint and strawberry) are worrying factors. Moreover, considering that the company already has a dominant share of the chocolate segment, the scope for growth through an increase in the market share appears limited.

The future growth prospects hinge, to a large extent, on the company's ability to expand the chocolate market. This, however, would entail huge financial outlays which, in turn, would tend to pressure the bottomline growth.

Even in the malted-food drink business, though Bournvita has gained some market share on the back of an aggressive re-launch, the company faces mounting competition from competing brands such as Boost, Milo and Maltova. This apart, Cadbury has to contend with competitive pressure from the other segment of the food drink sector, which comprises top brands such as Viva, Horlicks and Complan. In this context, the recent acquisition of Maltova and Viva by SmithKline Beecham Healthcare would again add to the competitive pressure for Cadbury's Bournvita.

On balance, the soft cocoa prices and the launch of products in low-priced packs could bolster financial performance. The long-term growth, however, hinges on successful product launches and, probably, acquisition of brands from other players. There is also some scope for volume growth in the sugar confectionery business, where the company has a relatively insignificant presence. While the financial performance could improve in the near term, the growth could taper if the cocoa prices turn up. The change in the competitive dynamics in the malted-food drink business is also a cause for concern.

Given that the stock price has risen steadily in recent weeks, much of the positive features appears to have been already discounted by the market. Given this backdrop, fresh exposures may be deferred, while shareholders could remain invested. Further price rise could use to clip exposures in Cadbury.