A slight change in the product mix and the recent hike in prices, have helped Cadbury India post a strong first quarter performance. For the three months ended March 1999, sales have grown a solid 16.54 per cent to Rs 116.05 crore, aided by a double digit volume growth in chocolate confectionery (which incidentally accounts for almost 66 per cent of total revenues). The company's new product initiatives and brand relaunches have helped egg on the volume growth. The bottomline too has grown correspondingly.

Cadbury has managed to record an 88.41 per cent growth in net profits which were at Rs 9.27 crore. At this rate of growth, the company looks well set, once again to overhaul its last year's annual net profit of Rs 26.02 crore, by the end of third quarter itself. However, tax provision has been higher at Rs 3.95 crore (last quarter Rs 1.97 crore). Expenditure on advertising and marketing which was almost 11 per cent of total revenue in 1998 has also been going up.

The abundance ofthe Ivory Coast cocoa has kept prices of Cadbury's main raw material quite low. Despite the fact that cocoa accounts for around 40 per cent of Cadbury's total raw material costs and the company imports nearly 35 per cent of its cocoa requirement, it has been able to derive only marginal benefits from the soft prices. This is largely because Cadbury apparently buys forward on Cocoa. However, the reasonably low prices for packing materials have helped Cadbury in the first quarter.

Stringent cost control, prudent working capital management and factory efficiencies have helped buoy earnings. This is reflected in the buoyant operating margins in the first quarter, which have improved from 12.38 per cent to 15.74 per cent. A reduction in the interest burden to Rs 1.22 crore, has further buoyed net profit margins which have also improved from 4.94 per cent to 7.98 per cent.

All of which seems to place Cadbury India on a firm wicket for the future. Especially, as the chocolate confectionery market in India isestimated to be in the region of 23,000 tonne by volume and around Rs 800 crore by value. The growth potential for Cadbury is indeed enormous. But perhaps one area of concern for Cadbury is the loosing battle it is fighting in the food drinks segment, where the brown beverage segment of Bournvita lost market share to the white drink segment wherein the market leader is SmithKline's Horlicks. Incidentally, the contribution of the food drinks segment to total revenue has also decreased during 1994 to 1998, from 32 per cent to 21 per cent.

This aside, Cadbury looks well set to continue its dominance with a 70 per cent market share in the chocolate confectionery market. Volume growth will also accrue due to increased capacities. The strategy to extend its sugar confectionery range into value-added products and increased distribution reach including the rural push, also augur well for the future. But perhaps most significant from the shareholders point of view in the interim, is the management's decision to sellsome of its surplus properties in Mumbai, which will generate a huge cash surplus for Cadbury. This surplus might then just find its way into the pockets of shareholders in the form of increased dividends!

IPCL

Critics claim that IPCL's Baroda facilities are unviable and have very low yields. Hence, it can be reasonably assumed that the company's decision to scrap the ethylene cracker would give it better operational flexibility in the pricing of products. However, for the investors who have picked up stake in IPCL hoping to benefit from the open offer to be made by the person who gets the controlling stake from the government, this may not be good news.So far, the crude indicator for the open offer price for retail investor has been the book value - which is Rs 120 and in any valuation method some weightage has to be given for the book value. But if some of the plants are old and a replacement or mordernisation is warranted, the valuations would change (for both the cash flow method and thereplacement cost method). The cash flow method yields a value of about Rs 80 per share taking the current polyester prices. Higher capacities would push this value upwards.

By the replacement cost method, analysts have arrived at a value of Rs 112 per share if all units are kept intact. Sans the units that need to be scrapped or modernised, IPCL's value per share works out to be Rs 92. This price range of Rs 92-112 is very close to that arrived by the core committee when they decided on the amount that the government can raise from selling the management control in IPCL.

For the existing management of IPCL, the question is how to fund the company the capex. Internal cash generation has dropped a lot, with the company barely effected to make Rs 150 crore profit for this fiscal. In the first half, the shut down of some plants led IPCL to report a loss. Also the raw-material linkages problem would not be completely solved till the new port at Gujarat is commissioned. Moreover, the yields of IPCL are effectedas they have to pick up 50 per cent of their naphtha requirement from IOC. The quality of naphtha given by IOC effects the output - with the result being that yield rates are slightly lower than that of Reliance. According to company officials, their yield rates are in the range of 30-32 per cent. In case of imported naphtha the yield rates are same as that of Reliance.Consequently, one can say that with product prices not moving up, the company's cash generation would not be any better this fiscal. Equity dilution is not attractive, as the company is already saddled with high equity base of 24.9 million shares. Possibly loan funds seem to be the option. However, the investment requirement of Rs 1,000 crore - Rs 1,050 crore would make total debt rise by 25 per cent. Analysts estimate that currently total loan funds stand at Rs 4,730 crore. Higher interest payments due to any additional loans would only reduce the viability of the new project.

One option is waiting for the divestment of the company andallowing the new player who has taken over the management bring in additional funds. However, this reduces the attractiveness of the entire deal for the acquirer. As a result, a lower bid would be made for the acquisition and correspondingly, the open offer price that investors could expect would also be lower.

EMCEE (with contributions from Percy Dubash & Manish Saxena)