The choclate major, Cadbury India, is offering its shareholders a sweet deal: The company offers 39.68 lakh shares at half of the current market price of the scrip. The scrip currently hovers around Rs 305, whereas the rights issue, in the ratio of one equity for every five shares held, is priced at Rs 150. The issue proceeds of Rs 59.52 crore will be used to part finance the company's Rs 92-crore expansion-cum-modernisation programme.

After the issue, Cadbury's equity will swell from Rs 19.84 crore to Rs 23.8 crore. An Indian associate of Cadbury Schweppes, (CSL), UK, which holds 51 per cent in the company, Cadbury enjoys a share of 70 per cent of the Indian choclate market which is estimated to be 20,000 tonnes. The expansion will help the company further consolidate its position. Cadbury owns several well-known chocolate brands like Dairy Milk, Eclairs, Relish, Perk, 5-star, Gems, Nutties and Break. Besides chocolate, its other products include malt foods, drinking chocolate and cocoa powder. Cadbury's malted beverage `Bournvita' enjoys a 15 per cent market share.

With five-decades of presence in India, Cadbury has almost built up a monopoly for its products. However, with the launch of `Kit Kat' chocolates (two years back) and `Milo' health drink by Nestle, the company is likely to face competition. Nestle has already captured 20 per cent of the chocolate market.

The proposed expansion of its present capacities should provide enough leverage to the company as far facing the competition is concerned.

Cadbury has recently entered into sugar confectionery business by launching `Googly' sweets and further plans to add value to the business by introducing premium sugar confectionery products. In quantity terms, the confectionery business is much larger at about 2 lakh tonnes, while chocolate market is 20,000 tonnes. However, in rupee terms, the sugar confectionery market is about half the size of the choclate market as the average product price is much lower. In the sugar confectionery business, Cadbury will face competition from established brands like Parry, Nutrine, Nestle and Parle. However, considering the large market, good brand name and quality standards maintained by Cadbury India, the company should come out with a decent growth rate in this segment. However, the profit margins in this segment are very low.

The company has an impressive track record to its credit. After reporting a loss in 1992-93 (excluding income from property sales), the company has been registering consistent growth in sales and profits. Thanks to high cocoa prices, profit margins squeezed during 1992-93. For the year ended December 28, 1996, Cadbury reported a 2.2 per cent drop in net profit to Rs 19.62 crore from Rs 20.08 crore in 1995. However, including profit from sale of land, net profit registered a growth of 17 per cent. Net sales increased by 24 per cent to Rs 314 crore during the period from Rs 253 crore in the previous year. Launch of `Perk' chocolate in 1995, which is a `ready to eat' snack food, mainly contributed to the growth this year. The product has snatched a part of market from Nestle's Kit-Kat. However, net profit margin fell to 6.2 per cent from 7.9 per cent in the previous year.

The company paid a lower dividend of Rs 3.5 per share as against Rs 5.5 per share in the previous year. However, the company compensated the shareholders with a bonus issue in the ratio of 3:5 ratio in June 1996.In India, the consumption of chocolate is restricted to the middle class. Also, since refrigeration facilities are needed for storage due to hot conditions in India, the market for choclates is concentrated in urban and semi-urban areas. With the company's proposed foray into sugar confectionery business, its reach will be wider.

In next few years demand for chocolates is expected to grow at the rate of 15-18 per cent annum. The per capita consumption of chocolates in India is very low at 25 gram compared with 2.2 kilogram in the West, which leaves scope for growth. Returns from sugar confectionery business will start accruing from 1998.

With Cadbury's good track record of rewarding its shareholders with bonus and dividends, the offer price of Rs 150 seems to be attractive.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.