Cadbury's and Nestle

Results posted by both Cadbury's and Nestle in the chocolate confectionery and beverage industry reflect the effects of increasing competition and a rising trend in the price of their basic raw material - cocoa. With India being a cocoa deficient country, both the MNC players are forced to rely on imports for their domestic operations.

Cocoa prices in the first half of the year moved on an upward spiral touching a nine-year high in May 1997, which is reflected in the unimpressive performances of both the companies for the six months ended June 1997.

While volumes in the chocolate business and the continuing success of Perk have buoyed revenues, Cadbury's recent foray into the sugar confectionery market via the Googly has come up against stiff competition from the existing players.

Incidentally, Bournvita's stagnation in the malted beverage segment can also be traced to the successful launch of Nestle's Milo. All these factors are accentuated in the slowdown in revenue growth which at Rs 153.12 crore, was up a mere 17 per cent.

The drain on earnings due to the 21.95 per cent increase in expenses is reflected in the margins at the operational level which dipped from 14.13 to 11.55 per cent. Furthermore, a burgeoning interest burden of Rs 3.75 crore (Rs 1.43 crore last year), possibly due to increased working capital limits for servicing new production capacities has been another major drain on profitability at Cadbury's. No wonder then that despite a lower tax rate, Cadbury's recorded a negative earnings growth of 35 per cent, with profits dipping from Rs 9.64 crore to Rs 6.18 crore for the six months.

On the other hand, aggressive capacity expansions, expenditure related to new product launches and an emphasis on volumes, have continued to take a toll on Nestle's performance for the six months ended June 1997. Earnings at Nestle have continued to stagnate quite like for the 12 months ended December 1997. Interestingly, this is despite a higher other income of Rs 4.2 crore cushioning the bottomline. Operating margins at Nestle dropped from 11.35 to 9.83 per cent, which is also a continuation of last year.

But this aside the saving grace for Nestle has been the 22.47 per cent improvement in revenues which largely is a corollary of volume growth, the success of products such as "Milo" and the brand extensions of Maggi.

However, even despite this performance one cannot ignore Nestle's diversified product portfolio - with brand such as Nescafe, Kit-Kat, Maggi, Milo and Polo, which results in the dilution of attention to individual markets, analysts point out that category-specific risks are negated due to this strategy. Furthermore, once the production from the expanded capacities stabilises volume growth would be quite significant. However till then margins are likely to remain under pressure.

KEC International

In India, almost all groups transfer funds among themselves without even asking shareholders. The RPG group is no stranger to this practice. In 1995-96, the practice was illustrated by Ceat and the KEC International balance sheet for 1996-97 reveals further group company funding. Consider the facts. KEC has a 99.99 percent owned subsidiary -- Bespoke Finvest. In 1995-96, KEC had invested Rs 49.13 crore in 14 per cent optionally convertible debentures of the subsidiary which had a net worth of Rs 435. KEC had also extended Rs 3.68 crore interest free loan to the subsidiary. Bespoke does not even have any internal audit system. In 1995-96, the subsidiary made investment of Rs 52.59 crore in 14 percent unquoted debentures. In August 1996, the debentures were sold off and Rs 55.8 crore was invested in equity of RPG group companies (market value:Rs 44.28 crore). However, amount due for more than six months for the investments sold amount to Rs 49.12 crore. The highest investment (Rs 17.18 crore) was made in Ceat at the average cost of Rs 63 per share. The investment in Ceat exceeds the limit specified in Prudential Accounting norms guidelines notified by RBI for NBFCs. In 1995-96, the subsidiary had negative net worth and even in 1996-97 has an accumulated loss of Rs 0.02 crore. KEC International had a negative cash flow from operations in 1996-97.

KEC has also changed the policy of accounting for retentions. Almost 70 percent of the business of the company is from overseas business. Some of the countries require retentions between 25 and 50 percent. The company has decided to account for the progress bills rendered on work done and work done but not billed without deducting retentions. This will have a material impact on profit and reserves but the amount has not been ascertained.

Besides the Rs 49.13 crore invested in the subsidiary is the investment in group company CESC. The amount invested is Rs 22.26 crore(previous year:Rs 20.46 crore) at an average cost of Rs 185 per share. Post April 1995, CESC scrip has never recorded this price.

In the absence of audited accounts for 1996-97, auditors have been unable to express any opinion on the realisability of inter corporate loans including interest amounting to Rs 49.34 crore. The company considers the amount recoverable. The audited accounts of 1995-96 of the loanee companies show substantial erosion/negative net worth. The diminution in value of investments and interest accrued thereon amounts to Rs 27.16 crore. The auditors qualifications indicate the extent of window-dressing of accounts and funding of group companies. KEC International is also another classic case of how seriously corporate governance is taken by financial institutions. The stake of FIs in KEC is close to 25 percent of the equity and yet they have done nothing to stop the haemorrhage.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.