Kraft Goes Bullish on India - Analyst Blog
November 23 2011 - 12:01PM
Zacks
Following the buyout of Cadbury Plc, the largest packaged food
maker Kraft Foods Inc. (KFT) seeks keen interest
in the growing markets of India, which has significant
opportunities in a number of key categories, which has yet to be
exploited.
Kraft, which bagged the Cadbury in January 2010 for $18.5
billion, has increased its sales growth in India by about 40% year
to date. The company also believes that India has an emerging
economy, and is expected to grow approximately 7.6% by this fiscal
year 2011 through March.
Moreover, the country offers significant opportunities to the
food makers like Kraft and other beverage makers like The
Coca-Cola Company (KO) and PepsiCo Inc.
(PEP) to expand, as the developed markets have started showing
signs of saturation.
Coca-Cola has already invested over $1 billion in the last 18
years and still remains very optimistic on the Indian operations.
PepsiCo has also invested $500 million in India in 2008 and expects
to triple its revenues over the next five years.
Last week, Coca-Cola, along with its bottling partners, invested
a massive amount of $2 billion in India in consumer marketing,
infrastructure and brand-building. The investment will start in
2012 and will continue over the next five years.
In addition, Kraft has increased its investment stake in India
by over 70%, post-Cadbury, in the areas of research, advertising,
selling and merchandising. Brands like Dairy Milk and Bournvita
also added to the growth drivers in the Kraft’s India portfolio.
Besides reaching the fast-growing developing countries in Latin
America and Asia, Kraft also enjoyed the meaningful revenue
synergies which came from Cadbury.
Kraft also hinted that it remains well poised to attain cost
savings of approximately $750 million from its integration of
Cadbury. Further, it will achieve 70% of that by the end of 2011
and also expect revenue synergies to contribute about 50 basis
points to the top line growth in 2011.
On the other hand, Kraft’s brands like Oreo cookies and Tang
powdered drink mix have already created space in India. Kraft now
expects to invest in the biscuits, candy and gum sectors, and also
foresees tremendous sales growth trend in chocolates.
Kraft, which competes with consumer giants such as Nestle,
Unilever Plc. (UL) and ConAgra Foods
Inc. (CAG), is focusing strongly on the big rapidly
industrializing countries of Brazil, Russia, China and
Indonesia, besides India.
Recently, the company also announced that it would separate its
global snacks operations from its North American grocery business,
creating two independent companies. The decision is expected to
help the company expand its global presence, besides giving
investors an option to invest either on a snacks business which is
driving growth in emerging markets, or on a slower-growing general
grocery business paying stable dividends.
Earlier this month, Kraft also delivered better-than-expected
third quarter 2011 op erating EPS of 58 cents per share, surpassing
the Zacks Consensus Estimate by 3.6% and the prior-year quarter
earnings by 23.4%.
Management credited the benefits of increased investments in
marketing and innovation, effective advertising and focus on
End-to-End Cost Management for strong results in the quarter.
Operating gains, favorable foreign currency and discrete tax items
also contributed to the profits.
Following the strong results, Kraft also revised its 2011
operating earnings guidance to at least $2.27 from at least $2.25
per share.
Currently, we provide a Neutral long-term recommendation on the
stock. Further, Kraft Foods holds the Zacks #3 Rank, which
translates into a short-term Hold rating.
CONAGRA FOODS (CAG): Free Stock Analysis Report
KRAFT FOODS INC (KFT): Free Stock Analysis Report
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
UNILEVER PLC (UL): Free Stock Analysis Report
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