Analysts perceive the ‘convenience food’ sector to be a booming one; it is estimated to grow even further in the coming years
Young, urban and chic, India's populace today has no time to linger around the kitchen to dish out their favourite meals. Gastronomy tours start at the supermarket and conclude at the microwave.
Ready-to-eat food is all the rage now. But despite the fact that India has a stronger agricultural market than countries like Thailand and Malaysia, processed food is being imported from these Southeast Asian countries. Although manufacturers like Nestlé and GlaxoSmithKline Consumer Healthcare have been selling low-priced instant foods for a number of years now in India, the food processing industry is still flooded with imports from various Asian countries. Right from pasta sauces to olives to salad dressings, foreign brands have monopolised the Indian market.
Analysts perceive the 'convenience food' sector to be a booming one; it is estimated to grow even further in the coming years. This lucrative market has also been attracting foreign direct investment (FDI). In FY08, Rs450 crore of FDI came into the country, this figure went up to Rs930 crore in FY10.
But it looks like Indian brands are finally realising the potential of the ready-to-eat domestic food market.
Ready meals by well-known brands such as Karen Anand's Gourmet Kitchen (with Temptation Foods) and Sanjeev Kapoor's Khana Khazana (with Capital Foods) have recorded a good 20%-25% growth since FY09.
Dehydrated soups, instant noodles and ready-to-eat parathas are just a few of the products manufactured by Indian companies which are flooding supermarkets now.
Many leading companies have been showing keen interest in this industry. For example, GlaxoSmithKline Consumer Healthcare has extended its famous 'Horlicks', brand to cereal bars, biscuits and instant noodles (among other 'convenience' foods).
"Horlicks has become a Rs1,500-crore megabrand post its progression from just a health and wellness brand to food and beverages," GlaxoSmithKline Consumer Healthcare's general manager-marketing (Horlicks), Prashant Pandey, told reporters recently.
Nestlé India Ltd has announced an investment of Rs10 billion in the Indian market by 2011, to build up production facilities. "Around Rs3.5 billion will be invested for a noodle factory in Karnataka and around Rs5.5 billion will be invested to set up a brownfield factory in Haryana," according to Antonio Helio Waszyk, chairman and managing director, Nestlé India. The factory in Haryana is expected to be set up by 2011-end.
With increasing per capita income and more women joining the workforce, the future of the food processing industry seems bright. Literacy, urbanisation, enhanced lifestyle and the importance of saving time which would have otherwise been spent in the kitchen are a few of the key drivers of this industry.
After all, chicken tikka masala is now Britain's most favourite food. More countries are beginning to appreciate Indian cuisine. With a large expat population in various corners of the globe, there also exists a huge export potential for Indian processed food.
No wonder this is a sunrise industry - and it is just a matter of time before more players (Indian and global) try to eat into this business.
Cement prices in the north and south of India are still under pressure due to heavy flooding and excess supply
As the monsoons ended last month, cement companies have increased prices. Last month cement companies hiked prices in the rage of Rs25- Rs40 for a 50-kg bag. According to media reports, Indian cement producers are likely to increase prices of cement by about 12% to Rs20 per 50-kg bag in Gujarat as construction activity is picking up. Companies are also planning to raise prices in Maharashtra. Over the past two to three months, cement prices in Andhra Pradesh were up by Rs60-70; Rs40 in Kerala, while Tamil Nadu and Karnataka saw an increase of Rs50 per 50-kg bag.
"The recent price hike has not been done due to an increase in demand. It is a complete understanding between cement companies," an analyst from Centrum Broking Pvt Ltd told Moneylife.
Even prices in the southern part of the country have been increased; cement prices in the north and south are still under pressure due to heavy flooding and excess supply.
Major cement companies have registered some growth in sales and production in September. UltraTech Cement, a subsidiary of the Aditya Birla Group, posted a 2.71% increase in sales, while production was 2.85 million tonnes (MT) in September. Ambuja Cement's sales were up 9% to 1.48MT, while production increased to 14.84 lakh tonnes during the month from 13.82 lakh tonnes in September 2009.
ACC posted sales of 1.58 MT, a decline of 3.07%; however, Jaypee's sales surged 61% to 1.17MT in September compared with the same period of 2009.
Sales growth has been showing a marginal fall in the period of April-July 2010; however, the industry registered a meagre growth in August following moderation in demand in southern India.
According to Nomura's report, published today, since the last two months, ACC, UltraTech and Grasim Industries are broadly coming back on track, while Ambuja Cement has been the standout performer during this period.
Shree Cement and India Cement were underperformers during the period. Heavy monsoons, mainly in north and east India, have hampered the construction activity during the last two-three months. Nomura expects some pick up in demand after the monsoons, but is doubtful over double-digit growth in demand for FY11. The firm has reduced its demand growth estimation by 1% in FY11 to 9.5%
The report says that currently SAAR (seasonally adjusted annual run-rate) is indicating total demand of 212.8MT for FY11 which would mean growth of just 6.9% y-o-y in FY11 on 10.7% y-o-y growth in FY10.
Since the past one-and-an-half years, the industry has seen a significant increase in capacity. It added 51MT of new capacity in FY10 and anther 41MT and 20MT increase in capacity is expected in FY11 and FY12 respectively, adds the report. However, only 10MT addition in capacity is expected in FY13, says the report.
The capacity utilisation for the industry will remain low at about 81% even in FY13, says Nomura. The report further adds that the future capacity addition will far exceed incremental demand till FY11. In FY12, utilisation and demand is expected to be roughly the same. It is only in FY13 that incremental capacity addition starts trailing demand, thereby leading to some improvement in capacity utilisation rates.
Region wise, demand in southern India could remain depressed for some time. The region's current capacity utilisation is merely 58%, with some capacity increment still to be commissioned. Demand in the region, particularly in Andhra Pradesh, is still sluggish, says the report.
After seeing volatility in the first quarter of this year, prices started correcting from May and by June in some regions. Prices were down till August. Cement companies started rising prices in September. During September, there were multiple price hikes in the south which helped companies recover at least part of their realisations lost during the previous three months. The impact of price hikes in the south has also been seen in regions like the west, where prices have bounced back from August lows, noted the report. Nomura predicts a 5.7% price decline in FY11 followed by a 2%-3% increase in FY12.
The report adds that the top five Indian cement producers, such as UltraTech, Jaiprakash and ACC will hold around 45% of the installed capacity base by the end of FY11, while the top ten will produce about 65%. However, more than 40 companies control 35% of total production. However, such a long tail will make it difficult to achieve any sort of understanding on pricing, says the report.
Input costs may bring some relief for cement companies as international coal prices have been stable over the past few months. Diesel prices have increased by 15% in the past one year and a further hike will bring changes in prices.
Pantaloon has achieved phenomenal sales growth over the past few years. The expansion has been driven by massive debt financing. Now the interest and repayment burden could restrict further growth
Over the past few years, Pantaloon Retail, the country's largest retail chain by sales, has recorded impressive sales growth, far outperforming its peers like Shoppers Stop and Trent. Unlike these smaller players, Pantaloon has aggressively resorted to debt financing to fund its robust expansion across the country.
The increase in bank borrowings over the past few years has helped Pantaloon achieve a growth rate that is more than twice that of its closest rivals. Since 2007, Pantaloon has recorded compounded annualised sales growth of 41%.
Comparatively, the sales growth of Shoppers Stop and Trent has been lower at 15% and 16%, respectively. On the other hand, Pantaloon's debt has increased at a CAGR (compounded annualised growth rate) of 53% during this period compared to Shoppers Stop and Trent whose debt has increased at a much lower rate of 18% and 4%, respectively.
To get a better picture of the extent to which Pantaloon has used debt to spruce up revenues, we compared the annual borrowings to sales for each of the companies. Pantaloon's debt level averaged a massive 44% of its sales for the past four years. In comparison, Shoppers Stop averaged a debt level of 16%, while Trent's debt accounts for 28% of its sales, averaged over the period. Pantaloon has a debt exposure of nearly Rs4,000 crore on its books as of March 2010 while Shoppers Stop and Trent have manageable debt of Rs252 crore and Rs264 crore, respectively.
What is a bit of a bother for Pantaloon is the meagre cash flows. Due to this limitation on cash, not only would growth be restricted, but the company may have to resort to additional debt or equity dilution to meet the rising costs of financing and repayment obligations. The company burnt cash to the tune of Rs2,400 crore and Rs1,100 crore in fiscal 2008 and 2009. In the fiscal year 2011, Pantaloon has a debt repayment obligation of over Rs2,500 crore, while the total cash outgo is expected to touch Rs7,500 crore.
"Unless cash generation from operations (before capex and interest payment), which was quite low during the last two years, improves, the company would need to borrow additional debt or raise equity to meets its interest and loan repayment obligations," BRICS Securities said.
BRICS Securities believes that the interest and repayment burden would severely restrict Pantaloon's growth prospects over the next five years. "Pantaloon's significant increase in debt could put company's growth off track. Rising rates and lower credit rating (would) make further debt funding both expensive and risky. Raising equity is EPS dilutive, restricting the quantum of funds from this route. Trent, Shoppers Stop and to a large extent Raymond, will not face this issue as their debt levels are manageable," the BRICS report said.
The BRICS report also pointed out that efforts by the company's majority owners to raise debt were further cause for concern. The report highlighted that in March 2010 one of the shareholders of Pantaloon, Pantaloon Industries, had raised long-term loans of Rs2,500 crore, which was assigned an MAAA- rating by credit rating agency ICRA. That's just one level about junk status. Another major shareholder, Future Corporate Resources, with debt outstanding amounting to Rs6,100 crore, had approached IL&FS to raise Rs2,500 crore through issuing 11.4% NCDs maturing in 2013. Already, the promoters have pledged 18.9% of their holdings in the company as security for debt facilities.
Given the tightening liquidity environment, the Future Group is likely to face pressure in servicing its Rs5,000 crore debt. As far as Pantaloon is concerned, its debt service coverage ratio stands at 0.7, which is quite low compared to its peers. Shoppers Stop and Trent have a healthier repayment ability, with a coverage of 4.5 and 2.6, respectively.
About the outlook for the company, BRICS Securities said, "Pantaloon may see growth pangs as it stares at Rs38.5 billion of debt that has been the primary driver of its growth (sales) so far. In the last three years, Pantaloon recorded sales growth of 58%, more than double the growth rates of peers, but this came with substantial increase in debt which posted 76% CAGR in case of Pantaloon against 19% for Shoppers, 9% for Raymond and 7% for Trent. The Future Group has over Rs50 billion in debt that needs to be serviced, that too in a liquidity environment which has tightened in the last three months and is expected to remain tight in the coming quarters."