Kraft Goes Bullish On India

Zacks Investment Research
updated | Zacks.com

Following the buyout of Cadbury Plc, the largest packaged food maker Kraft Foods Inc. (NYSE: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 (NYSE:KO) and PepsiCo Inc. (NYSE: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. (NYSE:UL) and ConAgra Foods Inc. (NYSE: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.

 
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