More Challenges Ahead For Coca-Cola India

BMI view: We see more challenges for Coca-Cola India in the coming months on the back of a crackdown on water overuse and pollution and a slowdown in consumer spending. Over the long term, we still see strong sales growth opportunities in the country, even if we expect juices and bottled water to perform better than carbonated drinks.

We see more challenges for Coca-Cola India in the coming months on the back of a crackdown on water overuse and pollution. Authorities in Northern India have ordered the closure of a Coca-Cola bottling plant on allegations that it was using too much groundwater, polluting the soil and hurting local agriculture. This comes as groundwaters in the Uttar Pradesh region have been at critically low levels for more than a decade. Severe water shortages are widespread in India on the back of wasteful irrigation practices that governments have had difficulties to address. Coca-Cola had already been accused in the past of polluting soils and hurting local agricultural prospects with waste from its plants.

We believe the plant shutdown will not hurt Coca-Cola's operating capacity in itself but we believe the company will be forced to be more cautious on water usage, especially in India, one of its largest growth markets. The plant shutdown should have little impact on the company's business as it is one of its smallest operating units in the country, producing an estimated 26,500 kilolitres of beverage a year. Still, we believe the decision, which could be followed by others in the coming months, will force Coca-Cola to limit water usage, especially in a region where water is already scarce and used intensively for local agriculture. We believe this will be particularly challenging for Coca-Cola since the company's product is extremely water-intensive (the company used 2.3 litres of water to produce 1.0 litres of Coke in 2010, which is already down from 2.7 in 2004). The company has the highest water consumption of the entire soft drinks and food industry.

Highest Water Usage In Industry
Selected Companies - Water Consumption (bn litres per year)

BMI view: We see more challenges for Coca-Cola India in the coming months on the back of a crackdown on water overuse and pollution and a slowdown in consumer spending. Over the long term, we still see strong sales growth opportunities in the country, even if we expect juices and bottled water to perform better than carbonated drinks.

We see more challenges for Coca-Cola India in the coming months on the back of a crackdown on water overuse and pollution. Authorities in Northern India have ordered the closure of a Coca-Cola bottling plant on allegations that it was using too much groundwater, polluting the soil and hurting local agriculture. This comes as groundwaters in the Uttar Pradesh region have been at critically low levels for more than a decade. Severe water shortages are widespread in India on the back of wasteful irrigation practices that governments have had difficulties to address. Coca-Cola had already been accused in the past of polluting soils and hurting local agricultural prospects with waste from its plants.

We believe the plant shutdown will not hurt Coca-Cola's operating capacity in itself but we believe the company will be forced to be more cautious on water usage, especially in India, one of its largest growth markets. The plant shutdown should have little impact on the company's business as it is one of its smallest operating units in the country, producing an estimated 26,500 kilolitres of beverage a year. Still, we believe the decision, which could be followed by others in the coming months, will force Coca-Cola to limit water usage, especially in a region where water is already scarce and used intensively for local agriculture. We believe this will be particularly challenging for Coca-Cola since the company's product is extremely water-intensive (the company used 2.3 litres of water to produce 1.0 litres of Coke in 2010, which is already down from 2.7 in 2004). The company has the highest water consumption of the entire soft drinks and food industry.

Highest Water Usage In Industry
Selected Companies - Water Consumption (bn litres per year)

These potential limitations will constrain the company's profitability in a context of slowing sales growth in the current subdued consumer environment. Coca-Cola India's most recent results showed slower growth in volume (even if India still outperformed the rest of Asia) and declining profits. In fact, sales volume growth was up 8.0% in Q413, compared with 5.0% in China and 3.0% in Japan. Still, net income in India declined 8.0% in Q413, while Pacific pre-tax income decline by 22.7% over the same period. We believe the strong mandate won by the opposition Bharatiya Janata Party (BJP) in the 2014 lower house elections will boost business confidence and economic activity in the near term. Still, we see more volatility in consumer spending in the coming months and forecast private consumption growth to stabilise at 5.6% in 2014, which is lower than previous levels between 6-9% in 2009-2011.

Slowing Sales Growth
Coca-Cola Pacific - Revenues (USDmn) & Growth (%, RHS)

Over the long term, we are positive about growth prospects in the industry and we believe Coca-Cola could benefit from booming consumer demand. However, we see more growth potential for fruit and bottled water than for soft drinks and believe soft drinks companies will have to push this kind of offering in the country to be successful. In that regard, Coca-Cola could easily be challenged by competitors such as Nestlé which have a stronger presence in these categories. In our view, volume sales of bottled water, functional drinks and fruit/vegetable drinks will rise between 2013 and 2018 by 15.4%, 16.7% and 15.2% respectively. Comparatively, we forecast carbonated drinks volume sales to increase by 13.0% between 2013 and 2018.

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Related sectors of this article: Food & Drink, Drink
Geography: India
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