Rising sugar prices sour Pepsi bottom line

Last year saw a loss of Rs 18.7 crore; this year could see similar pressure

Revenue of the Indian subsidiary of US-based PepsiCo in the financial year ended March 31, 2009, grew by 14 per cent to Rs 2,887 crore, according to its annual report.

However, rising sugar prices put pressure on the company’s profitability. It suffered a Rs 18.7 crore loss, compared to a profit a year earlier of Rs 23.7 crore.

Pepsico India Holding, the local subsidiary, is not listed on any of the exchanges and it does not declare its results publicly. According to the annual report, the refund of income tax in 2008-09 also dropped to Rs 5.9 crore against Rs 18 crore in the previous year, which further hit the profitability.

Analysts say the profitability of beverage companies may take a further hit, as sugar prices continue to rise. According to the annual report, it incurred Rs 824 crore of cost on account of raw material, including sugar, against Rs 667 crore in the previous year, a 24 per cent rise. Sugar prices in the financial year grew by 40 per cent to Rs 21.6 per kg for the small-size variety. In the current financial year, the price for this variety has further risen to Rs 40.50 per kg.

Indra Nooyi, the India-born chairman of the global beverage giant, had announced in September 2008 a plan to triple revenue of the subsidiary here in five years, with an investment of $500 million (Rs 2,270 crore) in three years. Last week, it got approval from the government to invest an additional $200 million (Rs 1,360 crore) in the country. But, rising sugar prices could spoil these plans.

“The beverage category is highly competitive and any price increase can lead to consumers shifting to rival companies,” said Anand Shah, an analyst with domestic brokerage Angel Broking. “So, these companies are going to take a hit on profitability due to rising sugar prices and any increase in their product price would come with a lag.”

The company plans to invest in the supply chain, fruit processing, agriculture, manufacturing capacity, market infrastructure and research and development in India. It plans new units and expansion of capacities of existing ones to meet the target of higher sales. India is one of the fastest growing markets for both the world’s largest soft drink companies, PepsiCo and Coca-Cola.