Citigroup Nippon Indosari Corpindo Tbk - Analyzed Non-Rated Snapshot

 Company Overview — The company was established in 1995 as PT Nippon Indosari Corporation (ROTI.JK). Today it is the largest high quality bread manufacturer in Indonesia with a 90% market share in the mass market segment.

 Business Strategy — Leveraging on the favourable prospects of the industry, it aims a) to broaden its reach and increase its market penetration by expanding to 5 new areas mainly Semarang, Medan, West Jakarta, Palembang and Balikpapan/Makassar over the next 4 years; and b) continue implementing an effective supply chain management (SCM) to maintain its competitive edge.

 Industry Overview — The Indonesian bakery market provides favourable prospects given the low consumption per capita of bread supported by a population of 237m. In the last 5 years alone, sales of bread by volume and revenues have been growing by 7.1% and 13.6% CAGR respectively. ROTI’s commanded no more than 5.2% of the total baked goods market in 2008 (see Figure 2).

 Competitive Analysis — 85% of the Indonesian bakery industry is controlled by the home/small category which is comprised of 5,000 producers with a 5-30km distribution coverage and no branding. The remaining 15% is split amongst mass production and boutique bakeries. The mass production is comprised of only a few enterprises (including ROTI who commands 90% market share) with a100-200km distribution coverage and branding. Boutique bakeries are mainly in franchise formats, located in permanent shops and with branding.

 Recent Results — 1H10 net profits grew 39% YoY to Rp41bn underpinned by the 21.6% YoY growth in revenues which helped cushion the 22.5% increases in COGS and 14.9% increases in operating expenses.

 Strengths — 1) Large untapped market (esp. outside Java) and low consumption per capita of bread in Indonesia. 2) Extensive distribution network (over 19k direct outlets and growing). 3) Established reputation and household brand name. 4) Ability to raise avg. selling prices through product differentiation and innovations. 5) Experienced mgmt team with high industry standing and good track record.

 Weaknesses — 1) Short life of bread: Given the short shelf life of bread (only 5 days), ROTI needs to always ensure that bread delivery is efficient and loss return ratio kept to a minimum. Fresh deliveries are made by purpose-built trucks supplied by rental companies. Unsold breads are withdrawn from market 4 days after prod’n to ensure freshness. To date, ROTI manages to keep its loss return ratio at a min. of 7% in its Cikarang factory. 2) Operating at nearly full capacity:
ROTI currently operates with a 75% utilization capacity for white bread and 98% utilization capacity for sweet bread. To address this, expansion plans are ongoing.