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Consistent performance pays dividends… - Views on News from Equitymaster
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  • Jan 27, 2001

    Consistent performance pays dividends…

    Steady, reliable and consistent value growth. That’s how one would describe Nestle India’s performance, the 51 percent subsidiary of global food products major, Nestle SA.

    The company has not only brought joy to the Indian consumers palate with culinary delights and healthy food supplements, it has also brought smiles to its investor’s in the process. Nestle’s turnover has grown at a compounded annual growth rate (CAGR) 19 percent over the past decade. Its profits have grown at an equally impressive CAGR of 21 percent during the period. In the last decade the company’s market capitalization has grown by more than 10 times.

    (Rs million) 9m FY00 9m FY01 Change
    Domestic Sales 9,524 10,097 6.0%
    Exports Sales 1,685 2,275 35.0%
    Total Sales 11,209 12,372 10.4%
    Other Income 57 75 31.6%
    Total Expenditure 9,546 10,205 6.9%
    Operating Profit 1,720 2,242 30.3%
    Operating profit margin (%) 15.3% 18.1%  
    Interest 217 120 -44.7%
    Depreciation 285 276 -3.2%
    Profit before Tax 1,218 1,846 51.6%
    Extraordinary Items 2 200  
    Tax 411 615 49.6%
    Profit after Tax/(Loss) 805 1,031 28.1%
    Net profit margin (%) 7.2% 8.3%  

    Though the company has seen some rough times in the recent past. Exports to Russia took a hit and as a result its turnover declined by 5 percent in fiscal year December ended 1999. But the company seems to have bounced back from this temporary setback. For the first nine months of fiscal year 2001 (January-September 2000), Nestle declared a 10 percent growth in turnover. This came on the back of a significant 35 percent jump in exports. The company’s bottomline improved by 28 percent during this period, as it managed to interest costs by 45 percent. It is this desire to continually improve its operational efficiencies that has stood the company in good stead.

    All this is a synopsis of the financial side of Nestle’s performance. Let’s look at Nestle’s product profile, which is responsible for this consistent performance.

    Nestle is India’s third largest food company having a leadership in coffee and culinary products. It has the widest portfolio of products in the food and beverage industry. The company derives its revenues from five major product categories - Coffee both domestic and exports (Nescafe), health beverages (Milo), chocolates and confectionery (Kit Kat, Munch, Bar One, Charge and Polo), milk products and baby foods (Cerelac, Lactogen, Nestum, Everyday Dairy Whitener and Milkmaid) and food products (Maggi noodles and ketchup).

    Category Brands Market share
    Coffee Nescafe Classic, Nescafe Select, Nescafe Sunrise 60%
    Culinary products Maggi Ketchup, Maggi Noodles 40%
    Milk products/
    baby foods

    Cerelac, Lactogen, Nestum, Milkmaid,
    Everyday Dairy Whitener

    Chocolates & confectionary KitKat, Munch, Charge, Bar One, Polo 18-20%
    Health beverages Milo -

    Nestle dominates the Rs 9 billion (US$ 194 million) domestic branded coffee market with a 60 percent share. The company also dominates the baby food segment. Soluble coffee i.e. ‘Nescafe’ and its brand extensions contribute 38 percent to the company’s turnover, followed by milk products (23 percent). Nestle is firmly entrenched in these two categories.

    It is in the other product categories that Nestle is under increasing pressure. In the culinary segment, Nestle was the undisputed market leader in tomato ketchup till the previous year (47 percent share). However, since then its brand ‘Maggi’ has consistently lost market share to Hindustan Lever’s aggressive brand extensions of ‘Kissan’. Both companies are now tied neck to neck in this segment and command 40 percent share each.

    In the chocolates and confectionery segment, Nestle has failed to make a dent in market leader Cadbury’s market share (70 percent). Though its brand Kit Kat enjoys immense brand recall, the market leader’s clever positioning of its mother brand and introduction of smaller chocolate packages has put a spanner in Nestle’s growth in this segment. In the health beverage segment too, Nestle has not made much headway since market leader Smithkline dominates this segment.

    Nevertheless, Nestle understands that it has too keep introducing new products and expand its folio in India. This will give it the critical mass for growth in future. In 2000, the company made a tentative entry in the dairy segment with the launch of its packaged milk. The company plans to introduce yogurts this year. The dairy segment is a Rs 30 billion (US$ 645 million) market and is growing at 10 percent annually.

    Similarly, Nestle also entered the premium bottled water segment with ‘Perrier’, its international brand. The company will also launch the ‘Pure Life’ brand aimed at the masses in 2001. Currently, India’s per capita consumption of bottled water is only half a litre, compared to 45 litres in the US. Thus this Rs 5 billion (US$ 108 million) segment offers immense potential.

    However, in the initial years investments in these segments will not yield high returns to the company. This is like to put its return on invested capital under pressure in the coming years. Also, though the exports have surged in the current year, Nestle’s dependence on Russia is a concern. But given the company’s past track record, Nestle’s strict control on operational efficiencies, will see it through these short-term hurdles.



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