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Nestle: Domestic biz drives profitable growth - Views on News from Equitymaster

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Nestle: Domestic biz drives profitable growth

Feb 15, 2012

Nestle India announced the fourth quarter results of calendar year 2011 (4QCY11). The company has reported 16.9% YoY and 13.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Backed by 16.7% growth in domestic sales, Nestle reported a 17% YoY growth in sales in 4QCY12. Sales for CY11 were up by 19.7% on a 20.2% YoY rise in revenues in the domestic market. Exports grew by a relatively slower 11.8% due to ban on milk powder exports.
  • Operating (EBITDA) margin improved by 120 basis points on the back of lower raw material cost as a proportion of sales. During CY11, the company has been able to tide over input cost inflation through improved product/channel mix and maintain its operating margin at 20.5%.
  • At 13.5%, growth in earnings was considerably watered down on a 24.7% higher operating income recorded in 4QCY12. Steep increases in interest expenses along with higher depreciation and tax outgo led to the muted rise in net profits during the quarter. The net profit for CY11 was up by 17.5% YoY.

Financial snapshot
(Rs m) 4QCY10 4QCY11 % change CY10 CY11 % change
Revenue 16,755 19,627 17.1% 62736.4 75144.3 19.8%
Expenditure 13459.8 15518.8 11.6% 50071.8 59,668 19.2%
Operating profit (EBDITA) 3,295 4,108 24.7% 12,665 15,477 22.2%
EBDITA margin (%) 19.7% 20.9%   20.2% 20.6%  
Other income 93 101 7.6% 237.6 272.5 -12.8%
Interest 1 33 6520.0% 10.7 51.1 377.6%
Depreciation 358 446 24.6% 1277.5 1533.3 20.0%
Impairment of Fixed Assets   104     104  
Provision for Contingencies 135 170 25.9% 162.9 181.7 11.5%
Profit before tax 2,896 3,456 19.4% 11,451 13,879 21.2%
Tax 861 1,148 33.3% 3264.5 4263.8 30.6%
Profit after tax/(loss) 2,035 2,308 13.5% 8,187 9,615 17.5%
Net profit margin (%) 12.1% 11.8%   13.0% 12.8%  
No. of shares (m)         96.42  
Diluted earnings per share (Rs)*         99.73  
Price to earnings ratio (x)*         43.9  
* On a 12-month trailing basis

What has driven growth in 4QCY11?
  • Nestle clocked a 17% rise in topline led by 16.7% growth in domestic sales. Exports that contribute only 5% to overall sales grew by 23.2% during the quarter.

    Cost break-up
    As a % of sales 4QCY10 4QCY11 Change in basis points
    Raw material 47.5% 45.2% -223.61
    Staff costs 7.0% 7.4% 40.21
    Other expenditure 25.5% 25.9% 35.18

  • Operating profitability improved significantly during the quarter on the back of controlled raw material expenses. Improved product/channel mix offset commodity inflation and led to 224 basis points drop in cost of goods to sales ratio. Staff costs and other expenditure (both as a proportion of sales) increased by upto 40 basis points each during the quarter. The operating margin appreciated by 120 basis points to 20.9%.

  • Despite a 24.7% jump in operating income, earnings growth remain muted at 13.5% on account of higher interest and tax outgo. While interest charges shot up by Rs 32 m, tax to PBT ratio increased to 33.2% from 29.7% in the year ago quarter. Even depreciation charges increased by 24.6% and additionally an amount of Rs 104 m was booked towards impairment of fixed assets during the quarter that further pulled back profit growth.

What to expect?
Nestle enjoys strong brand equity in most of the products it operates. Although competition is heating up in specific food segments such as noodles and value-added milk products, its diversified presence in the food sector lends it protection. The company has recently completed capital expenditure of Rs 2 bn invested mainly in manufacturing and distribution.

At a price of Rs. 4375, the stock is trading at 32 times our estimated CY13 earnings. At current valuations, the stock appears overpriced and we would advise investors to exercise caution.

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