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Nestle: CY13 remains lacklustre - Views on News from Equitymaster

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Nestle: CY13 remains lacklustre
Feb 18, 2014

Nestle India announced the fourth quarter results of calendar year 2013 (4QCY13). The company has reported 4% YoY and 1% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Nestle posted a poor 4.7% YoY topline growth in 4QCY13. For CY13, revenues increased by 9.2% aided by 7% YoY rise in domestic sales and 47% jump in export turnover.
  • Operating margin contracted by 2.5% YoY in 4QCY14 due to higher raw material costs and other expenses. The operating margin for CY13 remained flat at 22% during CY13.
  • Aided by a steep rise in other income earned and lower provisioning, the company has been able to limit contraction in net profit margin to 0.5% for 4QCY14. For CY13, net margin reduced by 0.5% YoY.
  • The company has declared a final dividend of Rs 12.5 per equity share of face value of Rs 10. The total dividend declared in CY13 adds up to Rs 48.5 per share. This translates into a dividend yield of less than 1%.

Financial snapshot
(Rs m) 4QCY12 4QCY13 % change CY12 CY13 % change
Revenue 21,611 22,630 4.7% 83,345 91,011 9.2%
Expenditure 16,589.9 17,946.1 8.2% 64,834 70,914 9.4%
Operating profit (EBDITA) 5,021 4,684 -6.7% 18,512 20,096 8.6%
EBDITA margin (%) 23.2% 20.7% -2.5% 22.2% 22.1% -0.1%
Other income 126 319 152.4% 310 831 167.8%
Interest 99 101   266 365 37.3%
Depreciation 835 757 -9.4% 2,772 3,300 19.1%
Impairment of Fixed Assets - -   0 0  
Provision for Contingencies 131 83 -36.9% 258 621 140.1%
Profit before tax 4,082 4,062 -0.5% 15,526 16,642 7.2%
Exceptional income - 102     138  
Tax 1,293 1,347 4.2% 4,847 5,609 15.7%
Profit after tax/(loss) 2,789 2,817 1.0% 10,679 11,171 4.6%
Net profit margin (%) 12.9% 12.4% -0.5% 12.8% 12.3% -0.5%
No. of shares (m)         96.4  
Diluted earnings per share (Rs)*         115.9  
Price to earnings ratio (x)*         43.5  
* On a 12-month trailing basis

What has driven growth in 4QCY13?
  • Nestle clocked a 4.7% increase in revenues on a 3.7% rise in domestic sales. Higher domestic sales have been on account of higher realizations from better product mix. Exports grew by 20.9% during the quarter contributed largely by exports to affiliates.

  • But a faster rise in input costs and other expenses shaved off 2.5% YoY from operating margin during the quarter. Input costs as a proportion of sales rose by 1.7% YoY. Even other expense to sales ratio increased by 0.7% for the quarter.

    Cost break-up
    As a % of sales 4QCY12 4QCY13 Change in basis points
    Cost of goods sold 44.6% 46.4% 174.38
    Staff costs 8.1% 8.2% 11.11
    Other expenditure 24.0% 24.7% 68.35

  • Despite a 6.7% YoY fall in operating profits, the company managed to report a 1% YoY rise in net profits backed by a 152% jump in other income earned during the quarter. Even a 37% decline in provision for contingencies propped up the profit performance during the quarter. The tax incidence rose to 33% in 4QCY13 from 31.7% in the year-ago quarter.
What to expect?
Nestle has reported a tepid performance in CY13. Majority of the sales growth during the year has been on account of higher realizations with volume growth in some product categories such as Maggi, Nescafe and Kitkat. Slowdown in discretionary spends has exerted pressure on the company's sale volumes. Further Nestle has been restructuring its product portfolio with a focus on premium and value-up ranges that has also affected its offtake. To add to this, increased interest costs and high depreciation on expanded capacities have adversely affected the profitability of the company.

At a price of Rs. 5035, the stock is trading at 32 times our estimated CY15 earnings. Armed with a diversified portfolio and strong brand equity, Nestle's long-term growth prospects remain bright. But at current valuations, the stock is overvalued and we re-iterate a SELL on the stock.

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