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Nestle: Growing demand booster - Views on News from Equitymaster

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Nestle: Growing demand booster
Feb 21, 2011

Nestlé India declared its 4QCY10 results. The company has reported 23.4% YoY and 80.1% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line for the quarter grew by 23.4% YoY. The growth comes on account of both volumes and price realization.
  • Operating (EBITDA) margins grew by 5.3% to stand at 18.9% (as a percentage of sales).
  • Net profit of the company grew by 80.1% YoY on the back of higher operating income and increase in other income. However, higher effective tax rate capped net profit growth.
  • For CY10, the company’s bottom line grew by 25% while the net profit margins grew by 0.3% to stand at 13%. This performance comes on the back of higher operating profits and other income.

Financial snapshot
(Rs m) 4QCY09 4QCY10 % change CY09 CY10 % change
Net Sales  13,577  16,755 23.4% 51,500 62,736 21.8%
Expenditure  11,740  13,595 15.8% 41,375 50,235 21.4%
Operating profit (EBDITA) 1,836 3,161 72.1% 10,125 12,502 23.5%
EBDITA margin (%) 13.5% 18.9%   19.7% 19.9%  
Other income  47  93 99.1%   172   238 38.3%
Interest 5 1 -79.6% 14 11 -23.6%
Depreciation    307    358 16.7%   1,113   1,278 14.8%
Profit before tax 1,572 2,895 84.2%   9,170 11,451 24.9%
Tax    442    861 94.6%   2,620   3,265 24.6%
Profit after tax/(loss) 1,129 2,034 80.1%   6,550   8,187 25.0%
Net profit margin (%) 8.3% 12.1%   12.7% 13.0%  
No. of shares (m) 96.4 96.4   96.4 96.4  
Diluted earnings per share (Rs)*         84.9  
Price to earnings ratio (x)*         42  
* On a 12-month trailing basis

What has driven growth in CY10?
  • Net sales of the company grew on the back of higher volumes and higher price realization. While domestic sales grew by 22.9% YoY, exports grew by 7.6% YoY. When adjusted for currency volatility, exports for the quarter grew by 10.3% YoY.

    Cost break-up
    As a % of sales 4QCY09 4QCY10 CY09 CY10
    Raw material 48.0% 47.5% 47.5% 48.7%
    Staff costs 10.1% 7.0% 8.4% 6.9%
    Other expenditure 28.3% 26.6% 24.4% 24.5%

  • Operating profit for Nestlé grew by 72% YoY. The growth was higher than sales growth due to slower growth than sales of raw material costs and other income and fall in staff costs. Raw material costs increased by 22% YoY while other expenditure increased by 16% YoY. Staff costs fell by 14.3% YoY during the quarter.

  • Net profits of the company grew by 80% YoY. This was a result of higher operating income and higher other income. Other income grew by 99% YoY to stand at Rs 93 m. However, increase in effective tax rates capped net profit growth. Effective tax rate increased by 1.6% to stand at 29.7%.

What we expect?
At a price of Rs. 3,556, the stock is trading at 33.1 times our estimated CY12 earnings (RPro subscribers click here). Nestle has all the drivers for growth in place with a diversified product portfolio. However, we see the competitive pressures building up for the company. Moreover, it is facing raw material pressure. This is likely to put some pressure on its margins going forward. While we believe in the company's long term growth potential, we see valuations as being stretched right now. For this reason, we have a cautious view on the stock.

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