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Nestle: Profits up on high realizations - Views on News from Equitymaster

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Nestle: Profits up on high realizations
Feb 21, 2013

Nestle India announced the fourth quarter results of calendar year 2012 (4QCY12). The company has reported 10% YoY and 21% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Backed by 9.6% rise in domestic sales and 20.6% jump in exports mainly to third parties, topline grew by 10% on a YoY basis. For CY12, revenues were up by 11% YoY.
  • Controlled raw material and other expenses enabled the company to expand operating margin by 2.2%. The operating margin for CY12 increased by 1.3% mainly due to input cost savings.
  • Net profits grew by 21% on a 24% increase in operating profit on a YoY basis. However, profits for full year CY12 grew by a relatively subdued 11% YoY due to a steep rise in interest and depreciation charges.

(Rs m) 4QCY11 4QCY12 % change CY11 CY12 % change
Revenue 19,628 21,611 10.1% 75145.5 83345.3 10.9%
Expenditure 15602.8 16616.8 6.5% 59667.8 65,104 9.1%
Operating profit (EBDITA) 4,025 4,994 24.1% 15,478 18,241 17.9%
EBDITA margin (%) 20.5% 23.1%   20.6% 21.9%  
Other income 100 126 26.9% 271.6 310.3 14.2%
Interest 33 99 199.4% 51.1 266 420.5%
Depreciation 446 835 87.3% 1533.3 2771.5 80.8%
Impairment of Fixed Assets 20 104   104 69  
Provision for Contingencies 170 -   181.8 -81.5  
Profit before tax 3,456 4,083 18.1% 13,879 15,527 11.9%
Tax 1,148 1,293 12.7% 4263.7 4846.9 13.7%
Profit after tax/(loss) 2,308 2,789 20.8% 9,616 10,680 11.1%
Net profit margin (%) 11.8% 12.9%   12.8% 12.8%  
No. of shares (m)         96.42  
Diluted earnings per share (Rs)*         110.76  
Price to earnings ratio (x)*         41.5  
* On a 12-month trailing basis

What has driven growth in 4QCY12?
  • Nestle posted a 10% YoY increase in revenues led by 9.6% growth in domestic sales. Domestic sales form a lion's share of 95% of overall revenues and witnessed growth mainly from higher realizations and better product-mix. Export sales grew by 20.6% YoY contributed largely by exports to third parties that surged by 47.2%.

    As a % of sales 4QCY11 4QCY12 Change in basis points
    Cost of goods sold 45.5% 44.6% -91.24
    Staff costs 7.4% 8.1% 65.57
    Other expenditure 26.5% 24.2% -234.65

  • Higher realizations from improved product-mix have enabled the company to offset raw material inflation. As a result, the cost of goods sold to sales ratio fell by 0.9%. This coupled with a controlled rise in other expense led to a 2.2% expansion in the operating margin during the quarter.

  • Net profit grew by 20.8% despite a sharp jump in interest and depreciation charges. Each of these expenses surged by over 80% during the quarter with completion of major capital projects and finance costs being charged to the income statement as against being capitalized so far. However, Nestle's tax incidence reduced to 31.7% from 33.2% in the corresponding quarter last year. Also, the company did not provide for contingencies in the current quarter as compared to a provision of Rs 170 m made in the year-ago quarter.

What to expect?
Nestle had embarked on an aggressive expansion in the last two years, scaling up capacities of chocolates, noodles and other products. But with capacity constraints addressed, the company is staring at slowdown in discretionary spending. Moreover, growth in its offtake has been moderating in past one year with most of the growth in sales due to price-hikes and better product mix. The company continues to face competition in noodles and other value added milk product categories.

At a price of Rs. 4594, the stock is trading at 31 times our estimated CY14 earnings. Backed by a diversified portfolio and strong brand equity, Nestle continues to have good potential. But at current valuations, the stock is overpriced and we re-iterate a SELL on the stock.

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