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Nestle: Rising raw material prices hurt - Views on News from Equitymaster
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Nestle: Rising raw material prices hurt
Feb 22, 2010

Performance summary
  • Top line for the quarter grew by 24.2% YoY. The growth comes on the back of strong domestic sales.
  • Operating (EBITDA) margins disappoint as they fell by 4.5% to stand at 14.7% of sales.
  • Net profit fell by 6.7% YoY during the quarter on the back of lower operating income and lower other income, partially offset by a fall in tax expense.
  • Net profit for the CY09 improved by 22.6% YoY while net profit margins improved by 0.4% to stand at 12.7%. This performance was aided by strong operating income growth and fall in effective tax rate.


Financial snapshot
(Rs m) 4QCY08 4QCY09 % change CY08 CY09 % change
Net Sales 10,933 13,577 24.2% 43,351 51,500 18.8%
Expenditure 8,837 11,585 31.1% 34,802 42,220 21.3%
Operating profit (EBDITA) 2,096 1,992 -5.0% 8,549 9,280 8.6%
EBDITA margin (%) 19.2% 14.7%   19.7% 18.0%  
Other income 97 47 -51.8% 230 172 -25.4%
Interest 2 5 188.2% 16 14 -14.6%
Depreciation 257 307 19.4% 924 113 -87.8%
Provision for contingencies 110 156 41.1% 110 156 41.1%
Profit before tax 1,824 1,572 -13.9% 7,729 9,170 18.6%
Tax 614 442 -27.9% 2,387 2,620 9.7%
Profit after tax/(loss) 1,211 1,129 -6.7% 5,341 6,550 22.6%
Net profit margin (%) 11.1% 8.3%   12.3% 12.7%  
No. of shares (m) 96.4 96.4   96.4 96.4  
Diluted earnings per share (Rs)*         67.9  
Price to earnings ratio (x)*         38.4  
* On a 12-month trailing basis

What has driven growth in 4QCY09?
  • Net sales of the company grew on the back of both higher volumes and price realisation. Moreover, the company's domestic sales which grew by 25% YoY were affected by favorable weather conditions and a lower base. Exports of the company grew by only 8.5% YoY as result of lower sales to Russia and Bangladesh partially offset by the depreciating Indian Rupee.

    Cost break-up
    As a % of sales 4QCY08 4QCY09 CY08 CY09
    Raw material 47.1% 48.0% 48.5% 47.5%
    Staff costs 7.6% 10.1% 7.3% 8.4%
    Other expenditure 26.1% 27.2% 24.5% 24.1%

  • Operating margins for the quarter were affected by rising raw material prices particularly milk and sugar. The company launched several new products like Nestle Pasta and Nestle Bhuna Masala during the quarter while investing heavily behind brand support. This had a negative effect on the company's operating income. Furthermore, during the quarter there was a revision in employee benefits plan which resulted in staff costs shooting up by 65%. While this is a one off event, it has depressed the growth of the company's operating income. The operating income could have been lower but for better sales mix, improved realization, energy costs and scale efficiencies exploited by the company which helped hold up the operating margins.

  • Net profit of the company was affected by lower operating income and lower other income. Other income was lower by 52% as a result of lower market rate of returns. However, lower effective tax rate helped prop up the company's bottom line. Effective tax rate of the company fell by 5.5% as a result of the receipt of tax benefits.

What to expect?
At a price of Rs. 2,594, the stock is trading at 29 times our estimated CY11 earnings. While the company has show a robust top line growth during the quarter, the increase in raw material costs depressed the company margins and bottom line. Further, due to rising food prices resulting in demand destruction, the company has to advertise more heavily to maintain top line growth. Going forward the key to further growth will be how effectively the company is able to pass on the rising in raw material costs. At the current market price, we feel the valuations are a bit stretched and have a "CAUTIOUS" view on the stock.

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