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Nestle: Healthy year - Views on News from Equitymaster
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Nestle: Healthy year
Mar 5, 2008

Performance summary
  • Topline grows 24% YoY in CY07 led by strong double digit growth in both domestic and export sales.
  • Operating margins improve by 0.7% YoY led by lower expenses.

  • Excluding the miscellaneous and extraordinary items (relating to litigation), bottomline is up 32% YoY for CY07.

  • The company has declared an aggregate dividend of Rs 33 for the year 2007 (dividend yield of 2.3%).

(Rs m) 4QCY06 4QCY07 % change CY06 CY07 % change
Net sales 7,363 8,957 21.6% 28,161 35,044 24.4%
Expenditure 6,160 7,380 19.8% 22,776 28,081 23.3%
Operating profit (EBDITA) 1,203 1,576 31.1% 5,385 6,963 29.3%
EBDITA margin (%) 16.3% 17.6%   19.1% 19.9%  
Other income 73 97 32.2% 206 254 23.4%
Interest 1 2 57.1% 4 9 93.2%
Depreciation 177 206 16.1% 663 747 12.8%
Profit before tax 1,097 1,465 33.5% 4,924 6,461 31.2%
Miscellaneous items (163) (42) -74.5% (115) 590 -615.2%
Extraordinary item (6) (6) 5.1% (4) (765) 19520.5%
Tax 303 481 58.6% 1,654 2,148 29.8%
Profit after tax/(loss) 625 936 49.9% 3,151 4,138 31.3%
Net profit margin (%) 8.5% 10.5%   11.2% 11.8%  
No. of shares (m) 96.4 96.4   96.4 96.4  
Diluted earnings per share (Rs)*         42.9  
Price to earnings ratio (x)*         33.4  
* On a 12-month trailing basis

What has driven performance in 4QCY07?
  • For 4QCY07, the topline was up 21.6% YoY led by the 22% YoY growth in domestic and export sales. For the full year, the sales were up 24% YoY. Net domestic sales and export sales increased by 25.2% YoY and 18% YoY respectively. Increase in volumes as well as realisations led to the strong growth in domestic sales. Export realisations were, however, negatively impacted by the appreciation of the rupee. The company has outperformed our topline estimates by 4%.

    Rs m 4QCY06 4QCY07 % change CY06 CY07 % change
    Domestic sales 6,603 8,027 21.6% 25,365 31,746 25.2%
    Exports 760 930 22.3% 2,796 3,298 18.0%
    Total sales 7,363 8,957 21.6% 28,161 35,044 24.4%

  • With rising consumerism and improving lifestyles in India, the company’s increased focus on innovation and development of products in the areas of nutrition, health and wellness has paid off. Its core brands like NESCAFE, MAGGI, NESVITA, KITKAT, MUNCH continued to witness stronger demand.

  • While for 4QCY07, the margins improved by 1.3% YoY, for the full year, the operating margins improved by 70 basis points. Fall in other expenses (as percentage of sales) aided the expansion. However, raw material costs were higher (48% in CY07 as compared to 45.9% in CY06) and was attributed to cost inflation in milk solids, wheat flour and edible oils. The performance on the operating margins front is marginally below our expectations.

  • Excluding the extraordinary and miscellaneous items, net profits registered a 31.9% YoY growth in CY07. For the quarter, the profits were up 23.9% YoY excluding the extraordinary and miscellaneous items. The profit reported is below our CY07 estimates.

What to expect?
At Rs 1,432, the stock is trading at 24.2 times our CY09 estimates. Inspite of severe input cost inflation faced by the company, the performance at the topline and the margin level is credible. Nestle continued to capitalise on the strong urban growth story. Scale efficiencies, cost reduction initiatives, strategic transformation process, new high margin products, changing lifestyles helped the company’s strong performance. Though we believe that the topline performance would remain strong, rising input prices would be an ongoing challenge. Also, at the current price levels, valuations appear stretched.

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