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Nestle: Exports mar performance

Mar 7, 2003

After reporting a 2% decline in net sales during the September quarter, Nestle India seems to have recovered somewhat to report a 3% topline growth in the December quarter, inline in the trend seen in the FMCG sector. The company reported a marginal 4% growth in net profits, inspite of Nestle upping its provisions and contingencies during the quarter. Excluding extraordinary items, the profit growth during the quarter was a healthy 39%.

(Rs m)4QFY024QFY03ChangeFY02FY03Change
Net sales4,6814,8273.1%19,21020,4776.6%
Other Income74819.1%16227972.1%
Expenditure4,1354,104-0.7%16,06516,6993.9%
Operating Profit (EBDIT)54672332.4%3,1453,77820.1%
Operating Profit Margin (%)11.7%15.0%16.4%18.5%
Interest 225-75.9%9961-38.6%
Depreciation1111229.5%43549413.6%
Profit before Tax & extraordinary items48767738.9%2,7733,50226.3%
Tax13618838.2%8461,11932.3%
Extraordinary items12-112 - -195-368 -
Profit after Tax/(Loss)3633773.8%1,7322,01516.3%
Net profit margin (%)7.8%7.8%9.0%9.8%
No. of Shares (eoy) (m)96.496.496.496.4
Diluted Earnings per share*15.115.618.020.9
Current P/e ratio34.225.6
*(annualised)

For the full year 2002, Nestle reported a 6.6% topline and a 16.3% bottomline growth. Here too, if we exclude the extraordinary items, net profit growth stood at a healthy 24% YoY. Low commodity prices helped Nestle keep its material costs in check. Consequently, the company's operating margins improved, for both the quarter and the full year.

Cost break-up
(Rs m)4QFY024QFY03ChangeFY02FY03Change
Material cost1,8251,777-2.7%7,8117,9942.3%
Staff cost369303-17.9%1,3211,46210.7%
Other expenditure1,9411,9842.2%6,9337,0311.4%
Impairment of fixed assets - 41--213-
Total expenditure4,1354,104-0.7%16,06516,6993.9%

The recovery in sales for the December quarter is was led by a 8.7% growth in domestic sales (88% of total revenues). However, due to a fall in exports, the net sales growth was marginally lower at 3%. Overall, the company finished 2002 with 6.6% sales growth. This was on the back 12.4% growth in domestic sales and a 24% decline in exports.

Nestle's export performance was the key reason for the staid topline growth, both in December quarter as well as for the full year. In value terms, exports declined by a huge 30% during the December quarter and 24% for the full year. This decline stemmed largely from drop in realisations as the volumes were lower by only 7% 2002. The drop in exports (in value terms) was mainly due to reduction in green coffee prices. Also, the product-mix for the coffee and tea businesses were in favour of low realisation bulk packs in 2002 as compared to last year.

Sales stats...
(Rs m)4QFY024QFY03ChangeFY02FY03Change
Domestic sales4,0044,3518.7%16,11118,11512.4%
Exports677476-29.7%3,0992,362-23.8%
Total sales4,6814,8273.1%19,21020,4776.6%

While in the first half of 2002, Nestle reported a healthy 13% topline and a significant 48% bottomline growth (excluding extraordinary items, in the second half of 2002 (July - December 2002), Nestle India could manage only 0.5% topline and an 18% bottomline growth. In our analysis of the first half of 2002 results we had indicated that the company's growth engine is likely to slow down owing to the difficult market conditions.

Second half worries...
(Rs m)1HFY021HFY03Change2HFY022HFY03Change
Net sales9,19910,41513.2%10,01110,0620.5%
Net Profit (excluding extraordinary items)9811,44747.5%1,9272,38323.7%
Net profit margin (%)10.7%13.9%19.2%23.7%

At the current price of Rs 534, the stock trades at 25.6x FY03 earnings, market cap to sales of 2.5x. Nestle already trades at the higher end of FMCG valuation spectrum. The poor third quarter results and a tough December quarter indicate tough market conditions. With concerns over the lag effect of poor agricultural output dominating market sentiment, the stock could see weakness in the short term. However, Nestle's exports business is prone to volatility and an uptick in this segment could provide a cushion to Nestle in FY04. Also, over the long term, Nestle India would continue to occupy premium positioning in the investor's FMCG folio.

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