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Nestle: Exports mar performance - Views on News from Equitymaster
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  • Mar 7, 2003

    Nestle: Exports mar performance

    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) 4QFY02 4QFY03 Change FY02 FY03 Change
    Net sales 4,681 4,827 3.1% 19,210 20,477 6.6%
    Other Income 74 81 9.1% 162 279 72.1%
    Expenditure 4,135 4,104 -0.7% 16,065 16,699 3.9%
    Operating Profit (EBDIT) 546 723 32.4% 3,145 3,778 20.1%
    Operating Profit Margin (%) 11.7% 15.0%   16.4% 18.5%  
    Interest 22 5 -75.9% 99 61 -38.6%
    Depreciation 111 122 9.5% 435 494 13.6%
    Profit before Tax & extraordinary items 487 677 38.9% 2,773 3,502 26.3%
    Tax 136 188 38.2% 846 1,119 32.3%
    Extraordinary items 12 -112 - -195 -368 -
    Profit after Tax/(Loss) 363 377 3.8% 1,732 2,015 16.3%
    Net profit margin (%) 7.8% 7.8%   9.0% 9.8%  
    No. of Shares (eoy) (m) 96.4 96.4   96.4 96.4  
    Diluted Earnings per share* 15.1 15.6   18.0 20.9  
    Current P/e ratio   34.2     25.6  

    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) 4QFY02 4QFY03 Change FY02 FY03 Change
    Material cost 1,825 1,777 -2.7% 7,811 7,994 2.3%
    Staff cost 369 303 -17.9% 1,321 1,462 10.7%
    Other expenditure 1,941 1,984 2.2% 6,933 7,031 1.4%
    Impairment of fixed assets - 41 - - 213 -
    Total expenditure 4,135 4,104 -0.7% 16,065 16,699 3.9%

    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) 4QFY02 4QFY03 Change FY02 FY03 Change
    Domestic sales 4,004 4,351 8.7% 16,111 18,115 12.4%
    Exports 677 476 -29.7% 3,099 2,362 -23.8%
    Total sales 4,681 4,827 3.1% 19,210 20,477 6.6%

    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) 1HFY02 1HFY03 Change 2HFY02 2HFY03 Change
    Net sales 9,199 10,415 13.2% 10,011 10,062 0.5%
    Net Profit (excluding extraordinary items) 981 1,447 47.5% 1,927 2,383 23.7%
    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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