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Nestle: 4Q margins slides

Mar 8, 2001

Nestle India has reported a depressing fourth quarter results with a squeeze in operating margins. During the fourth quarter the company's exports sales witnessed a significant drop of 36% while domestic sales was higher by 10%. Nestle India has reported a depressing fourth quarter results with a squeeze in operating margins. During the fourth quarter the company's exports sales witnessed a significant drop of 36% while domestic sales was higher by 10%.

Year ended December (Rs m) FY00 FY01 Change 4QFY00 4QFY01 Change
Sales 15,439 16,775 8.7% 4,230 4,403 4.1%
Other Income 83 107 28.9% 26 32 23.1%
Expenditure 13,091 14,035 7.2% 3,544 3,830 8.1%
Operating Profit (EBDIT) 2,348 2,740 16.7% 686 573 -16.5%
Operating Profit Margin (%) 15.2% 16.3%   16.2% 13.0%  
Interest 265 149 -43.8% 48 29 -39.6%
Depreciation 319 379 18.8% 34 103 202.9%
Profit before Tax 1,847 2,319 25.6% 630 473 -24.9%
Other Adjustments 265 328 23.8% 263 128 -51.3%
Tax 597 805 34.8% 186 190 2.2%
Profit after Tax/(Loss) 985 1,186 20.4% 181 155 -14.4%
Profits before adjustment 1,250 1,553 24.2% 444 322 -27.5%
Net profit margin (%) 6.4% 7.1%   10.5% 7.3%  
No. of Shares (eoy) (m) 96.4 96.4   96.4 96.4  
Diluted Earnings per share* 13.0 16.1   18.4 13.4  
P/E (at current price)   33     40  
*(annualised)            

Revenue growth of the company in the December quarter slowed down to 4% compared to its outstanding performance in the past two quarters ( 2QFY01-15% and 3QFY01-13%). This could be due to stiff competition in both the chocolate confectionery market (from Cadbury) and in the culinary segment (from HLL).

However, if we exclude the other adjustments Nestle's profits have shown a growth of 24%, which is in line with its peers in the industry. Although, efficient working capital management and supply chain efficiencies added a gain of around 100 basis points to its operating margins YoY, the margins declined by more than 300 basis points in the fourth quarter. The reason could be attributed to depressed green coffee prices in domestic and international markets which kept the export realizations low.

The YoY growth analysis of domestic and export sales is explained below:

Particulars 1Q 2Q 3Q 4Q FY
Domestic Sales 0.1% 10.3% 7.0% 10.8% 7.3%
Export Sales 16.2% 58.0% 35.0% -36.4% 16.3%

During the year Nestle launched several new products which has resulted in 15% volume growth in domestic sales and 32% in exports sales. The new launches of the company include 'Nestle Milk', 'Nestle Slim Milk', 'Nestle Dahi', 'Nescafe Frappe', Nestle Pure Life' and 'Maggi prawn cubes'. Its initiatives to introduce smaller pack sizes at lower price points were well received by the consumers.

The depreciation cost of the company was substantially higher due to provision of higher charge of depreciation in respect of IT equipment. Also investments in bottled water plant and liquid milk could have increased its depreciation cost. Other adjustment mainly included the contingency provision resulting from various matters under litigation and product warranties.

We had projected an earnings growth of 39%, which is higher than 24% declared by Nestle. However, our sales projections are in line with the company's actual performance. Lower than expected operating margins, increase in provisions for depreciation and high tax payment has resulted in subdued performance for the full year.

At the current market price of Rs 530 Nestle trades at a P/E multiple of 33 times with a market cap to sales ratio of 3 times. The company's current valuations are in line with its peers in the industry. We may see some correction in the price on the back of its disappointing financial performance in the fourth quarter.


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