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Nestle: Growth engine chugs on...

Mar 8, 2002

Nestle India declared nearly 15% topline growth in FY02. This makes it one of the fastest growing FMCG companies in India during the year. The company finished FY02 with a significant 46% growth in bottomline, aided by lower provisioning.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Net sales 4,403 4,681 6.3% 16,775 19,210 14.5%
Other Income 32 74 131.3% 107 162 51.4%
Expenditure 3,830 4,135 8.0% 14,035 16,065 14.5%
Operating Profit (EBDIT) 573 546 -4.7% 2,740 3,145 14.8%
Operating Profit Margin (%)13.0%11.7% 16.3%16.4% 
Interest 29 22 -24.1% 149 99 -33.6%
Depreciation 103 111 7.8% 379 435 14.8%
Profit before Tax & extraordinary items 473 487 3.0% 2,319 2,773 19.6%
Tax 190 136 -28.4% 805 846 5.1%
Extraordinary items (128) 12 -109.4% (328) (195)-40.5%
Profit after Tax/(Loss) 155 363 134.2% 1,186 1,732 46.0%
Net profit margin (%)3.5%7.8% 7.1%9.0% 
No. of Shares (eoy) (m)96.496.4 96.496.4 
Diluted Earnings per share*6.415.1 12.318.0 
Current P/e ratio 33.6  28.2 

Based on the quarterly performance, the company declared a 6% growth in topline and a 134% growth in bottomline, again aided by lower provisioning YoY. The sluggishness in 4QFY02 topline growth could be attributed to the company's export sales that declined by nearly 9% during the quarter. However, on a YoY basis, exports were up by a healthy 17%.

Despite the strong topline performance in FY01, the company's operating margins stagnated at 16.4%. Infact, in 4QFY02, operating margins declined by 130 basis points to 11.7%. A significant 26% growth in the annual staff costs escalated Nestle operating expenses and thus deflated its operating margins. The staff costs seem to have increased largely on account of increased retirement benefits owing to reduction in long term interest rates.

Cost break-up
(Rs m)4QFY014QFY02ChangeFY01FY02Change
Material cost1,7171,8256.3%6,9557,81112.3%
Staff cost28436929.9%1,0491,32125.9%
Other expenditure1,8291,9416.1%6,0316,93315.0%
Total expenditure3,8304,1358.0%14,03516,06514.5%

The company's profit before tax and provisioning for contingencies was up 20% for the full year and only 3% in 4QFY02. Lower provisioning during FY02 aided the company's significant bottomline growth and the net margin improvement.

Export statistics
(Rs m)FY01FY02Change
First quarter54880547.0%
Second quarter6136719.5%
Third quarter75994624.6%
Fourth quarter738677-8.3%
Total exports2,6583,09916.6%

Though the operating margins seem to be under pressure, Nestle has done well to keep them steady in light of the lower returns on investments in new businesses like water and dairy products. Going forward, Nestle's management of the return on its new businesses will determine the course of its valuations.

At the current price of Rs 506 the stock trades at a healthy 28x FY02 earnings and Mcap to sales of 2.5x. The management's decision to a further 10% equity through the creeping acquisition route will take the management's stake to 64%. While this indicates the confidence of the management in India's growth prospects, over the long run the liquidity in the stock may come under a cloud.

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