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Nestle: Strong quarter, strong year - Views on News from Equitymaster

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Nestle: Strong quarter, strong year
Mar 9, 2009

Performance summary
  • Topline grows by 22% YoY during 4QCY08 and 23% YoY during CY08. Domestic sales jump 26% YoY during the year.
  • For the full year the margins are stable at 20.2%. The company’s performance is marginally higher than our estimates of 19.9%.
  • For the full year, the profit excluding the extraordinary item (additional employee cost) is up 9% YoY.
  • The company has recommended a final dividend of Rs 12 for 2008 (dividend yield 2.9%).


Financial snapshot
(Rs m) 4QCY07 4QCY08 change CY07 CY08 %change
Net sales 8,986 10,933 21.7% 35,131 43,351 23.4%
Expenditure 7,380 8,778 18.9% 28,081 34,606 23.2%
Operating profit (EBDITA) 1,606 2,155 34.2% 7,050 8,745 24.0%
EBDITA margin (%) 17.9% 19.7%   20.1% 20.2%  
Other income 67 97 44.7% 167 230 37.6%
Interest 2 2 -22.7% 9 16 92.9%
Depreciation 206 257 25.0% 747 924 23.6%
Profit before tax 1,465 1,994 36.1% 6,461 8,036 24.4%
Miscellaneous items (48) (169) 253.2% 579 (308)  
Extraordinary item   -   (754) -  
Tax 481 614 27.5% 2,148 2,387 11.1%
Profit after tax/(loss) 936 1,211 29.4% 4,138 5,340 29.0%
Net profit margin (%) 10.4% 11.1% 11.8% 12.3%  
No. of shares (m) 96.4 96.4   96.4 96.4  
Diluted earnings per share (Rs)*       55.4  
Price to earnings ratio (x)*         26.1  
* On a 12-month trailing basis

What has driven performance in CY08?
  • Nestle reported a topline growth of 22% YoY during 4QCY08. For the full year, the sales are higher by 23% YoY. This was the eighth consecutive quarter when the company reported a topline growth of more than 20% YoY. Domestic sales for the year increased by 25.6% YoY due to increase in volumes as well as realisations. To offset the higher input prices, the company had taken price hikes. Exports however saw a muted growth of 2.6% YoY is mainly due to the depreciation of the rupee. The company’s sales growth performance is higher than our estimates by 3%.

  • The operating margins during the quarter improved by 2.1% YoY. Lower other expenses (as a percent of sales) led to the improvement in margins. The company had taken price increases and cost optimisation initiatives to offset the steep increase in cost of inputs like milk solids, green coffee, fuels and vegetable fat. For the full year, the margins were stable at 20.2%. We had estimated the full year operating margins at 19.9%. The company’s performance is therefore marginally higher than our estimates.

    Cost break-up
    As a % of net sales 4QCY07 4QCY08 CY07 CY08
    Total Cost of goods 47.5% 47.1% 48.0% 48.5%
    Staff Cost 7.3% 7.6% 7.7% 7.3%
    Other Expenditure 27.3% 25.6% 24.3% 24.0%

  • The net profits improved by 29% YoY during 4QCY08. Higher operating profits and other income led to the strong growth. For the full year, the profits excluding the extraordinary item (additional employee cost) is up 9% YoY. On account of tax holiday for its Pantnagar factory, the effective tax rate stood at 29.7% compared to 33.2% in CY07.

What to expect?
At Rs 1,445, the stock is trading at a multiple of 19.7 times our CY10 estimates. While CY08 has been a very good year, the management expects 2009 to be relatively more difficult. Nestle has been consistence in introducing differentiated product innovations and renovations and has a strong support from its parent which today is the world's biggest food and beverage company. Nestle India is planning to invest Rs.6 bn in the year 2009 in India for new research and development, advertising and capacity building. It is also increasing its focus on the ’Bottom of the Pyramid’ with price-pointed products (PPP) and small SKUs in existing brands. On account of its presence in low penetrated and high growth categories aided by powerful brands, the company is expected to continue to do well. We remain positive on the stock.

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