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Nestle: Recipe for success? - Views on News from Equitymaster
 
 
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  • Mar 14, 2001

    Nestle: Recipe for success?

    Nestle India had set a target (some time back) to become a Rs 100 bn company by 2008. This translates into a compounded annual growth rate of 29% in sales. This was highly ambitious as the company’s revenues growth stagnated substantially in the past three years.

    Increasing competition and lack of any major new product launch has impacted Nestle’s volume growth significantly. This is reflected from its disappointing fourth quarter results (December ’00). Its topline, which has grown at a double digit in the past three quarters slowed down to a mere 4%. As a result revenues for the entire year showed a single digit growth.

    Click for detailed analysis.

    Its Swiss parent, Nestle SA, the world’s largest food process company recorded an encouraging growth of 9% in its topline for the year ended December ‘00. The strong revenue growth of the company was backed by its wide spread operations across all five continents and over 60 countries. Nestle India accounts for a marginal 0.7% of its parent’s revenues and 1% to profits.

    Comparative performance
    Year end December '00
    (Rs bn)
    Nestle Nestle SA
    Sales 16.8 2,274.1
    Growth 8.7% 9.1%
    Operating Profits 2.7 268.1
    Growth 16.7% 15.7%
    Net Profits 1.6 166.9
    Growth 24.2% 22.3%
    No. of shares (m) 96.4 40.4
    Ratio analysis
    Particulars Nestle Nestle SA
    OPM 16.3% 11.8%
    NPM 9.3% 7.3%
    EPS (Rs) 16.1 4,135.8

    Nestle SA is boast of wide product range and enjoys a leading presence in soluble beverages, chocolates & confectionery, culinary products, infant nutrition, frozen foods, pet foods and pharmaceutical products. The company derives more than a quarter of its revenues from prepared dishes and pet care category. Most of the categories where Nestle SA is strong in the global markets have no or a marginal presence in the Indian markets. With the removal of quantitative restrictions from April 2001, Nestle India could exploit this situation by importing global brands from its parent.

    Turnover mix of Nestle SA
    Contribution to total sales 1999 2000
    Beverages 27.9% 28.3%
    Milk products 26.0% 27.0%
    Prepared dishes
    and pet care
    27.0% 25.3%
    Chocolate, confectionery
    and biscuits
    13.7% 13.5%
    Pharmaceutical products 5.4% 5.9%

    Nestle SA is also engaged in research and development and provides know-how on continuous basis in engineering, marketing, production, organisation and personnel training to its group companies worldwide. The company spends around 1% of its sales on R&D every year. Nestle SA’s strategy since inception has been based on two parallel policies- ‘Internal Growth’, which led to aggressive launching of new products, through greenfield ventures and secondly, ’External Growth’ through mergers and acquisition.

    Nestle India has taken the advantage of this research base and launched its brands in the bottled water and pure milk category during the year. What is of higher interest is the fact that Nestle India could witness higher growth in its existing segment given the low per capita consumption of its product categories. On the other hand Nestle SA is situated in a developed country where the per capita consumption is already higher. Also due to intense competition in the International markets the growth rate is slower than the developing country. This leads to a conclusion that Nestle India offers more growth opportunity in future.

    At the current market price of Rs 508, Nestle India is trading at a premium compared to its parent. The company’s relatively premium valuations among its Indian peers are due to its wide brand portfolio, strong parentage and focused management (in terms of increasing sales and profits).

    Comparative valuations
    Particulars Nestle Nestle SA
    Market Price (Rs) 508 99,770
    P/E (x) 31.6 24.1
    Price/sales (x) 2.9 1.8
    EV/EBIDTA (x) 18.2 15.5

     

     

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