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Nestle: Margins remain stagnant - Views on News from Equitymaster

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Nestle: Margins remain stagnant
Mar 31, 2015

Nestle India announced the fourth quarter results of calendar year 2014 (4QCY14). The company has reported a 11.7% YoY growth in sales and 16% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grew by 11.8% YoY in 4QCY14 on 11% growth in domestic sales. For CY14, revenues increased by 8% YoY on 8.6 % domestic revenue growth mainly from better realizations.
  • Operating margin expanded by 1.7% YoY for 4QCY14 aided by lower raw material costs in proportion to sales. However for CY14, the operating margin contracted by 0.6% YoY due to high milk prices for most part of the year.
  • Net profits grew by 15.9% in 4QCY14 on a 21% rise in operating profit. For CY14, net profit growth was muted at 6%.
  • The company has declared a final dividend of Rs 12.50 per equity share of face value of Rs 10 for 2014. This along with three interim dividends declared earlier aggregates to a total dividend of Rs 63 per equity share of face value of Rs 10 for 2014. The dividend yield works out to 0.9% at current price levels.

Financial snapshot
(Rs m) 4QCY13 4QCY14 % change CY13 CY14 % change
Revenue 22,630 25,309 11.8% 91,011 98,548 8.3%
Expenditure 17890.4 19568.6 9.4% 70,769 77,248 9.2%
Operating profit (EBDITA) 4,739 5,741 21.1% 20,241 21,301 5.2%
EBDITA margin (%) 20.9% 22.7% 1.7% 22.2% 21.6% -0.6%
Other income 319 177 -44.4% 831 873 5.1%
Interest 101 -   365 142 -61.0%
Depreciation 757 848 12.1% 3,300 3,375 2.3%
Employee benefit expenses due to passage of time 138 158 13.8% 558 648 16.2%
Provision for Contingencies - -   207 250 20.3%
Corporate Social Responsibility Expense - 85   0 85  
Profit before tax 4,062 4,827 18.8% 16,642 17,674 6.2%
Exceptional income 102 70 -31.2% 138 70  
Tax 1,347 1,634 21.3% 5,609 5,897 5.1%
Profit after tax/(loss) 2,817 3,264 15.9% 11,171 11,847 6.0%
Net profit margin (%) 12.4% 12.9% 0.4% 12.3% 12.0% -0.3%
No. of shares (m)         96.4  
Diluted earnings per share (Rs)*         122.9  
Price to earnings ratio (x)*         55.8  
* On a 12-month trailing basis

What has driven growth in 4QCY14?
  • Nestle clocked a robust 11.8% YoY topline growth aided by the base effect. The domestic segment grew by 11% contributed by better realizations and volume growth in certain product categories. Export sales grew by 17.9% mainly on account of export of milk and nutrition products to Bangladesh.
  • Operating margin expanded by 1.7% YoY due to input cost savings from easing commodity prices. As a proportion of sales, raw material costs fell by 2% YoY whereas employee costs were up by 0.5% YoY during the quarter.

    As a % of sales 4QCY13 4QCY14 Change in basis points 
    Cost of goods sold 46.4% 44.3% -203.25
    Staff costs 7.6% 8.1% 47.54
    Other expenditure 25.1% 24.9% -18.26

  • At the net level, margin remained flat due to Corporate Social Responsibility expense of Rs 85 m and 14% increase in employee benefit expense, due to passage of time, booked during the quarter. In addition, lower other income and exceptional income earned during the quarter further pulled down the profitability for the quarter. On a positive note, there were no interest charges for the quarter due to full repayment of External Commercial Borrowings (ECB).
What to expect?
Nestle has been sprucing up its product portfolio by launching more value added offerings. The company recently launched premium chocolates such as Kit-Kat Senses and Alpino. Apart from that the company has also launched expensive variants of its power brand Maggi. Armed with strong brand equity, the company's sales volumes are expected to gain momentum with the pick-up in consumer sentiment.

At a price of Rs. 6,860, the stock is trading at 40 times our estimated CY16 earnings. Armed with a diversified portfolio and strong brand presence, Nestle's long-term growth prospects remain bright. But at current valuations, the stock is overvalued and we would recommend that investors do not buy the scrip at current price levels.

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