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Nestle: Food inflation hurts bottomline - Views on News from Equitymaster

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Nestle: Food inflation hurts bottomline

Apr 23, 2010

Nestle has announced its 1QCY10 results. The company has reported a 17% YoY and 2.3% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line for the quarter grew by 17% YoY. The growth comes on the back of strong volume growth.
  • Operating (EBITDA) margins disappoint as they fell by 2.7% to stand at 21.2% of sales.
  • Net margins of the company fell by 1.9% during the quarter on the back of higher raw material costs and lower other income.
  • The company has declared a dividend of Rs 9 per share.

Financial snapshot
(Rs m) 1QCY09 1QCY10 % change
Net Sales 12,702 14,854 16.9%
Expenditure 9,661 11,710 21.2%
Operating profit (EBDITA) 3,041 3,145 3.4%
EBDITA margin (%) 23.9% 21.2%  
Other income 54 35 -35.1%
Interest 2 6 243.8%
Depreciation 256 310 21.1%
Profit before tax 2,837 2,864 0.9%
Tax 864 845 -2.2%
Profit after tax/(loss) 1,973 2,019 2.3%
Net profit margin (%) 15.5% 13.6%  
No. of shares (m) 96.4 96.4  
Diluted earnings per share (Rs)*   68.4  
Price to earnings ratio (x)*   40  

What has driven growth in 1QCY10?
  • Net sales of the company grew on the back of higher volumes and limited price increases. While domestic sales grew by 16.7% YoY, exports grew by 20.4% YoY. The export growth was adversely affected by the appreciation of the Indian Rupee against the US Dollar.

    Cost break-up
    As a % of sales 1QCY09 1QCY10
    Raw material 47.1% 49.7%
    Staff costs 6.9% 6.7%
    Other expenditure 22.1% 22.5%

  • Operating profit for Nestlé grew by 3.4% YoY. This muted growth was due to rising raw material prices particularly for milk, sugar and wheat. The company took a conscious decision not to pass on food inflation to its customers and instead drive volumes. As a result of this strategy, while the top line has grown, operating profit has been affected. There was further pressure on the company's operating profit due to higher advertisement expense as a result of brand building and higher freight costs as a result of fuel costs moving north.

  • Net profits of the company grew by 2.3% and were capped by lower operating income and lower other income. Other income was lower by 35% as a result of lower market rate of returns. However, lower effective tax rate helped prop up the company' bottom line. Effective tax rate of the company fell by 1% during the quarter.

What to expect?
At a price of Rs. 2,770, the stock is trading at 30 times our estimated CY11 earnings. While the company has show a robust top line growth during the quarter, the increase in raw material costs depressed the company margins and bottom line. Further, the company has to advertise more heavily to maintain top line growth. Going forward, the company has indicated that the company will continue to absorb food inflation to drive volumes. At the current market price, we feel the valuations are a bit stretched and have a "CAUTIOUS" view on the stock.

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