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Nestle: Consistent growth on higher demand - Views on News from Equitymaster

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Nestle: Consistent growth on higher demand

Apr 25, 2011

Nestle India has announced the first quarter results of financial year 2010-2011 (1QCY11) (December ending company). The company has reported 22.1% YoY and 26.7% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line for the quarter grew by 22.1% YoY. The growth comes on account of both volumes and price realization.
  • Operating (EBITDA) margins remained flat at 21.1% (as a percentage of sales).
  • Net profit of the company grew by 26.7% YoY on the back of higher operating income, increase in other income, fall in interest and lower effective tax rate.
  • The company declared an interim dividend of Rs 9 per share.

Financial snapshot
(Rsm) 1QCY10 1QCY11 % change
Net Sales 14,854 18,144 22.1%
Expenditure 11,710 14,316 22.3%
Operating profit (EBDITA) 3,145 3,829 21.8%
EBDITA margin (%) 21.2% 21.1%  
Other income 35 83 138.1%
Interest 6 1 -87.3%
Depreciation 310 327 5.6%
Profit before tax 2,864 3,584 25.1%
Tax 845 1,027 21.5%
Profit after tax/(loss) 2,019 2,557 26.7%
Net profit margin (%) 13.6% 14.1%  
No. of shares (m) 96.4 96.4  
Diluted earnings per share (Rs)*   90.5  
Price to earnings ratio (x)*   42.5  
* On a 12-month trailing basis

What has driven growth in 1QCY11?
  • Net sales of the company grew on the back of higher volumes and higher price realization. While domestic sales grew by 23.1% YoY, exports grew by 10.2% YoY.
    Cost break-up
    Asa % of sales 1QCY10 1QCY11
    Raw material 49.7% 48.7%
    Staff costs 6.7% 6.6%
    Other expenditure 22.5% 23.5%

  • Operating profit for Nestle grew by 21.8% YoY. This is slightly lower than top line growth as lower cost of raw material was more than offset by higher other expenditure (both as a percentage of sales). Cost of raw material was lower as a result of improved product/channel mix and reduction in free goods promotion, partially offset by increase in commodity cost. Other expenditure is higher due to special charges for the redesign of existing factory layout to increase production. Higher provisions for contingencies from operations also contributed to higher other expenditure.

  • Net profits of the company grew by 26.7% YoY. This was a result of higher operating income, increase in other income, fall in interest, subdued growth in depreciation and lower effective tax rate. Other income grew by 138% YoY to stand at Rs 83 m while interest expense fell by 87% YoY to stand at Rs 0.7 m. Depreciation was subdued as higher depreciation of fixed assets was offset by reduction in amortisation in management information system. Effective tax rate fell from 29.5% to 28.7% during the quarter.

What we expect?
At a price of Rs. 3,852, the stock is trading at 35.8 times our estimated CY12 earnings (RPro subscribers click here). Nestle has all the drivers for growth in place with a diversified product portfolio. However, we see the competitive pressures building up for the company. Moreover, it is facing raw material pressure. This is likely to put some pressure on its margins going forward. While we believe in the company's long term growth potential, we see valuations as being stretched right now. For this reason, we have a cautious view on the stock.

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