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Nestle packs a punch

Apr 30, 2002

Nestle India, one of India's largest packaged food companies has recorded a power packed performance. The company saw a significant 17% growth in 1QFY03 topline, in an environment where other players are finding it hard to maintain even a single digit growth.

(Rs m) 1QFY02 1QFY03 Change FY02
Net sales 4,516 5,300 17.4% 19,210
Other Income 21 46 119.0% 162
Expenditure 3,742 4,053 8.3% 16,065
Operating Profit (EBDIT) 774 1,247 61.1% 3,145
Operating Profit Margin (%) 17.1% 23.5%   16.4%
Interest 28 31 10.7% 99
Depreciation 108 123 13.9% 435
Profit before Tax & extraordinary items 659 1,139 72.8% 2,773
Tax 173 371 114.5% 846
Extraordinary items -90 -154 71.1% -195
Profit after Tax/(Loss) 396 614 55.1% 1,732
Net profit margin (%) 8.8% 11.6%   9.0%
No. of Shares (eoy) (m) 96.4 96.4   96.4
Diluted Earnings per share* 16.4 25.5   18.0
Current P/e ratio   20.3   28.7
*(annualised)        

Favourable commodity prices helped Nestle in keeping its material costs under control. Thus, while sales grew by over 17%, expenses were up only 8.3%. This resulted in a significant expansion in Nestle's operating margins from 17% to over 23%.

Cost break-up
(Rs m) 1QFY02 1QFY03 Change
Material cost 1,852 2,031 9.7%
Staff cost 308 322 4.5%
Other expenditure 1,568 1,700 8.4%
Impairment of fixed assets 14 0  
Total expenditure 3,742 4,053 8.3%

If we analyse the company's sales stats, it becomes clear that the company's domestic business spearheaded this topline growth. The company's domestic sales improved by a significant 25% YoY during the quarter. The company's exports however, saw a 16%decline. The decline in exports was largely contributed by competitive environment in Russia, which is a key export market.

Sales stats
(Rs m) 1QFY02 1QFY03 Change
Domestic sales 3,711 4,627 24.7%
Exports 805 673 -16.4%
Total sales 4,516 5,300 17.4%

It seems that the company's coffee business is bringing in the margins, and new businesses like dairy products are bringing in the volumes. The company's 'Cerelac' and 'Lactogen' food for babies has done very well during the quarter.

The results are way above market expectations. At the current price of Rs 516 the stock trades at 20x 1QFY03 annualised earnings. The stock price of the company is likely to see an upward movement in the short term on the back of this strong performance. However, Nestle management themselves have indicated that commodity prices are firming up and as such, going forward a 23% operating margin looks unsustainable. But even considering that, the company's focus on its business makes it a dominant FMCG company on the Indian bourses. The only concern is the parent's efforts to increase its stake in the company, leading to fears of a future 'Cadbury like' exit.


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