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Nestle: Topline growth continues…

Apr 30, 2003

Nestle India has reported enthusing March quarter results. The company's topline increased by 13% and bottomline growth was 22% during the quarter. The company however, reported a marginal dip in operating margins to 21.9%.

(Rs m)1QFY031QFY04ChangeFY03
Net sales5,3005,98112.8%20,477
Other income46111140.2%279
Total expenditure4,0534,66815.2%16,699
Operating profit12471,3135.3%3,778
Operating profit margin (%)23.5%21.9% 18.5%
Interest3111-64.8%61
Depreciation123113-7.8%494
Profit before tax and extraordinary items11391,29914.0%3,502
Extraordinary items-154-120-22.1%-368
Tax37143216.4%1,119
Profit after tax61474721.7%2,015
Net profit margin (%)11.6%12.5% 9.8%
Effective tax rate (%)32.6%33.3% 32.0%
No. of Shares (eoy) (m)96.496.4 96.4
Diluted Earnings per share*25.531.0 20.9
Current P/e ratio 17.1 25.4
*(annualised)    

The most encouraging aspect of the company's performance was the double-digit topline growth. This comes at a time when the entire FMCG sector is struggling to find growth. Nestle's domestic sales perked up by a strong 15% during the quarter. However, exports continued to be a blip on the company's overall performance. Export sales in volume terms have declined by 5.1% mainly due to lower coffee exports to Russia. The same in value terms is lower by 2.2% mainly due to higher realisation on instant coffee (owing to increased green coffee prices).But the export dip witnessed in March quarter is marginal, as compared to the trend seen in past quarters (see chart).

Sales stats
(Rs m)1QFY031QFY04Change
Domestic sales4,6275,32315.0%
Exports673658.4-2.2%
Total sales5,3005,98112.8%

The strong sales growth trend is largely a result of Nestle's product push to lower price points, as well as new product introductions. In chocolates for example, it has started giving Cadbury a run for its money. Though Cadbury is still the market leader in the segment by a wide margin, Nestle continues to march forward. Nestle's culinary products (Maggi) too seemed to have contributed to this strong growth trend. Even in the case of the dip in operating margins, a 22% operating margin is higher than the average operating margin of 18.5% witnessed in FY03.

Cost break-up
(Rs m)1QFY031QFY04Change
Material cost2,0312,35515.9%
Staff cost32238920.7%
Other expenditure1,7001,92513.2%
Total expenditure4,0534,66815.2%

However, if we look closely, the bottomline growth has largely come about due to strong other income growth (140% YoY). Nestle has attributed this increase in other income to interest on income tax refunds received relating to earlier years. Also, if we exclude the extraordinary items, profit before tax growth is only 14%.

At Rs 530 the stock trades at 17.1x annualised 1QFY04 earnings and market cap to sales of 2.1x. Nestle is the only FMCG company that has continously showed an improvement in topline trend even in difficult market conditions like this. This fact alone may keep the stock an attractive investment proposition in the near term.

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