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Nestle: Robustness continues - Views on News from Equitymaster

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Nestle: Robustness continues
Apr 30, 2008

Performance summary
  • Topline grows 26% YoY in 1QCY08 led by strong 29% YoY growth in domestic sales.
  • Operating margins improve by 1.9% YoY led by lower expenses.

  • The net Profit for the quarter grows by 47.6% YoY. The tax rate reduces from 33% to 27% in the quarter.

  • The company has declared an interim dividend of Rs. 8.5/- per equity share (dividend yield of 0.5%)

(Rs m) 1QCY07 1QCY08 % change
Net sales 8,631 10,909 26.4%
Expenditure 6,829 8,420 23.3%
Operating profit (EBDITA) 1,802 2,490 38.1%
EBDITA margin (%) 20.9% 22.8%  
Other income 70 63 -9.9%
Interest 2 1 -52.6%
Depreciation 179 211 17.5%
Profit before tax 1,691 2,341 38.4%
Extraordinary item 754    
Miscellaneous items 710 (100) -114.0%
Tax 563 640 13.8%
Profit after tax/(loss) 1,084 1,601 47.6%
Net profit margin (%) 12.6% 14.7%
No. of shares (m) 96.4 96.4  
Diluted earnings per share (Rs)*   48.29
Price to earnings ratio (x)*   36.0  
* On a 12-month trailing basis

What has driven performance in 1QCY08?
  • Nestle’s topline increased by 26.4% YoY for 1QCY08. While domestic sales rose by 29% YoY exports reported a flat growth. Strong growth across all its product categories led to the domestic sales contributing 92% of the total sales (up from 90% in corresponding quarter). Lower exports of beverages and appreciation of Indian Rupee affected the export growth. A growing middle class and rising prosperity is resulting in more and more consumers looking at better options to whet appetites. Consequently, food processing is likely to emerge as one of the fastest growing segment. Nestle is well placed to capitailise on the growth.

    Cost break-up
    As a % of net sales 1QCY07 1QCY08
    Total Cost of goods 47.8% 47.7%
    Staff Cost 7.5% 6.9%
    Other Expenditure 23.8% 22.6%

  • On account of economies of scale and improved sales channel mix, the operating margins for the quarter improved by 190 basis points. Though higher raw material process continues to affect the company, its ongoing strategic transformation process has allowed mitigating higher raw materials costs. Prices of all the major inputs like wheat flour, coffee, milk, etc. have remained strong. Nestle operates at the higher end of the branded food chain. Further, due to its superior bargaining power, it has the ability to pass on input price hikes, thereby improving margins.

  • The net Profit for the quarter grew by 47.6% YoY. Higher margins aided by lower interest costs led the strong growth. Further the tax outgo also reduced from 33% to 27% in the quarter. This was due to the accrual of tax holiday claim arising out of Pantnagar factory operations.

What to expect?
At Rs 1,740, the stock is trading at 27times our CY10 estimates. The company continues to benefit from the rising consumerism. Nestle is perfectly placed to tap the growing middle class and rising consumer confidence. Its strong brands, innovations and distribution reach enable it to tap the huge growth opportunity. The management though is concerned about the higher agri input prices. Nestle is one of the best plays on the healthy growth potential in the food processing sector in India. We expect strong growth to continue but the rising input prices would be an ongoing challenge. Also, at the current price levels, valuations appear stretched.

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