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Nestle: Brand power - Views on News from Equitymaster

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Nestle: Brand power
May 4, 2009

Performance summary
  • Topline grows 16% YoY during 1QCY09 led by strong 19% YoY growth in domestic sales. 'Maggi' celebrated 25 years of serving the consumers.
  • Operating margins improve by 1.8% YoY led by better sales mix, higher realizations and lower inflation
  • Higher operating margins coupled with higher other income leads to the bottomline growth of 23% YoY.


Financial snapshot
(Rs m) 1QCY08 1QCY09 % change
Net sales 10,933 12,708 16.2%
Expenditure 8,419 9,562 13.6%
Operating profit (EBDITA) 2,514 3,146 25.1%
EBDITA margin (%) 23.0% 24.8%
Other income 39 54 37.6%
Interest 1 2 77.8%
Depreciation 211 256 21.6%
Profit before tax 2,341 2,942 25.6%
Miscellaneous items (100) (105) 5.7%
Tax 640 864 35.0%
Profit after tax/(loss) 1,602 1,972 23.2%
Net profit margin (%) 14.6% 15.5%  
No. of shares (m) 96.4 96.4
Diluted earnings per share (Rs)* 59.25  
Price to earnings ratio (x)* 29.7
* On a 12-month trailing basis

What has driven performance in 1QCY09?
  • Nestle reported a topline growth of 16% YoY during 1QCY09. The domestic sales which contributed around 94% to the total sales grew by 18.7% YoY. Higher volumes and improved realizations led to the strong performance. However, export sales saw a drop of 15% YoY mainly on account of lower sales to Russia. However, depreciation of Indian rupee against the dollar bought some relief. Other operating income also jumped 110% YoY on account of backlog of export incentives.

    Cost break-up
    As a % of net sales 1QCY08 1QCY09
    Total Cost of goods 47.6% 47.0%
    Staff Cost 6.9% 6.9%
    Other Expenditure 22.6% 21.3%

  • The operating margins improved by 180 basis points during the quarter. The raw material and other expenses declined as a percent of sales. Better sales mix, higher realizations and lower crude prices aided the jump.

  • Higher operating margins coupled with higher other income led to the bottomline growth of 23% YoY. The company’s performance is better than our estimates.

What to expect?
At Rs 1,760, the stock is trading at 20.3 times our CY11 estimates. The board has declared a dividend of Rs 9 per share (dividend yield of 0.5%). Nestle has moved to a higher growth curve in the recent past. Extremely strong brands across its business segments and ability to launch new brand extensions continue to aid its performance. Reduced raw material prices and excise duty cut has helped the company to improve its margin. We remain positive on the stock.

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