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Nestle: Volume growth remains elusive

May 14, 2013

Nestle India announced the first quarter results of calendar year 2012 (1QCY13). The company has reported 10% YoY and 1.2% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grew by 10% YoY on the back of 7.7% YoY rise in domestic sales and a 51% YoY jump in export turnover.
  • Aided by input cost savings and controlled other expenditure, operating margin expanded by 1.2% YoY.
  • Net profit grew by a mere 1.2% YoY due to higher interest and depreciation charges during the quarter.

Financial snapshot
(Rs m) 1QCY12 1QCY13 % change
Revenue 20,559 22,554 9.7%
Expenditure 15902.1 17154.8 7.9%
Operating profit (EBDITA) 4,657 5,399 15.9%
EBDITA margin (%) 22.7% 23.9%  
Other income 52 127 146.2%
Interest 23 79 249.3%
Depreciation 528 821 55.6%
Impairment of Fixed Assets - -  
Provision for Contingencies 129 323 151.2%
Profit before tax 4,029 4,302 6.8%
Tax 1,272 1,512 18.8%
Profit after tax/(loss) 2,757 2,791 1.2%
Net profit margin (%) 13.4% 12.4%  
No. of shares (m)   96.42  
Diluted earnings per share (Rs)*   111.11  
Price to earnings ratio (x)*   43.9  
* On a 12-month trailing basis

What has driven growth in 1QCY13?
  • On the back of a 7.7% YoY rise in domestic sales, Nestle clocked a 10% increase in revenues. Domestic sales constitute more than 90% of overall sales and have registered growth primarily from price-hikes and better product-mix. Export turnover grew by 51% YoY on 98% jump in exports to affiliates.

  • Better product-mix coupled with easing raw material prices have led to a 0.6% fall in input cost to sales ratio. This along with a 0.7% reduction in the proportion of other expenses to sales has led to incremental operating margin during the quarter.

    Cost break-up
    As a % of sales 1QCY12 1QCY13 Change in basis points
    Cost of goods sold 45.6% 45.0% -60.47
    Staff costs 7.5% 7.6% 5.77
    Other expenditure 24.2% 23.4% -74.00

  • Net profit grew by a mere 1.2% YoY on account of a 151% YoY jump in provisioning for contingencies and a 56% YoY surge in interest cost. Even depreciation charges grew by 56% YoY due to expansion in production capacities made over last year. The tax incidence rose to 35% from 31.6% in the year-ago quarter.

What to expect?
Nestle continues to derive a substantial part of its growth from price-hikes taken earlier even as volume growth remains subdued. With discretionary spending on a slow track, the company may not have the flexibility of raising prices to maintain growth momentum in future. Moreover, the company's profits have also come under pressure with rising depreciation on new capacities and increased interest charges on foreign currency loans taken to fund expansion.

At a price of Rs. 4878, the stock is trading at 36 times our estimated CY14 earnings. Armed with a diversified portfolio and strong brand equity, Nestle's long-term growth prospects remain bright. But at current valuations, the stock is overvalued and we re-iterate a SELL on the stock.

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Jun 18, 2021 (Close)