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Nestle: Slowdown continues in CY14 - Views on News from Equitymaster

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Nestle: Slowdown continues in CY14

May 19, 2014

Nestle India announced the first quarter results of calendar year 2014 (1QCY14). The company has reported a 3% YoY growth in sales and 7% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • In 1QCY14, Nestle's revenues grew by a sluggish 3% YoY backed by 3.4% YoY rise in domestic sales even as exports declined by 4.4% YoY.
  • The operating margin contracted by 2.5% YoY due to faster rise in cost of goods sold and other expenses.
  • At the net level, reduction in margin has been limited to 1.2% YoY backed by a steep 143% YoY jump in the other income earned during the quarter.
  • The company has declared an interim dividend of Rs 12.50 per equity share of face value of Rs 10.

Financial snapshot
(Rs m) 1QCY13 1QCY14 % change
Revenue 22,554 23,215 2.9%
Expenditure 17,129.1 18,203 6.3%
Operating profit (EBDITA) 5,424 5,012 -7.6%
EBDITA margin (%) 24.1% 21.6% -2.5%
Other income 127 309 143.0%
Interest 79 103 29.4%
Depreciation 821 839 2.2%
Employee benefit expenses due to passage of time 141 165 16.5%
Provision for Contingencies 207 250 20.3%
Profit before tax 4,302 3,965 -7.8%
Exceptional income - -  
Tax 1,512 1,374 -9.1%
Profit after tax/(loss) 2,791 2,592 -7.1%
Net profit margin (%) 12.4% 11.2% -1.2%
No. of shares (m)   96.4  
Diluted earnings per share (Rs)*   113.8  
Price to earnings ratio (x)*   40.2  
* On a 12-month trailing basis

What has driven performance in 1QCY14?
  • Nestle posted a 2.9% YoY rise in revenues on a 3.4% YoY increase in domestic sales. However export sales, constituting 6% of overall sales, declined by 4.4% YoY largely due to exports to affiliates (mainly Russia) as capacity was utilized on a priority basis to service domestic orders.

  • The operating margin contracted by 2.5% YoY due to a sharper rise in input costs and other expenses relative to sales. The cost of goods to sales ratio increased by 1.1% YoY as a result of higher price of milk solids. Other expenses as a proportion of sales rose by 1.1% YoY for the quarter.

    Cost break-up
    As a % of sales 1QCY13 1QCY14 Change in basis points
    Cost of goods sold 45.0% 46.1% 108.22
    Staff costs 7.0% 7.2% 25.97
    Other expenditure 24.0% 25.1% 112.09

  • However, a 143% YoY jump in other income earned during the quarter enabled the company to restrict the contraction to a mere 1.2% YoY for the quarter. The depreciation outgo grew by a modest 2.2% YoY but the interest cost rose by 29.4% YoY during the quarter. The tax incidence hovered close to 35% during the quarter.
What to expect?
Nestle's sales performance in 2014 continues to be sluggish. As a result even its margins remained under pressure. Going ahead, the company would be ramping up rural distribution network, increasing sales force and accelerating the pace of innovations. The company is also exploring the option of introducing new products such as pet food and bottled water in India.

At a price of Rs. 4580, the stock is trading at 31 times our estimated CY15 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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