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Nestle: Concerns on slow offtake continue - Views on News from Equitymaster
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Nestle: Concerns on slow offtake continue
Jun 12, 2015

Nestle India announced the first quarter results of calendar year 2015 (1QCY15). The company has reported a 7.6% YoY growth in sales and 23.6% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Revenues increased by 8.4% YoY in 1QCY15 on 7.6% growth in domestic sales.
  • The company has been able to post a 2.7% expansion in operating margin backed by higher realizations.
  • Net profits grew by 23.6% on a 22% rise in operating profit and lower interest charges.
  • The company has declared an interim dividend of Rs 14 per equity share of face value of Rs 10 each.

Standalone financial results
(Rs m) 1QCY14 1QCY15 % change
Revenue 23,215 25,165 8.4%
Expenditure 18203 19057.4 4.7%
Operating profit (EBDITA) 5,012 6,107 21.9%
EBDITA margin (%) 21.6% 24.3% 2.7%
Other income 309 255 -17.7%
Interest 103 34 -66.8%
Depreciation 839 950 13.2%
Employee benefit expenses due to passage of time 165 191 15.7%
Provision for Contingencies 250 302 20.8%
Corporate Social Responsibility Expense - 20  
Profit before tax 3,965 4,866 22.7%
Exceptional income - -  
Tax 1,374 1,663 21.0%
Profit after tax/(loss) 2,592 3,203 23.6%
Net profit margin (%) 11.2% 12.7% 1.6%
No. of shares (m)     96.4
Diluted earnings per share (Rs)*     129.2
Price to earnings ratio (x)*     47.2
* On a 12-month trailing basis

What has driven growth in 1QCY15?
  • Nestle clocked an 8.4% YoY revenue growth aided by 7.6% growth in domestic sales mainly on account of higher realizations. Export sales grew by 19.2% contributed largely by the export of milk and nutrition products to Bangladesh and Middle East.

  • Operating margin expanded by 2.7% YoY due to input cost savings from price hikes as well as carry over pricing. As a proportion of sales, raw material costs fell by 3.9% YoY that has more than offset higher staff costs and other expenses during the quarter.

    As a % of sales 1QCY14 1QCY15 Change in basis points 
    Cost of goods sold 46.1% 42.2% -389.47
    Staff costs 7.2% 8.0% 78.42
    Other expenditure 25.1% 25.5% 43.07

  • The net profit grew by 23.6% during the quarter on a 21.9% increase in operating profit coupled with a steep fall in interest charges. The interest costs fell by 67% YoY during the quarter after the company has fully repaid its External Commercial Borrowings (ECB).
What to expect?
Nestle has been deriving growth largely from realizations. As if poor offtake was not enough, the company's flagship brand Maggi, that was growing (in volumes), has been pulled up by the Food Safety and Standards Authority of India (FSSAI) for violating food safety norms. In the wake of a number of states issuing a temporary ban on the product, the company has recalled the entire Maggi portfolio from the market. Prepared dishes & cooking aids constitute 29% of overall sales of Nestle. The ban on Maggi is likely to impact the company's goodwill and also affect other product segments such as pasta, sauces and noodles pulling down overall revenues in FY15. While in the long run, the company may re-introduce Maggi by changing the formulation and undertake damage control exercise; its sales for now remains shrouded in uncertainty.

At a price of Rs 6102, the stock is trading at 36 times our estimated CY17 earnings. At current valuations, the stock is overvalued and we would recommend that investors do not buy the scrip at current price levels.

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