India’s second largest food company Nestle’s profits in the 2QFY00, increased by 30% to Rs 371 m. The company’s total revenues grew by 15% to Rs 4.2 bn led by 58% jump it its export revenues to Rs 613 m. Exports increased mainly due to doubling in volume sales to Russia. However realisations were lower because of highly competitive prices prevailing in the international markets.
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The operating margins improved to 19.2% (15.5% in 2QFY99) due to favourable commodity prices. Further reduction in the interest cost and better working capital management led to improvement in the net profit margins. The commodities & packing materials are showing tendency to rise & under such circumstances it would be difficult for the company to maintain the level of earnings unless the company takes price increase on finished products which would depend on market conditions & competitor activities.
The chocolate and confectionery market witnessed strong growth in the second quarter. This is evidenced by Nestle's near competitor Cadbury's satisfactory topline growth. In the culinary segment Nestle's 'Munch' , 'Nescafe' and 'Maggi 2-minute noodles' continued to grow. In the current year the company has introduced its UHT (Ultra Heat Treated) milk in Delhi and most of southern & western markets. During the quarter it has also launched its internationally renowned mineral water brand 'Perrier' which is priced premiumly unlike other domestic brands.
At the current market price of Rs 450, Nestle has a P/E multiple of 29 times its 2QFY00 annualised earnings. The company has market cap to sales ratio of 2.6 times. Its valuations are comparatively lower than its peers (Hindustan Lever and Cadbury included) in the industry. Nestle's ability to introduce new products and efficient management of working capital will help it to improve its margins further.
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