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Nestle: Margins remain staid - Views on News from Equitymaster

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Nestle: Margins remain staid
Jul 30, 2012

Nestle India announced the second quarter results of calendar year 2012 (2QCY12). The company has reported 12.7% YoY and 15% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Led by a 13.7% YoY rise in domestic revenues, Nestle posted a 12.7% YoY increase in topline. Exports fell marginally during the quarter. For 1HCY12, sales were up by 13%.
  • Operating margin improved by 210 basis points on the back of higher realizations and a favourable product/channel mix. For 1HCY12, operating margin increased by 170 basis points.
  • At the net level, the company margin remained static at 12.3% due to a steep rise in interest cost and higher depreciation outgo. Nestle further raised USD 35 m of external commercial borrowings to fund its capital expenditure. For 1HCY12, Nestle's margins remained static at 13%.

Financial snapshot
(Rs m) 2QCY11 2QCY12 % change 1HCY11 1HCY12 % change
Revenue 17,681 19,934 12.7% 35824.9 40492.7 13.0%
Expenditure 14185.8 15571 3.5% 28432.4 31,473 10.7%
Operating profit (EBDITA) 3,495 4,363 24.8% 7,393 9,020 22.0%
EBDITA margin (%) 19.8% 21.9%   20.6% 22.3%  
Other income 30 45 50.5% 112.8 96.4 -14.5%
Interest 6 220 3700.0% 6.5 243.1 3640.0%
Depreciation 367 673 83.6% 693.8 1201 73.1%
Impairment of Fixed Assets - 44   - 44  
Provision for Contingencies 58 (75)   127 53.7  
Profit before tax 3,094 3,545 14.6% 6,678 7,574 13.4%
Tax 956 1,085 13.5% 1982.7 2356.8 18.9%
Profit after tax/(loss) 2,138 2,460 15.0% 4,695 5,217 11.1%
Net profit margin (%) 12.1% 12.3%   13.1% 12.9%  
No. of shares (m)         96.42  
Diluted earnings per share (Rs)*         105.14  
Price to earnings ratio (x)*         42.8  
* On a 12-month trailing basis

What has driven growth in 2QCY12?
  • For the second quarter in a row, Nestle sales growth was below 15%. While domestic revenues grew by 13.7% aided by higher realizations and volume growth, exports to affiliates fell yet again by 24.5% pulling down export turnover earned during the quarter.

    As a % of sales 2QCY11 2QCY12 Change in basis points 
    Raw material 49.3% 45.3% -404.17
    Staff costs 7.8% 8.4% 57.70
    Other expenditure 23.1% 24.5% 134.37

  • Nestle's operating performance continued to benefit from higher price realizations and favourable product portfolio/channel mix. During the quarter, the cost of goods sold to sales ratio fell by 404 basis points. This has more than offset the increase in staff costs and other expenses (as a percentage of sales). The operating margin expanded by 210 basis points during the quarter.

  • However, at the net level margins remain muted due to a steep jump in interest outgo. Higher external commercial borrowings to fund capex plans coupled with a weak rupee led to a 37 folds jump in interest cost during the quarter. The outstanding borrowings as on 30th June stood at Rs 10.8 bn. Even depreciation outgo was up by 84% after the recent commissioning of the Tahliwal facility.

What to expect?
Nestle sales growth is witnessing some pressure due to moderating volume growth. For the second quarter in a row, its sales growth was below 15%. The company is facing increased competition in food categories such as noodles and value added milk products. Even its margins were muted due to higher interest and depreciation charges.

At a price of Rs. 4501, the stock is trading at 31 times our estimated CY14 earnings. On the back of diversified portfolio, strong brand equity and capacity expansion plans, Nestle holds good growth potential. But at current valuations, the stock is overpriced and we maintain a SELL on the stock.

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