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Nestle: Robustness continues - Views on News from Equitymaster

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Nestle: Robustness continues
Jul 31, 2008

Performance summary
  • Topline grows by 24% YoY led by the growth in the domestic business.
  • Operating margins in the quarter decline by 0.8% YoY on account of higher raw material and other costs (as percentage of sales).
  • While the net profits for 2QCY08 grow by 27% YoY, the bottomline in 1HCY08 is up 38% YoY.


(Rs m) 2QCY07 2QCY08 % change 1HCY07 1HCY08 % change
Net sales 8,389 10,356 23.5% 17,020 21,265 24.9%
Expenditure 6,743 8,407 24.7% 13,571 16,826 24.0%
Operating profit (EBDITA) 1,646 1,950 18.4% 3,448 4,440 28.8%
EBDITA margin (%) 19.6% 18.8%   20.3% 20.9%  
Other income 32 67 111.0% 101 130 28.0%
Interest 4 14 273.0% 6 15 162.5%
Depreciation 178 224 25.5% 358 434 21.5%
Profit before tax 1,496 1,779 18.9% 3,187 4,121 29.3%
Miscellaneous items (32) (31) -2.2% 678 131 -80.7%
Extraordinary item   -   (754) -  
Tax 507 538 6.1% 1,070 1,178 10.1%
Profit after tax/(loss) 957 1,210 26.5% 2,041 2,812 37.7%
Net profit margin (%) 11.4% 11.7%   12.0% 13.2%  
No. of shares (m) 96.4 96.4   96.4 96.4  
Diluted earnings per share (Rs)*         50.9  
Price to earnings ratio (x)*         32.2  
* On a 12-month trailing basis

What has driven performance in 2QCY08?
  • Nestle witnessed a topline growth of 24% YoY during 2QCY08. While the domestic sales in 2QCY08 grew by 25% YoY, exports were higher by 11% YoY. In the half year period, the domestic segment grew by 27% YoY, while exports were up 6% YoY. The company continues to ride on the urban growth story aided by product development, innovation and renovation.

    Revenue Breakup
    Rs m 2QCY07 2QCY08 % change 1HCY07 1HCY08 % change
    Domestic sales 7,569 9,442 24.8% 15,337 19,481 27.0%
    Exports 820 914 11.4% 1,683 1,785 6.1%

  • The operating margins in the quarter declined by 0.8% YoY on account of higher advertising and sales promotion expenses. For the half-year period, the margins improved by 0.6%. The company had taken price hikes to offset the steep hike in input prices. Nestle has already raised prices of most of its products by more than 11% YoY last year and had also reduced weights of some products by 9% to 12% YoY to absorb the escalations.

  • While the net profits for 2QCY08 grew by 27% YoY, the bottomline in 1HCY08 was up 38% YoY. Excluding the extraordinary item (additional labour costs in 1HCY07), the bottomline in 1HCY08 grew by a mere 0.6% YoY due to a considerable reduction in miscellaneous items and higher interest costs. The effective tax rate reduced to 30.2% and 28.6% in 2QCY08 and 1HCY08 respectively on account of the tax holiday for its Pantnagar factory.

What to expect?
At Rs 1,640, the stock is trading at a multiple of 25.4 times our CY10 estimates. Nestle’s performance has been better than our expectations. With its strong product portfolio and new launches, the company would continue to witness strong double-digit growth. Also, Nestle has high pricing power and strong product positioning, which empowers it to take steady price increases to offset input cost pressures. This would keep the margins stable going forward. While we are positive on the growth prospects of the company, valuations at the current juncture are on the higher side.

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