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Nestle: Reports losses due to the Maggie row - Views on News from Equitymaster
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Nestle: Reports losses due to the Maggie row
Jul 31, 2015

Nestle India declared its results for the quarter ended June 2015. The company reported a revenue decline of 20% YoY during the quarter, while reporting a loss at the net level. Here is our analysis of the results.

Performance summary
  • Revenues decline by 20% YoY.
  • Operating profits decline by about a fourth with margins coming in at 20.2% as compared to 20.9% in same period of last year.
  • While the company reported higher other income, the Rs 4.5 bn write off (costs related to products going off the shelves) led it to report a pretax loss of about around Rs 1.2 bn.
  • During 1HCY15, revenues came in lower by 6% YoY, while operating profits remained flat.

Standalone financial performance
(Rs m) 2QCY14 2QCY15 Change 1HCY14 1HCY15 Change
Net sales 24,320 19,570 -19.5% 47,535 44,735 -5.9%
Expenditure 19,247 15,624 -18.8% 37,450 34,567 -7.7%
Operating profit (EBDITA) 5,072 3,946 -22.2% 10,085 10,168 0.8%
EBDITA margin (%) 20.9% 20.2%   21.2% 22.7%  
Other income 231 301 30.3% 541 556 2.9%
Depreciation 842 720 -14.5% 1,681 1,670 -0.6%
Interest 38 1 -98.4% 140 35 -75.3%
Employee benefit expenses due to passage of time 164 191 16.5% 329 382 16.1%
Provision for contingencies - -   250 302 20.8%
Corporate social responsibility expense - 5   - 25  
Exceptional items - (4,517)   - (4,631)  
Profit before tax 4,260 (1,186)   8,226 3,680 -55.3%
Tax 1,382 (542)   2,756 1,121 -59.3%
Effective tax rate 32% 46%   33% 30%  
Profit after tax/(loss) 2,879 (644)   5,470 2,559 -53.2%
Net profit margin (%) 11.8% -3.3%   11.5% 5.7%  
No. of shares (m)       96.4 96.4  
Diluted earnings per share (Rs)*         138.1  
Price to earnings ratio (x)         45.9  
(*On a trailing 12-month basis)

What has driven performance in the quarter ended June 2015?
  • Nestle's revenues declined by 20% YoY as domestic revenues (92% of revenues) fell by 21% YoY, while export sales were down by 13% YoY. The decline in revenue was clearly an impact of the Maggi controversy (allegations of the company's products not meeting the quality standards). As per the company, it took the measure of taking the products off the shelves temporarily on 5th June 2015. Sales worth Rs 2.9 bn were reversed during the quarter in relation to Maggi noodles stock being withdrawn from trade partners and the market. Exports on the other hand were impacted by lower coffee exports.

  • During the quarter, Nestle's operating profits declined by 22% YoY led by the decline in sales. Operating margins contracted by 0.7% YoY to 20.2%

    Cost break up
    Particulars 2QCY14 2QCY15 Change 1HCY14 1HCY15 Change
    Raw material costs 11,509 8,553 -25.7% 22,216 19,179 -13.7%
    % of sales 47.3% 43.7%   46.7% 42.9%  
    Employee benefit 1,919 1,880 -2.0% 3,593 3,893 8.3%
    % of sales 7.9% 9.6%   7.6% 8.7%  
    Other expenses 5,820 5,190 -10.8% 11,642 11,495 -1.3%
    % of sales 23.9% 26.5%   24.5% 25.7%  
    Total 19,247 15,624 -18.8% 37,450 34,567 -7.7%
    Data source: Company, Equitymaster Research

  • Nestle reported a loss of Rs 64 m during the quarter, its first in decades. This was largely due to a Rs 4.5 bn exceptional item on the back of write offs. Excluding this figure, the profit before tax would have been at Rs 3.3 bn, which would be lower by about 22% YoY as compared to last year's figure.
What to expect?
At the current price of Rs 6,337, Nestle trades at a multiple of about 46x its trailing twelve month earnings (adjusted for extraordinary items) and at about 37x our estimated CY17 EPS.

Given the impact of the Maggi fiasco, and the uncertainty of the short term outcome of what the company will do to fix the situation, we believe putting any numbers to it will be a tough task. In the past, such situations have led other companies to incur major marketing and rebranding expenses to earn back the goodwill of the customers. But they were eventually able to overcome the problems. We believe the strong brand that Maggi is, probability of a similar outcome is high. But as we said, putting a number to it is difficult at the moment. We would like to wait for a while to make any major changes to our projections as such.

We maintain our view that the stock seems overvalued at current levels and thus believe that investors should not buy the scrip at current price levels.

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