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Nestle: Milking its way - Views on News from Equitymaster

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Nestle: Milking its way

Aug 1, 2007

Performance summary
  • Topline grows 23% YoY in 2QCY07 led by domestic sales growth of 24% YoY on account of higher volumes and price increases.

  • The operating margins for 2QCY07 remains flat.

  • Excluding the miscellaneous items (relating to litigation) bottomline is up 19.5% YoY.

  • Nestle is planning expenditure of Rs 1 bn for expanding its chilled dairy portfolio. It has also lined up capacity expansion

(Rs m) 2QCY06 2QCY07 % change 1HCY06 1HCY07 % change
Net sales 6,812 8,389 23.2% 13,571 17,020 25.4%
Expenditure 5,455 6,755 23.8% 10,876 13,598 25.0%
Operating profit (EBDITA) 1,357 1,634 20.4% 2,695 3,422 27.0%
EBDITA margin (%) 19.9% 19.5%   19.9% 20.1%  
Other income 44 32 -27.9% 95 101 7.2%
Interest 2 4 60.9% 3 6 115.4%
Depreciation 161 178 10.9% 318 358 12.5%
Profit before tax 1,238 1,484 19.9% 2,469 3,160 28.0%
Miscellaneous items (7) (20) 197.0% 147 705 379.6%
Extraordinary item         754  
Tax 421 507 20.5% 920 1,070 16.3%
Profit after tax/(loss) 810 957 18.1% 1,696 2,042 20.4%
Net profit margin (%) 11.9% 11.4%   12.5% 12.0%  
No. of shares (m) 96.4 96.4   96.4 96.4  
Diluted earnings per share (Rs)*         36.3  
Price to earnings ratio (x)*         32.9  
* On a 12-month trailing basis

What is the company’s business?
Nestle India is the third largest FMCG company in India after Hindustan Lever and ITC. Nestle dominates the culinary (Maggi) and the hot beverages (coffee - Nescafe) segments in India. It also has a significant presence in baby foods and has emerged as a strong No. 2 in dairy segment (after Amul) and chocolates (after Cadbury’s). In each of the segments, the company has been growing through new product launches and new price point presence. In the last couple of years it has emerged as the fastest growing food FMCG company.

What has driven performance in 2QCY07?
Favourable environment: The continuing favourable consumer environment allowed Nestle to exercise price increases and new product introductions, thereby witnessing a topline growth of 23% YoY in 2QCY07. The domestic sales grew by 24%YoY on account of higher volumes and price increases. The exports were up 15.6% YoY led by higher realisations and better product mix. The company has entered the probiotic milk market by launching its new low-fat product, Nestle Nesvita Dahi. The rising health consciousness amongst the Indian consumer is set to open new avenues for probiotic product innovation in the market. Globally, the market for probiotic products is estimated to be US$ 14 bn with countries like Japan and Europe taking the lead. Nestle is slated to roll out the product across the six metros in the future. It has chalked out an ambitious growth plan, which includes new product launches, capacity expansion and acquisitions. We are positive on its growth going forward.

Rs m 2QCY06 2QCY07 % change 1HCY06 1HCY07 % change
Domestic sales 6,103 7,569 24.0% 12,354 15,337 24.1%
Exports 709 820 15.6% 1,217 1,683 38.3%

Flat margins: The operating margins for 2QCY06 remained flat. This decline in margins is mainly due to higher raw material prices which have gone up by 29% YoY. Prices of milk in the local markets corrected sequentially on QoQ basis due to the ban on milk powder exports from India, but YoY milk prices have remained firm. The sustainability of lower milk prices in India, when global prices are rising, is doubtful. The company expects higher milk prices going forward.

Cost break-up
As a % of net sales 2QCY06 2QCY07 1HCY06 1HCY07
Total Cost of goods 46.1% 48.3% 45.6% 47.7%
Staff Cost 8.3% 8.3% 8.2% 7.9%
Other Expenditure 25.7% 24.0% 26.4% 24.3%

On the profits: Net profits were up 18% YoY in 2QCY07. However, higher interest costs and lower other income restricted the growth. Excluding the miscellaneous items (relating to litigation) bottomline is up 19.5% YoY. On the half yearly basis, excluding extraordinary (one time expenses relating to hike in salary and expansion costs) and miscellaneous items, net profits are up 35% YoY. The new facility in Pantnagar will accrue tax benefits once it is fully operational in 3QCY07, thereby improving the profits.

What to expect?
At Rs 1,192, the stock is trading at 24.4 times our CY09 estimates. Nestle is planning expenditure of Rs 1 bn for expanding its chilled dairy portfolio. It has also lined up capacity expansion at its existing manufacturing facilities in Moga (Punjab) and Samalkha (Haryana), and is sprucing up its distribution network. The company is also considering a re-entry into the water business by acquiring an existing brand. The company believes that the new product line-up will help maintain volume growth in spite of raw material pressures. While we are positive on the stock from a long term perspective, it is reasonably valued at the current levels.

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Mar 22, 2019 (Close)