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Nestle: Milk prices affects bottomline - Views on News from Equitymaster
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Nestle: Milk prices affects bottomline
Aug 3, 2010

Nestlé India declared its 2QCY10 results. The company has reported 21% YoY and 20% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line for the quarter grew by 21% YoY. The growth comes on the back of strong volume growth and selective price increases.
  • Operating (EBITDA) margins disappointed as they fell by 1.4% to stand at 19.8% (as a percentage of sales).
  • Net profit of the company grew on the back of higher other income, fall in depreciation and lower effective tax rates partly offset by higher raw material costs.
  • For 1HCY10, the company’s bottom line grew by 10.4% while the net profit margins fell by 1.1% to stand at 13.4%. This performance comes on the back of higher raw material costs, partly offset by lower effective tax rates.


Financial snapshot
(Rs m) 2QCY09 2QCY10 % change 1HCY09 1HCY10 % change
Net Sales 12,149 14,713 21.1% 24,851 29,567 19.0%
Expenditure 9,580 11,794 23.1% 19,300 23,504 21.8%
Operating profit (EBDITA) 2,570 2,919 13.6% 5,551 6,063 9.2%
EBDITA margin (%) 21.2% 19.8%   22.3% 20.5%  
Other income 34 55 64.1% 88 90 3.1%
Interest 6 4 -35.1% 7 9 26.0%
Depreciation 323 304 -6.0% 520 614 18.0%
Profit before tax 2,274 2,667 17.2% 5,112 5,531 8.2%
Tax 654 718 9.8% 1,518 1,564 3.0%
Profit after tax/(loss) 1,620 1,948 20.3% 3,593 3,967 10.4%
Net profit margin (%) 13.3% 13.2%   14.5% 13.4%  
No. of shares (m) 96.4 96.4   96.4 96.4  
Diluted earnings per share (Rs)*         71.8  
Price to earnings ratio (x)*         41  
* On a 12-month trailing basis

What has driven growth in 2QCY10?
  • Net sales of the company grew on the back of higher volumes and selective price increases. While domestic sales grew by 20.2% YoY, exports grew by 36.2% YoY. The export growth came on the back of higher exports to Russia. However, the export growth was adversely affected by the appreciation of the Indian Rupee against the US Dollar.

    Cost break-up
    As a % of sales 2QCY09 2QCY10 1HCY09 1HCY10
    Raw material 47.4% 48.9% 47.2% 49.3%
    Staff costs 9.1% 7.6% 7.9% 7.2%
    Other expenditure 22.4% 23.7% 22.2% 23.1%


  • Operating profit for Nestlé grew by 13.6% YoY. The growth was lower than sales growth due to rising raw material prices particularly for milk and sugar. The company took a conscious decision not to pass on food inflation to its customers and instead drive volumes. As a result of this strategy, while the top line has grown, operating profit has been affected. The operating income growth was also affected due to higher freight charges as a result of fuel costs moving north.

  • Net profits of the company grew by 20.3% and were capped by lower operating income. However, higher other income, lower depreciation charges and lower effective tax rate helped prop up the company’s bottom line. Effective tax rate of the company fell by 1.9% during the quarter.

What to expect?
At a price of Rs. 2,963, the stock is trading at 27.4 times our estimated CY12 earnings (RPro subscribers click here. We will update our analysis after a meeting with the company. However, at the current market price, we feel the valuations are a bit stretched and have a “CAUTIOUS” view on the stock.

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