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Nestle: Profit growth slows down
Aug 7, 2013

Nestle India announced the second quarter results of calendar year 2013 (2QCY13). The company has reported 11% YoY and 10% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline increased by 11.5% backed by 9.2% YoY rise in domestic sales and 47% YoY jump in export turnover. For 1HCY13, revenues grew by 10.6%.
  • Operating margin improved slightly to 21.9% aided by moderating raw material costs and other expenditure. During 1HFY13, operating margin improved by 0.8% YoY .
  • Net profit grew by 10.3% YoY due to a higher depreciation charges and tax outgo during the quarter. For 1HCY13, net profits were up by a mere 5.5% YoY.
  • The company has declared an interim dividend of Rs 18 per equity share, translating into a dividend yield of 0.4%.

Financial snapshot
(Rs m) 2QCY12 2QCY13 % change 1HCY12 1HCY13 % change
Revenue 19,934 22,227 11.5% 40493 44781 10.6%
Expenditure 15622 17361.4 11.1% 31653 34632 9.4%
Operating profit (EBDITA) 4,312 4,866 12.8% 8840 10149 14.8%
EBDITA margin (%) 21.6% 21.9%   0 0  
Other income 45 154 244.5% 96 281 191.8%
Interest 220 85 -61.4% 243 164 -32.4%
Depreciation 673 887 31.7% 1201 1708 42.2%
Impairment of Fixed Assets - -   0 0  
Provision for Contingencies (82) - -100.0% -82 207  
Profit before tax 3,545 4,048 14.2% 7574 8350 10.3%
Tax 1,085 1,334 23.0% 2357 2846 20.7%
Profit after tax/(loss) 2,460 2,714 10.3% 5,217 5,505 5.5%
Net profit margin (%) 12.3% 12.2%   12.9% 12.3%  
No. of shares (m)         96.4  
Diluted earnings per share (Rs)*         107.8  
Price to earnings ratio (x)*         46.0  
* On a 12-month trailing basis

Standalone financial performance

What has driven growth in 2QCY13?

  • Nestle reported a 11.5% rise in revenues on a 9.2% increase in domestic sales. The growth in domestic sales has been on account of higher realizations and volume growth in certain product categories. Exports have risen sharply by 46.9% mainly due to exports to affiliates.

  • The company has been able to improve operating margin aided by easing input prices and rationalization in other expenses.

    Cost break-up
    As a % of sales 2QCY12 2QCY13 Change in basis points
    Cost of goods sold 45.3% 45.0% -26.03
    Staff costs 8.4% 8.5% 18.45
    Other expenditure 24.7% 24.6% -18.36

  • Net profit grew by a relatively slower 10.3% on account of over 20% jump in each of the depreciation charges and tax outgo. The tax incidence rose to 33% from 30.6% in the year-ago quarter. However interest charges fell by 61% during the quarter. Other income surged by 245% due to higher average liquidities.
What to expect?
Nestle's profit growth has been lagging far behind its sales growth. While easing commodity inflation and controlled other expenses have led to improvement in operating margins, at the net level profit growth remains tardy. During 1HFY13, profit growth at 5.5% was nearly half the growth rate in topline. A reason for this can be attributed to low volume growth whose impact has been further accentuated by the new capacity additions resulting in lower asset utilization.

At a price of Rs. 4961, the stock is trading at 37 times our estimated CY14 earnings. Armed with a diversified portfolio and strong brand equity, Nestle's long-term growth prospects remain bright. But at current valuations, the stock is overvalued and we re-iterate a SELL on the stock.

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