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Nestle – Efficient cost management

Sep 4, 2000

Nestle India has been consistently improving its bottomline growth led by higher operating margins and efficient working capital management. The favourable raw material prices have also contributed to the profit growth.The raw material cost as a percentage to sales has consistently declined from 1995 to 1998. However during the last year, higher international cocoa prices have inflated, Nestle’s raw material cost, resulting in slower growth in the profit margins. Currently the cocoa prices have been hovering around $ 900 as compared to the high of $ 1,750 in the last year. The total raw material and packing cost during the first half of FY01 further declined to 46.4% of net sales. Nevertheless it is still higher than 43.8% in the first half of FY00.

Cost as a percentage to sales
Year End DecemberFY96FY97FY98FY99FY00
Raw material consumed45.1%43.2%41.7%39.7%48.4%
Packing material12.2%13.2%12.2%11.9%12.5%

Apart from cost of production, efficient net working capital management (arising as a result of declining interest cost) has had a positive impact on its bottomline. Net working capital to sales ratio declined to 0.6% in FY00 compared to 12.3% in FY97. Also during the 2QFY01, there was a significant reduction in inventory compared to corresponding previous quarter. Reduction in the net working capital has enabled the company to increase its returns year over year.

RONW 28.7%31.2%34.1%
ROA 9.4%11.4%13.8%
ROIC 21.7%24.5%31.1%

At the current market price of Rs 461, Nestle is trading at a P/E of 34 times its 2QFY01 annualised earnings. Historically the company’s stock had traded in a P/E range of 40-45 times. Its valuations are expected to improve further with excellent financial performance boosted by higher export sales. Also favourable cocoa prices will lead to better cost management for the company.

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