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Nestle: Analyst meet extracts - Views on News from Equitymaster
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Nestle: Analyst meet extracts
Sep 7, 2010

We recently attended Nestlé India's analyst meet. The company is a subsidiary of Nestlé S.A. of Switzerland. It has seven manufacturing facilities in India. Its product range includes milk products, prepared dishes and cooking aids, beverages, and chocolate and confectionaries. The company has iconic products in its portfolio, like Cerelac, Maggie, Nescafe, and KitKat.

Here are the key takeaways from the analyst meet.

Nestle's topline grew by a strong 21% in 2QCY10 (financial year ends in December). However, its margins were subdued, falling by 0.4% to 19.8% during the quarter. This was primarily a result of increase in raw material costs (as a percentage of sales). Bottomline grew by 20% YoY. This came on the back of higher other income, lower interest costs, and fall in effective tax rates. For 1HCY10, the company's topline grew by 19% YoY while operating margins fell to 20.5%, from 22.3% in 1HCY09. This was again a result of higher raw material costs. Bottomline grew by 10% YoY for this period. This was on the back of fall in effective tax rates.

The company witnessed strong growth in both its domestic business and exports. As seen from the chart below, strong volume growth was the main growth driver for its business. While the growth in volumes in domestic business was 18% YoY during 1HCY10, the same for exports stood at 29% YoY. The growth in domestic business was a result of all round growth in the company's product categories. Growth in exports came from higher demand from Russia, in the beverages segment. However, the company believes that the growth from Russia is not sustainable. Domestic value growth for 1HCY10 was 18% YoY while export business grew by 29% YoY in value terms during the same period.

Nestle:  Volume in 'OOO tonnes

Nestle: Value in Rs billion

Nestle:  Export portfolio Geography

Nestle:  Export portfolio product category

During 1HCY10, Nestle's biggest contributor to sales - milk products and nutrition - grew by 14% YoY. This was on the back of a 7% YoY growth in volumes. During this period, milk prices moved up steeply by 27% YoY. As a result, the company was forced to increase prices to protect its margins. However, in order to drive volume growth, the company did not pass on the increase in raw material prices entirely.

This resulted in some pressure on margins. The second largest contributor to sales for the company, i.e. 'prepared dishes and cooking aids' grew by 26% YoY in volume terms and almost 29% YoY in value terms. The main growth driver here was 'Maggie', which grew in spite of stiff competition from GSK Consumer and HUL. The company also increased its spending on brand building for this category which was reflected in the robust volume growth. Nestlé's chocolate and confectionery portfolio grew by 25% YoY in volume terms and 26% in value terms. This signifies that the growth in this category was entirely volume driven. Sales in 'beverages' grew by 13% YoY. Volume growth for this business stood at 27% YoY. As mentioned earlier, this was due to higher beverage exports to Russia. However, these are low margin exports and a fall in price of coffee resulted in the company witnessing a lower increase in sales as compared to volume growth.

Nestle: Contibution to net sales

One of the main challenges being faced by the company is the increasing price of raw material. While milk has been on the way north for some time, the company saw sugar and wheat prices climb up by 54% YoY and 14% YoY respectively. Till now, the company has been judicious in passing on higher cost price to its customers as it is looking to drive volume growth. However, it expects to get some relief as sugar and wheat prices have started to soften. On the other hand, the company expects the prices of milk to remain high.

What we expect? At the current price of Rs 3,212, the stock is trading at 29.8 times our estimated CY12 earnings (RPro subscribers, kindly click here). Nestle has all the drivers for growth in place with a diversified product portfolio. However, we see the competitive pressures building up for the company. Moreover, it is facing raw material pressure. This is likely to put some pressure on its margins going forward. While we believe in the company's long term growth potential, we see valuations as being stretched right now. For this reason, we have a cautious view on the stock.

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