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Nestle: Genetic advantage
Sep 15, 2005

Nestle (Switzerland), the global major and the parent of Nestle India, recently announced its second quarter and half yearly numbers. We have compared here our very own Nestle with its parent, who happens to be the worlds biggest food and beverages company. Here is a brief comparison of Nestle’s Indian operations vis-à-vis the parents global functioning. Background

Nestle Switzerland
Nestle, headquartered in Switzerland, was founded in 1866 and is the world’s largest food and beverages company with a presence in almost every country. It’s product folio includes renowned brands like Nescafe (Coffee), Pure Life (Water), Milo (Malted beverage), Milk Maid (Condensed milk), Kit-Kat (Chocolates), ice-creams, soups, pet care products, pharmaceutical products, etc. Nestle also has an equity stake in L’Oreal, one of the world’s largest hair colour company.

(Rs m) 1HCY04* 1HCY05* Change
Net sales 1,485,890 1,521,555 2.4%
Expenditure 1,316,420 1,339,170 1.7%
EBITDA 169,470 182,385 7.6%
Operating margin % 11.4% 12.0%  
Net profit after Tax(Loss) 97,370 128,905 32.4%
Net profit margin % 6.6% 8.5%  
EPS** (Rs) 501.2 663.6  
P/E ratio   19.0  
* Note: 1 CHF (Swiss Franc) = Rs 35   ** annualised

Nestle India
Nestle India is the third largest FMCG company in the country 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 (Cerelac) and has emerged as a strong No. 2 in the 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. In the past 5 years, Nestle’s topline and net profits have recorded a CAGR of 15% and 24% respectively.

(Rs m) 1HCY04 1HCY05 Change
Net sales 11,645 12,293 5.6%
Expenditure 9,606 9,526 -0.8%
EBITDA 2,039 2,767 35.7%
Operating margin % 17.5% 22.5%  
Other income 65 149 129.7%
Net profit after Tax(Loss) 1,072 1,608 50.1%
Net profit margin % 9.2% 13.1%  
EPS* (Rs) 22.2 33.4  
P/E ratio   25.6  
* annualised      

As can be seen from the above tables, revenues of Nestle India are not even 1% of that of the parent. But, one must note here that the figures mentioned above for nestle (Switzerland) are consolidated world figures and in India, the parent has launched only a fraction of the over 75 brands that are present in its product portfolio. However, on the margins front, Nestle India has displayed better performance, both at the operating as well as the net profit level.

Now lets take a closer look at the parent and the child…

Nestle Switzerland
as % of net sales 1HCY04 1HCY05
Material cost 41.3% 41.5%
Staff cost & marketing expense 36.6% 36.7%
Other expenditure 10.8% 9.8%
Total expenditure 88.6% 88.0%
Nestle India
as % of net sales 1HCY04 1HCY05
Material cost 43.1% 43.7%
Staff cost 7.1% 7.5%
Other expenditure 32.3% 26.3%
Total expenditure 82.5% 77.5%

As can be seen from the above tables, raw material costs in India are higher, due to firm milk prices and also lower bargaining power owing to its relative smaller size compared to its parent. Further, the parent has the policy of sourcing products from countries where it is the cheapest to manufacture, thus reducing overall raw material costs. However, staff costs in India are considerably lower than that of the parent as it is a well-known fact that labour is much cheaper in India as compared to the western countries. It must be noted that marketing expenses in Indian operations are clubbed with other expenditure, as the company does not provide detailed expenses on a quarterly basis.

The Asia pacific region…

As can be seen from the graph below, Asia, along with Africa and Oceania (Australia and New Zealand), accounts for 17% of the parent’s revenues. During the first half of the year, growth from this zone stood at 6% YoY, the second highest in the parents folio after America (7.2%). As per the company, growth from this region would have overtaken that of Americas had there not been local regulatory compliance issues in greater China. Overall, this region grew on the back of increased offtake in ice creams and other products maintaining their market shares. However, it must be noted that ice creams is currently not present in the Indian product offering by Nestle.

What to expect?

Nestle India currently trades at Rs 855, implying a price to earnings multiple of 20.2 times our estimated CY07 earnings and market capitalisation to sales of 3.0 times. Following the implementation of Project GLOBE, we expect further benefits to the company on the margins front. The parent has a lot of aspirations from its Asian subsidiaries, especially India and China, since these are growing economies. These two countries are constantly on the parent’s radar as they are a major growth driver in Asia.

We continue to view Nestle as one of the top FMCG companies in India with strong growth prospects. We believe that there is a need to upgrade our earnings estimates for the next two years. But valuation continues to remain an issue. We suggest investors to adopt a ‘wait and watch’ approach and ascertain whether this growth can be sustained going forward.

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