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Nestle: What will drive growth? - Views on News from Equitymaster
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  • Oct 12, 2000

    Nestle: What will drive growth?

    Nestle India has offlate shown an encouraging performance (2QFY01) due to rising operational efficiencies and declining raw material prices. The company has also initiated a restructuring exercise to increase growth in revenues and profits.

    Change in RM Prices YoY FY98 FY99 FY00
    Milk 10.5% 4.8% 5.0%
    Skimmed milk powder -2.0% 1.0% -4.0%
    Sugar 4.6% 3.4% 3.0%
    Raw coffee -11.6% 4.2% -13.0%
    Chicory 10.4% 13.0% 9.0%
    Tea 20.2% 44.6% -12.0%
    Nestle has decided to completely restructure the operations of Excelcia Foods, the company in which earlier Dabur had 40% and Nestle SA had a 60% stake. Nestle India had recently bought over Dabur's stake in the joint venture to gain complete ownership of the biscuit manufacturing company. Apart from saving in raw material prices the company would be able to save cost through efficient use of its existing network for selling Excelcia products.

    As part of brand revamping, Nestle has decided to focus more on its flagship brands like ‘Nescafe’ and ‘Maggi’. It has initiated various measures to improve Nescafe sales in India. The company has installed coffee vending machines at strategic locations. This has proved to be very successful. Nestle is also trying to imbibe the coffee culture amongst the Indians and particularly the young generation through various promotional campaigns. It has phased out its tea brand ‘Taster's Choice’ and is now offering its packaged tea under ‘Nestea’ brand. It is also eyeing new markets for coffee like Poland, Finland and Hungary to increase exports.

    However, major concern for the company is its stagnating market share in the chocolates business and the export sales as a percentage of total sales, which was 15% in second quarter of FY01. It is still low when compared with the 30% levels in FY98 and FY99.

    Nestle has also launched two new brands - ‘Pure Milk’ and ‘Perrier’ in the milk and mineral water segment respectively. Nestle SA, the parent company is very strong in both the segments and enjoys high brand loyalty. In India, mineral water is a big business worth Rs 7 bn and is growing by a healthy 35-40% per annum. Packaged Milk is another big business worth more than Rs 100 bn. As per a McKinsey report the milk business is expected to grow by 30% annually to reach Rs 360 bn by year 2005. Its milk business will account for around 10% of its total revenues and the company expects to achieve a turnover of Rs 1.5 bn in the next 3-5 years. We feel that despite stiff competition Nestle will be able to able to grab substantial part of this business due to its strong distribution network, established brand image and excellent promotional strategies.

    Comparative Valuations
    Particulars Nestle Cadbury HLL Briatannia
    Market Price (Rs) 488.0 590.0 189.0 700.5
    P/E (x) 34.0 39.5 22.0 26.5
    Market Cap / Sales (x) 2.8 3.5 3.0 1.4

    At the current market price of Rs 488 Nestle gets a P/E of 34 times its FY01 projected earnings. On the other hand HLL gets P/E of 22 times, which may be attributed to the sluggish growth prospects. Nestle is likely to maintain its growth rate in the second half and we expect an increase in bottomline for the whole year to be in the range of 35-40%. However the major valuation drivers are going to be the new focus areas i.e. the milk and the water business.



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