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Operating efficiencies drive Nestle's profits

Oct 27, 2000

Nestle India has reported an impressive performance for the quarter ended September 2000. The company's profit after tax excluding other adjustments grew by 37% to Rs 497 m (from Rs 363 m in 3QFY00). During the quarter higher domestic sales, favourable raw material prices and operational efficiencies boosted the profits of the company. However, higher provision for contingencies led to a net increase of 20% in profits of the company.

(Rs m)3QFY003QFY01Change
Sales 4,169 4,694 12.6%
Other Income 25 28 12.0%
Expenditure 3,491 3,847 10.2%
Operating Profit (EBDIT) 678 847 24.9%
Operating Profit Margin (%)16.3%18.0% 
Interest 62 42 -32.3%
Depreciation 80 93 16.3%
Profit before Tax56174031.9%
Other Adjustments48118145.8%
Tax 198 243 22.7%
Profit after Tax/(Loss) 315 379 20.3%
Net profit margin (%)7.6%8.1% 
Diluted number of shares (m) 96.4 96.4  
Diluted Earnings per share*13.115.7 
*(annualised)   
P/E (at current price) 39 33  

Raw coffee accounts for 22% of Nestle's total raw material cost. Favourable commodity prices during the quarter resulted in reduction in raw material cost, in turn improving operating profit margins by 180 basis points to 18%. Also the company's interest cost declined by 32% due to better working capital management.

During the first half of FY01 Nestle's exports were up by 35% while domestic sales registered a marginal growth of 5%. However, the company's exports during the 3QFY01 declined by 8% due to lower realisations from coffee exports to Russia as the green coffee prices have been lower in both domestic and international markets.

Nestle's revenues from domestic market grew by 16% due to new product launches, widening its product basket. The company's product portfolio includes macroni, soup, ketchup, cooking and culinary bases apart from milk & milk products. During the quarter it has also launched 'Perrier' - mineral water brand from its parent's stable.

At the current market price of Rs 514 Nestle is trading at a P/E multiple of 33 times its 3QFY01 anualised earnings. We have projected an EPS of Rs 14.3 for the year ended December 2000. During the nine months ended September 2000, the company has recorded a remarkable year on year growth of 52% in profits (excluding the other adjustments) and 10% growth in revenues. We feel initiatives taken by Nestle should help it to maintain its performance in 4QFY01.

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