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Nestle: Exports driven! - Views on News from Equitymaster
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Nestle: Exports driven!
Oct 30, 2006

Introduction to results
Processed foods major, Nestle India, announced its results for the third quarter and nine months ending September 2006 on Saturday. The company reported a decent topline growth for the quarter backed by growth in its export portfolio. However, there was a margin contraction of 80 basis points due to higher input costs. The bottomline grew by 11.3% YoY in 3QCY06.

(Rs m) 3QCY05 3QCY06 % change 9mCY05 9mCY06 % change
Net sales 6,248 7,227 15.7% 18,541 20,798 12.2%
Expenditure 4,970 5,802 16.7% 14,496 16,624 14.7%
Operating profit (EBDITA) 1,278 1,425 11.4% 4,045 4,174 3.2%
EBDITA margin (%) 20.5% 19.7%   21.8% 20.1%  
Other income 57 47 -17.6% 206 142 -31.1%
Interest 0 0 33.3% 1 3 161.5%
Depreciation 156 168 7.6% 430 486 13.0%
Profit before tax 1,179 1,303 10.6% 3,820 3,826 0.2%
Miscellaneous items (47) (42) -10.8% (214) 49 -122.9%
Extraordinary item - -   39 2 -94.9%
Tax 386 431 11.8% 1,290 1,351 4.8%
Profit after tax/(loss) 746 830 11.3% 2,355 2,526 7.3%
Net profit margin (%) 11.9% 11.5%   12.7% 12.1%  
No. of shares (m) 96.4 96.4   96.4 96.4  
Diluted earnings per share (Rs)*         33.9  
Price to earnings ratio (x)*         30.9  
* On a 12-month trailing basis

What is the company’s business?
Nestle India is the third largest FMCG company in India 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 and has emerged as a strong No. 2 in 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.

What has driven performance in 3QCY06?
Strong topline: During the quarter, Nestle consolidated its operations as sales improved across most categories and channels. The topline grew by a strong 15.7% YoY. The company introduced new products like MAGGI Teekha Masala, MAGGI Tiffin Pack and Nestle Funbar, which added to the topline performance. Domestic sales as well as exports contributed towards the growth during the quarter. Domestic sales saw a 10% YoY jump. The export sales grew by 34.8% YoY, driven by sale of beverages to USA and milk & nutrition products within South Asia.

Rs m 3QCY05 3QCY06 % change
Domestic sales 6,071 6,687 10.1%
Exports 607 819 34.8%

Margins under pressure: Margins continue to be impacted by the steep increase in prices of commodities, fuels/energies and higher operating costs associated with upgraded formulations and manufacturing processes of the Infant Nutrition products. However, the increased selling prices and higher volumes have partially offset the input cost increases.

Cost break-up
As a % of net sales 3QCY05 3QCY06 9mCY05 9mCY06
Total Cost of goods 45.1% 47.1% 44.2% 46.1%
Staff Cost 7.6% 7.5% 7.5% 7.7%
Other Expenditure 26.8% 25.8% 26.5% 26.1%

Bottomline picture: Despite a dip in operating margins, lower other income and a rise in interest charges, the net profit growth reported by the company was over 11.3% YoY. This was owing to the reversal of provisions created in the earlier years. Adjusting for the extra-ordinary item, the bottomline has actually declined by 10% YoY

What to expect?
At Rs 1,049, the stock is trading at 30.9 times its trailing 12-month earnings. Though the input prices are a cause of concern, the company had taken steps to offset the same by increasing the product prices. Higher volumes across categories, newer products and strong export sales are some of the positives. Though the valuations of the company are not favourable currently, given its market leadership in key categories, Nestle will continue to deliver adequate returns over the longer term.

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