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Nestle: Volumes boosts topline - Views on News from Equitymaster

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Nestle: Volumes boosts topline
Oct 30, 2010

Nestlé India declared its 3QCY10 results. The company has reported 25.6% YoY and 19.6% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line for the quarter grew by 25.6% YoY. The growth comes on account of both volumes and price realization.
  • Operating (EBITDA) margins disappoint as they fell by 1.1% to stand at 20% (as a percentage of sales).
  • Net profit of the company grew by 19.6% YoY on the back of higher other income and flat depreciation, partly offset by higher effective tax rates and higher raw material costs.
  • For 9mCY10, the company’s bottom line grew by 13.5% while the net profit margins fell by 0.9% to stand at 13.4%. This performance comes on the back of higher raw material costs, partly offset by lower depreciation and lower effective tax rates.

Financial snapshot
(Rs m) 3QCY09 3QCY10 % change 9mCY09 9mCY10 % change
Net Sales         13,072         16,414 25.6%        37,923        45,981 21.2%
Expenditure         10,320         13,136 27.3%        29,560        36,640 24.0%
Operating profit (EBDITA)           2,752           3,278 19.1%          8,364          9,341 11.7%
EBDITA margin (%) 21.1% 20.0%   22.1% 20.3%  
Other income                 38                 54 40.6%             125             144 15.5%
Interest                   2                   1 -72.2%                  9                10 6.6%
Depreciation              302              306 1.3%             881             920 4.3%
Profit before tax           2,487           3,026 21.7%          7,598          8,556 12.6%
Tax              659              840 27.5%          2,177          2,404 10.4%
Profit after tax/(loss)           1,828           2,186 19.6%          5,421          6,153 13.5%
Net profit margin (%) 14.0% 13.3%   14.3% 13.4%  
No. of shares (m) 96.4 96.4   96.4 96.4  
Diluted earnings per share (Rs)*         75.5  
Price to earnings ratio (x)*         47  
* On a 12-month trailing basis

What has driven growth in 3QCY10?
  • Net sales of the company grew on the back of higher volumes and higher price realization. While domestic sales grew by 27.8% YoY, exports fell as a result of the negative impact of diversion of capacity to domestic demand, timing difference and appreciation of the rupee.

    Cost break-up
    As a % of sales 3QCY09 3QCY10 9mCY09 9mCY10
    Raw material 47.6% 48.9% 47.4% 49.2%
    Staff costs 7.5% 6.3% 7.8% 6.9%
    Other expenditure 23.9% 24.7% 22.8% 23.7%

  • Operating profit for Nestlé grew by 19.1% YoY. The growth was lower than sales growth due to rising raw material prices particularly milk. Other expenditure also increased as a percentage of sales. This was due to higher spending by the company towards brand building. Other expenditure was also higher on account of provision for contingencies made during the quarter.

  • Net profits of the company grew by 19.6% and were capped by lower operating income and higher effective tax rate. However, higher other income and flat depreciation charges helped prop up the company’s bottom line. Depreciation was lower during the quarter as increase in depreciation of tangible fixed assets was partially offset by reduction in amortisation of management information systems as they have been fully amortised.

What we expect?
At a price of Rs. 3,517, the stock is trading at 32.7 times our estimated CY12 earnings (RPro subscribers 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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