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Nestle: Slow offtake & margins staid - Views on News from Equitymaster

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Nestle: Slow offtake & margins staid
Oct 30, 2014

Nestle India announced the third quarter results of calendar year 2014 (3QCY14). The company has reported a 9% YoY growth in sales and 9% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grew by 9% YoY in 3QCY14 led by 10% rise in domestic sales. For 9mCY14, revenues have grown by 7% YoY on a 8% domestic revenue growth.
  • Higher milk prices have led to a slight dip in operating margin for 3QCY14. The operating margin contracted by 1.4% Yoy for 9mCY14.
  • Net profits grew by 9% in 3QCY14 on a 8% rise in operating profit coupled with lower interest charges. For 9mCY14, net profit grew by a slower 2.7% on flat operating profit.

Financial snapshot
(Rs m) 3QCY13 3QCY14 % change 9mCY15 9mCY14 % change
Revenue 23,600 25,704 8.9% 68,381 73,239 7.1%
Expenditure 18,527.6 20,228.6 9.2% 52,879 57,679 9.1%
Operating profit (EBDITA) 5,073 5,476 7.9% 15,502 15,560 0.4%
EBDITA margin (%) 21.5% 21.3% -0.2% 22.7% 21.2% -1.4%
Other income 231 155 -32.6% 512 696 35.9%
Interest 100 2 -98.0% 264 142 -46.1%
Depreciation 835 846 1.4% 2,543 2,527 -0.6%
Employee benefit expenses due to passage of time 139 162 16.5% 420 491  
Provision for Contingencies - -   207 250 20.3%
Profit before tax 4,229 4,621 9.2% 12,580 12,846 2.1%
Exceptional income 36 -   36    
Tax 1,416 1,508 6.5% 4,262 4,263 0.0%
Profit after tax/(loss) 2,850 3,113 9.2% 8,355 8,583 2.7%
Net profit margin (%) 12.1% 12.1% 0.0% 12.2% 11.7% -0.5%
No. of shares (m)         96.4  
Diluted earnings per share (Rs)*         118.2  
Price to earnings ratio (x)*         51.6  
* On a 12-month trailing basis

What has driven growth in 3QCY14?
  • Nestle posted a tepid 9% YoY topline growth with the largest domestic segment posting 10% growth arising from better realizations. Export sales declined by 3.9% mainly due to lower coffee exports.

  • The operating profitability remained under pressure due to steep rise in price of milk and its derivatives resulting in a 1.1% jump in raw material to sales ratio. The impact was partially neutralized by savings in other expenses and staff costs (both as a proportion of sales). The operating margin dipped by 0.2% for the quarter.

    Cost break-up
    As a % of sales 3QCY13 3QCY14 Change in basis points
    Cost of goods sold 44.8% 45.9% 113.61
    Staff costs 7.7% 7.4% -22.95
    Other expenditure 26.1% 25.3% -71.51

  • At the net level, margin was in-tact due to 98% fall in interest charges. Nestle repaid USD$ 157 m from total External Commercial Borrowings (ECB) of USD$ 192 m during the June 2014 quarter. Other income earned was down by 33% for the quarter.
What to expect?
Nestle continues to battle slowdown pangs with topline growth being primarily driven by higher realizations. Notwithstanding, the company has been rationalizing its product portfolio to eliminate low margin stock keeping units that do not conform to either its wellness or growth strategy. At a price of Rs. 6100, the stock is trading at 35 times our estimated CY16 earnings. Armed with a diversified portfolio and strong brand equity, Nestle's long-term growth prospects remain bright. But at current valuations, the stock is overvalued and we re-iterate a SELL on the stock.

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