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Nestle: Slowdown catches upů - Views on News from Equitymaster
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  • Oct 31, 2002

    Nestle: Slowdown catches upů

    After reporting a stupendous 13% topline and over 40% bottomline growth in the first half of FY03, the slowdown in the FMCG market has finally caught with Nestle India in the September quarter. The company has reported a 16% dip in net profit in 3QFY03 backed by a marginal 2% decline in net sales. Other income is higher mainly due to receipt of duty drawback claims.

    (Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
    Net sales 5,330 5,235 -1.8% 14,529 15,650 7.7%
    Other Income 31 64 107.4% 88 198 124.7%
    Expenditure 4,408 4,324 -1.9% 11,944 12,431 4.1%
    Operating Profit (EBDIT) 922 911 -1.2% 2,585 3,219 24.5%
    Operating Profit Margin (%) 17.3% 17.4%   17.8% 20.6%  
    Interest 26 2 -90.8% 77 55 -28.3%
    Depreciation 110 126 14.6% 324 372 14.7%
    Profit before Tax & extraordinary items 817 846 3.6% 2,272 2,990 31.6%
    Tax 235 235 -0.2% 709 932 31.4%
    Extraordinary items -55 -171 - -193 -420 -
    Profit after Tax/(Loss) 527 441 -16.4% 1,370 1,638 19.6%
    Net profit margin (%) 9.9% 8.4%   9.4% 10.5%  
    No. of Shares (eoy) (m) 96.4 96.4   96.4 96.4  
    Diluted Earnings per share* 21.9 18.3   18.9 22.7  
    Current P/e ratio   30.2     24.4  

    Nestle's domestic sales growth slowed down considerably during the quarter under review to 6% YoY. The company had earlier reported a significant 25% growth in domestic sales during the March quarter, and then over 12% growth in the June quarter of FY03. Overall, the company finished the first nine months of FY03 with over 14% domestic sales growth, tempered largely by the September quarter numbers.

    Sales stats...
    (Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
    Domestic sales 4,384 4,635 5.7% 12,107 13,764 13.7%
    Exports 946 600 -36.6% 2,422 1,886 -22.1%
    Total sales 5,330 5,235 -1.8% 14,529 15,650 7.7%

    Nestle's export performance was even worse. In value terms, exports declined by a huge 37% during the quarter. But the decline in terms of volume sales was only 19%. This indicates a significant dip in export realisations. As per the company's release, the drop in volumes is mostly due to capacity limitations on the supply of instant coffee to Russia and restructuring of tea business. Besides, the drop in exports (in value terms) is mainly due to reduction in green coffee prices and ocean freight. Also, the product-mix was in favour of low realisation bulk packs in 2002 as compared to last year.

    Nestle managed to maintain its operating margins as compared to September quarter last year, but sequentially (with respect to March and June quarter) Nestle's margins are lower. The company's bottomline was impacted by a significant jump (52%) in staff costs, as well as due to extraordinary impairment of fixed assets. In the press statement, Nestle has said that staff costs jumped due to revaluation of retirement benefit liabilities, necessitated by continuing decline in interest rates.

    The extraordinary expense of Rs 172 m in 3QFY03 represents a write down on assets employed in its water business. The said assets are now valued at just over Rs 30 m based on the aforesaid write down. Excluding extraordinary items in both corresponding quarters, Nestle would have finished 3QFY03 with a marginal 5% net profit growth.

    Cost break-up
    (Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
    Material cost 2,235 2,106 -5.8% 5,984 6,171 3.1%
    Staff cost 330 500 51.6% 952 1,159 21.8%
    Other expenditure 1,843 1,718 -6.8% 4,994 5,100 2.1%
    Impairment of fixed assets - - - 14 0 -
    Total expenditure 4,408 4,324 -1.9% 11,944 12,431 4.1%

    In our analysis of the company's June quarter performance we had written, "Despite this strong 2QFY03 performance, we note that domestic sales growth has been slower in the second quarter as compared to an over 24% growth witnessed in 1QFY03. This indicates that the growth is reverting to a mean and going forward Nestle's growth engine is likely to slowdown". The growth engine certainly has hit a road block.

    To be fair to Nestle, its management too had hinted at growth tempering down. In his message during the June quarter result announcement, Nestle India's chairman & MD, Mr Carlo M Donati had said:"I am happy with the results achieved for the quarter and for the first half of the year, but sustainable growth continues to be under pressure. Difficult market conditions, weak consumer sentiment, particularly in the FMCG area, could be further compounded by the unfortunate possibility of a failing monsoon and may impact the performance for the second half of the year."

    At the current price of Rs 552, the stock trades at 24.4x annualised 9mFY03 earnings, market cap to sales of 2.6x. Nestle already trades at the higher end of FMCG valuation spectrum. The poor third quarter results are likely to affect the sentiment towards the counter in the short to medium term. But over the long term, Nestle India would continue to occupy premium positioning in the investor's FMCG folio.



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