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Nestle: Business as usual

Oct 31, 2003

One of India's largest processed food companies, Nestle India, continues to grow steadily. The company has reported nearly 9% topline growth during 3QFY04, in a segment where its FMCG peers are hard pressed for growth. What's more, the company has finished the quarter with a significant 72% bottomline growth, propelled by extraordinary income in the form of a provision write back (Rs 129 m)

(Rs m) 3QFY03 3QFY04 Change 9mFY03 9mFY04 Change
Net sales 5,235 5,690 8.7% 15,650 17,132 9.5%
Other Income 64 52 -19.4% 198 227 14.8%
Expenditure 4,324 4,570 5.7% 12,431 13,531 8.9%
Operating Profit (EBDIT) 911 1,121 23.1% 3,219 3,601 11.9%
Operating Profit Margin (%) 17.4% 19.7%   20.6% 21.0%  
Interest 2 2 -12.5% 55 19 -66.5%
Depreciation 126 114 -9.3% 372 344 -7.4%
Profit before Tax & extraordinary items 846 1,056 24.8% 2,990 3,465 15.9%
Tax 235 401 70.8% 932 1,191 27.8%
Extraordinary items -171 105 - -420 -98 -
Profit after Tax/(Loss) 441 760 72.4% 1,638 2,177 32.9%
Net profit margin (%) 8.4% 13.4%   10.5% 12.7%  
No. of Shares (eoy) (m) 96.4 96.4   96.4 96.4  
Diluted Earnings per share* 18.3 31.5   22.7 30.1  
Current P/e ratio   18.0     18.8  
*(annualised)            

The company's domestic sales grew strongly at nearly 10% during the quarter. The consolidated nine month revenue growth in the domestic market is also up by a similar 10%, underlining the consistency in growth during the current year. The performance has largely come about owing to the company's healthy showing in culinary (Maggi), baby foods (Cerelac), as well as dairy products (largely milk).

Sales stats...
(Rs m) 3QFY03 3QFY04 Change 9mFY03 9mFY04 Change
Domestic sales 4,635 5,080 9.6% 13,764 15,112 9.8%
Exports 600 610 1.7% 1,886 2,020 7.1%
Total sales 5,235 5,690 8.7% 15,650 17,132 9.5%

Nestle's export performance was however, lacklustre (up 1.7%). Though the company benefited from higher green coffee prices, it was largely offset by a shift in demand towards low realisation bulk packs. The company expects this trend to continue. The company's operating margins saw a significant 230 basis points to nearly 20%, largely an effect of lower staff costs (down 22%). This was because during last year September quarter, the staff costs were up 52% YoY owing to revaluation of retirement benefit liabilities.

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 27 m. Excluding extraordinary items in both corresponding quarters, Nestle at the PBT (profit before tax and extraordinary items) level has still grown by a healthy 24% YoY during 3QFY04.

Cost break-up
(Rs m) 3QFY03 3QFY04 Change 9mFY03 9mFY04 Change
Material cost 2,106 2,320 10.1% 6,171 6,937 12.4%
Staff cost 500 391 -21.9% 1,159 1,160 0.1%
Other expenditure 1,718 1,857 8.1% 5,100 5,431 6.5%
Impairment of fixed assets - 3 - - 3 -
Total expenditure 4,324 4,570 5.7% 12,431 13,531 8.9%

At the current price of Rs 566, the stock trades at 18.8x annualised 9mFY04 earnings, market cap to sales of 2.4x. Nestle is one the fastest growing consumer companies in India and is very focused on the food processing space. The company continues to grow owing to its strategy of introducing new products at lower price points. The concern over the long term for the shareholders is the management's continued hiking of stake in the company (stands at nearly 62%). This points to the preference of the parent towards taking Nestle India 100% private (much like Cadbury).


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