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Nestle: Riding the urban trend

Oct 31, 2007

Performance summary
  • Topline grows 26% YoY in 3QCY07 led by higher volume and value sales in domestic markets
  • Operating margins improve by 1.8% YoY led by lower expenses

  • Excluding the miscellaneous and extraordinary items (relating to litigation), bottomline is up 41% YoY for 3QCY07

(Rs m) 3QCY06 3QCY07 % change 9mCY06 9mCY07 % change
Net sales 7,227 9,067 25.5% 20,798 26,087 25.4%
Expenditure 5,829 7,151 22.7% 16,698 20,749 24.3%
Operating profit (EBDITA) 1,398 1,916 37.1% 4,100 5,338 30.2%
EBDITA margin (%) 19.3% 21.1%   19.7% 20.5%  
Other income 47 57 21.2% 133 158 18.4%
Interest 0 1 75.0% 3 6 85.3%
Depreciation 168 184 9.8% 486 542 11.6%
Profit before tax 1,276 1,788 40.1% 3,744 4,947 32.1%
Miscellaneous items (15) (29) 93.3% 133 675 409.5%
Extraordinary item - -   - 754  
Tax 431 597 38.5% 1,351 1,667 23.4%
Profit after tax/(loss) 830 1,161 39.9% 2,525 3,202 26.8%
Net profit margin (%) 11.5% 12.8%   12.1% 12.3%  
No. of shares (m) 96.4 96.4   96.4 96.4  
Diluted earnings per share (Rs)*         39.8  
Price to earnings ratio (x)*         34.4  
* 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.

What has driven performance in 3QCY07?
Strong topline: Having a predominantly urban oriented product portfolio, the company continues to benefit from a changing lifestyle and increasing consumerism. It witnessed a topline growth of 26% YoY during the quarter, driven by both volumes as well as better realisations. The domestic sales grew by 30% YoY for the quarter, contributing 92% to the total sales. During the quarter, it launched Nestlé ‘NESVITA’, a healthy low fat dahi in the probiotics segment. Also, ‘NESVITA Fruit Yoghurts’ and ‘NESTLE MILKMAID Funshakes’ in three variants were launched. Variants were also added in the chocolate and confectionery and soup segments. As far as the exports are concerned, the company faced pressure here as sales declined 16% YoY for the quarter. This was mainly due to reduction in beverage exports to the USA, appreciation of Indian Rupee and a general restriction on export of certain milk based products. Notwithstanding these short term blips, we are positive on the company’s growth performance as it is constantly innovating and focusing on developing higher value products.

Rs m 3QCY06 3QCY07 % change 9mCY06 9mCY07 % change
Domestic sales 6,408 8,382 30.8% 18,762 23,719 26.4%
Exports 819 685 -16.3% 2,036 2,368 16.3%

Margins improve: The operating margins for 3QCY06 improved by 1.8% YoY. Decline in operating costs led to the expansion of margins to 21%. Though the company faced pressure on the input side, sale of higher margin products and scaling up of the business, thereby leading to better absorption of structural fixed costs led to the expansion in margins. For 9mCY07, the margins touched 20.5%. It is in line with our estimates.

Cost break-up
As a % of net sales 2QCY06 2QCY07 1HCY06 1HCY07
Total Cost of goods 48.1% 47.7% 47.0% 48.3%
Staff Cost 7.8% 7.6% 8.0% 7.8%
Other Expenditure 24.7% 23.5% 25.2% 23.5%

Faster growth in profits: Excluding the extraordinary and miscellaneous items, the bottomline grew 41% YoY and 37% YoY respectively for 3QCY07 and 9mCY07. The tax rate for 9mCY07 has reduced to 34% from 35%, as its new facility in Pantnagar accrues tax benefits.

What to expect?
At Rs 1,366, the stock is trading at 23.1 times our CY09 estimates. The strong topline performance continues, backed by growth across offerings. Further, it is also witnessing margin expansion inspite of higher input prices. We are buoyant on the company’s long-term growth prospects due to changing lifestyle, strong portfolio and parent company support. However, at current levels, the valuations seem to be on the higher side.

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