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Nestle: Higher volumes drive growth - Views on News from Equitymaster

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Nestle: Higher volumes drive growth
Nov 3, 2008

Performance summary
  • Topline grows by 22% YoY during 3QCY08 and 24% YoY during 9mCY08.

  • Operating margins during the quarter are down by 2.6%, while 0.5% decline is seen in 9mCY08.

  • Net profit for 3QCY08 grows by 13.5% YoY, up 29% YoY in 9mCY08.



Financial performance

(Rs m) 3QCY07 3QCY08 % change 9mCY07 9mCY08 % change
Net sales 9,088 11,104 22.2% 26,144 32,420 24.0%
Expenditure 7,129 9,004 26.3% 20,701 25,830 24.8%
Operating profit (EBDITA) 1,959 2,100 7.2% 5,443 6,590 21.1%
EBDITA margin (%) 21.6% 18.9%   20.8% 20.3%  
Other income 36 54 49.7% 101 133 31.7%
Interest 1 0 -100.0% 6 15 133.3%
Depreciation 184 233 26.2% 542 667 23.1%
Profit before tax 1,810 1,922 6.2% 4,996 6,042 20.9%
Miscellaneous items (52) (8) -84.2% 627 139 -77.8%
Extraordinary item   -   (754) -  
Tax 597 596 -0.3% 1,667 1,774 6.4%
Profit after tax/(loss) 1,161 1,318 13.5% 3,202 4,129 29.0%
Net profit margin (%) 12.8% 11.9%   12.2% 12.7%  
No. of shares (m) 96.4 96.4   96.4 96.4  
Diluted earnings per share (Rs)*         52.5  
Price to earnings ratio (x)*         27.6  
* On a 12-month trailing basis

What has driven performance in 3QCY08?
  • Nestle witnessed a topline growth of 22% YoY during 3QCY08 and 24% YoY during 9mCY08. While domestic sales were higher by 23% YoY, the exports jumped 12% YoY during the third quarter. Strong volume growth coupled with price increases aided the robust topline growth. Higher sales were witnessed in the milk powder, baby food, coffee and noodles segments. The processed food industry in India is on a high growth trajectory and Nestle continues to benefit from the same.

    Cost break-up

    As a % of net sales 3QCY07 3QCY08 9mCY07 9mCY08
    Total Cost of goods 47.6% 50.1% 48.1% 49.0%
    Staff Cost 7.6% 6.8% 7.8% 7.1%
    Other Expenditure 23.2% 24.2% 23.3% 23.5%

  • The operating margins during the quarter were down by 2.6%, while 0.5% decline was seen in 9mCY08. Steep increase in commodity prices especially milk, green coffee, vegetable fats, wheat flour and sugar impacted margins. Higher volumes and price increases, however, partially offset the pressure on cost. The operating margins are in line with our estimates for the full year.

  • While the net profits for 3QCY08 grew by 13.5% YoY, the bottomline in 9mCY08 was up 29% YoY. Excluding the extraordinary item (additional labour costs in 9mCY07), the bottomline in 9mCY08 grew by a mere 4.4% YoY. The other income has increased largely due to higher rate of return supplemented by availability of higher cash flow. The effective tax rate reduced to 33% from 29% in 9mCY08 on account of the tax holiday for Nestle’s Pantnagar factory. The profits are in line with our estimates.


What to expect?
At Rs 1,450, the stock is trading at a multiple of 19.3 times our CY10 estimates. On the back of low penetration of processed food, rising income levels and urbanisation, Nestlé stands to benefit on account of its established brands. Its innovative products coupled with pricing power have led the company to witness higher realisations. Further, it has plans to increase its presence in smaller cities and lower income segment. It has launched lower priced SKUs, which have received good response. We expect the company to retain its strong performance on the back of its robust product pipeline. At the current valuations, we have a positive view on the stock.

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