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Nestle: Margins remain muted - Views on News from Equitymaster
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Nestle: Margins remain muted
Nov 5, 2013

Nestle India announced the third quarter results of calendar year 2013 (3QCY13). The company has reported 11% YoY and 6.6% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Nestle clocked a 11% increase in topline driven by 10.3% rise in domestic sales and 74% jump in export turnover. For 9m CY13, revenues grew by 10.8% YoY.
  • Operating margin remained flat as input cost savings were offset by higher staff costs and other expenditure. For 9mCY13, operating margin improved by 0.6%.
  • Net profit grew by a subdued 6.6% due to a steep jump in provision for contingencies, higher interest and tax outgo. Even for 9mCY13, the net profit was up by a mere 5.9%.
  • The company has declared an interim dividend of Rs 18 per equity share, in addition to the interim dividend of Rs 18 per share paid in August 2013. This translates into a dividend yield of less than 1%.


Financial snapshot
(Rs m) 3QCY12 3QCY13 % change 9mCY12 9mCY13 % change
Revenue 21,241 23,600 11.1% 61734 68381 10.8%
Expenditure 16726.1 18561.1 11.0% 48244 52968 9.8%
Operating profit (EBDITA) á4,515 5,039 11.6% 13490 15413 14.2%
EBDITA margin (%) 21.3% 21.4%   21.9% 22.5%  
Other income 88 á 231 163.5% 184 512 178.4%
Interest á (76) á 100   167 264 58.2%
Depreciation 735 á 835 13.6% 1936 2543 31.3%
Impairment of Fixed Assets - á -   0 0  
Provision for Contingencies 74 á 106 43.1% 127 538  
Profit before tax á3,870 4,230 9.3% 11444 12580 9.9%
Exceptional income - 36     36  
Tax á1,197 1,416 18.3% 3554 4262 19.9%
Profit after tax/(loss) á2,673 2,850 6.6% á7,890 á8,355 5.9%
Net profit margin (%) 12.6% 12.1%   12.8% 12.2%  
No. of shares (m)         96.4  
Diluted earnings per share (Rs)*         115.6  
Price to earnings ratio (x)*         49.7  
* On a 12-month trailing basis

What has driven growth in 3QCY13?
  • Nestle posted a 11% rise in revenues on a 10.3% increase in domestic sales. The growth in domestic sales has been on account of higher realizations and volume growth in certain product categories. Exports have risen sharply by 74% mainly due to exports to affiliates coupled with rupee depreciation.

  • However, operating margin remained static at 21.4%. Raw material cost savings have been more than offset by higher staff costs and other expenditure (all as a proportion of sal;es).

    Cost break-upů
    As a % of sales 3QCY12 3QCY13 Change in basis points
    Cost of goods sold 45.7% 44.8% -94.16
    Staff costs 7.9% 8.3% 39.10
    Other expenditure 25.2% 25.6% 45.53

  • At the net level, profits grew by a tepid 6.6% due to a sharp rise in provision for contingencies mainly for matters related to litigation. The company booked an interest cost of Rs 100 m in 3QCY13 as compared to a credit of Rs 76 m in the year-ago quarter due to one-off reversal of exchange differences on foreign loans. Moreover, even the tax incidence rose to 33.5% from 30.9% in the year-ago quarter. Other income increased 2.6 folds due to higher average liquidities during the quarter.

What to expect?

Nestle's profit growth remains muted as robust growth in offtake still remains elusive. Slowdown in discretionary spends continues to adversely impact its volume growth. Therefore, sales growth has fallen short of the steep rise in interest costs and higher depreciation charges on expanded capacities.

At a price of Rs. 5750, the stock is trading at 37 times our estimated CY15 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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