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Nestle: Weak offtake mars profits - Views on News from Equitymaster

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Nestle: Weak offtake mars profits
Nov 20, 2012

Nestle India announced the third quarter results of calendar year 2012 (3QCY12). The company has reported 7.8% YoY and 2% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • On the back of 7.6% increase in domestic sales and 10.5% rise in exports, revenues grew by 7.9%. During 9mFY12, topline grew by 11.2%.
  • Raw material cost savings were offset by higher other expenditure and employee costs translating into flat operating margin for the quarter. For 9mFY12, operating margin expanded by 110 basis points aided by controlled input costs.
  • Earnings increased at a tepid 2.3% due to steep rise in depreciation charges on huge expansion in production capacities made over the past year. The net profits for 9mFY12 were up by 8% on account of steep jump in interest charges and higher depreciation outgo.

Financial snapshot
(Rs m) 3QCY11 3QCY12 % change 9mCY11 9mCY12 % change
Revenue 19,693 21,241 7.9% 55517.6 61734 11.2%
Expenditure 15589.7 16795.8 7.7% 44149 48,404 9.6%
Operating profit (EBDITA) 4,103 4,446 8.3% 11,369 13,330 17.3%
EBDITA margin (%) 20.8% 20.9%   20.5% 21.6%  
Other income 59 88 47.8% 172 183.9 6.9%
Interest 12 (76)   18 166.9 827.2%
Depreciation 394 735 86.8% 1087.3 1936.2 78.1%
Impairment of Fixed Assets - 4   - 49  
Provision for Contingencies 12 -   11.9 -82  
Profit before tax 3,745 3,870 3.3% 10,423 11,444 9.8%
Tax 1,134 1,197 5.6% 3116.2 3553.7 14.0%
Profit after tax/(loss) 2,612 2,673 2.3% 7,307 7,891 8.0%
Net profit margin (%) 13.3% 12.6%   13.2% 12.8%  
No. of shares (m)         96.42  
Diluted earnings per share (Rs)*         105.77  
Price to earnings ratio (x)*         43.5  
*On a 12 month trailing basis

What has driven performance in 3QFY13?
  • On account of slower offtake, Nestle's performance continued to remain lackluster for the third quarter in a row. The company's domestic sales, forming 96% of overall revenues, grew by 7.6% mainly due to realizations and product mix. As per Nestle, its domestic sales growth was adversely impacted by portfolio/channel optimization and pricing for value in certain products. The export turnover grew by 10.5% on the back of a 29.7% jump to third parties. However, exports to affiliates declined by 4.7% during the quarter

    As a % of sales 3QCY11 3QCY12 Change in basis points
    Raw material 48.0% 45.7% -228.61
    Staff costs 7.2% 7.9% 63.85
    Other expenditure 23.9% 25.5% 155.38

  • Nestle has been able to maintain operating profitability on the back of price hikes and favourable product mix. Therefore the raw material to sales ratio fell by 229 basis points during the quarter. Input cost savings enabled the company to ward off higher staff costs and other expenditure and hold operating margin at 20.9%.

  • Earnings grew by a slower 2.3% due to a steep 87% jump in depreciation charges on expanded production capacities. During the quarter, the company reversed exchange differences amounting to Rs 178.6 m, expensed earlier under finance costs, and capitalized the same with the cost of fixed assets in accordance with the amended Accounting Standard 16. This has resulted in a positive interest inflow of Rs 76 m as compared to a charge of Rs 12 m in the year-ago quarter. Excluding this one-off favourable impact, the earnings would have eroded by 2.3% during the quarter.

What to expect?
Nestle's financial performance continues to be hit by slower offtake coupled with higher interest and depreciation charges. The company is facing increased competition in noodles and value added milk product categories. Going forward, the company's adspends are expected to remain high to ward off competition.

At a price of Rs. 4602, the stock is trading at 28 times our estimated CY14 earnings. Backed by a diversified portfolio and strong brand equity, Nestle continues to have good potential. But at current valuations, the stock is overpriced and we re-iterate a SELL on the stock.

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