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Nestle: Riding the growth trajectory - Views on News from Equitymaster
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Nestle: Riding the growth trajectory
Dec 5, 2011

Nestle India announced the third quarter results of calendar year 2011 (3QCY11). The company has reported 20% YoY and 19.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line in 3QCY11 increased by 20% YoY led by 20.7% growth in domestic sales. Sales for 9mCY11 were up by 20.8% on a 21.5% YoY rise in revenues in the domestic market.
  • Operating (EBITDA) margin improved by 70 basis points on the back of lower raw material cost and other expenditure as a proportion of sales. During 9mCY11, the company has been able to maintain its operating margin at 20.5% backed by slower rise in cost of goods sold.
  • Net profit of the company grew by relatively subdued 19.5% YoY despite a 24% YoY rise in operating income. The slower rise has been on account of a steep rise in interest and depreciation expense. Even tax outgo increased sharply after the tax holiday enjoyed by the Pantnagar facility fell from 100% to 30% since FY12. The net profit for 9mCY11 was up by 18.8% YoY.

Financial snapshot
(Rs m) 3QCY10 3QCY11 % change 9mCY10 9mCY11 % change
Revenue 16,414 19,693 20.0% 45981.2 55517.6 20.7%
Expenditure 13,108 15,590 18.9% 36612 44,149 20.6%
Operating profit (EBDITA) 3,306 4,103 24.1% 9,369 11,369 21.3%
EBDITA margin (%) 20.1% 20.8%   20.4% 20.5% 0.5%
Other income 54 59 9.6% 144.2 172 19.3%
Interest 1 12 2200.0% 9.7 18 85.6%
Depreciation 306 394 28.7% 919.6 1087.3 18.2%
Provision for Contingencies 28 12 -57.5% 28 11.9 -57.5%
Profit before tax 3,026 3,745 23.8% 8,556 10,423 21.8%
Tax 840 1,134 35.0% 2403.5 3116.2 29.7%
Profit after tax/(loss) 2,186 2,612 19.5% 6,153 7,307 18.8%
Net profit margin (%) 13.3% 13.3%   13.4% 13.2% -1.6%
No. of shares (m)         96.42  
Diluted earnings per share (Rs)*         96.89  
Price to earnings ratio (x)*         43.9  
* On a trailing 12 months basis

What has driven growth in 3QCY11?
  • Nestle reported double-digit sales growth of 20% YoY led by consistent price-hikes and volume growth. Domestic sales that constitute a lionís share of 96% grew by 20.7% during the quarter. Export turnover increased by 4.6% YoY.

    Cost break-up
    As a % of sales 3QCY10 3QCY11 Change in basis points
    Raw material 52.4% 50.7% -170.50
    Staff costs 6.3% 7.2% 89.04
    Other expenditure 24.6% 23.9% -64.76

  • The company has been able to improve operating margin by 70 basis points aided by controlled growth in raw material and other expenses. As a proportion of sales, cost of goods sold and other expenses reduced by 170 and 65 basis points, respectively. However, wages to sales ratio was up by 89 basis points during the quarter.

  • At the net level, the profit margin remained flat as higher depreciation and interest charges offset the higher operating income. Depreciation outgo was up by 28.7% due to expanded capacities whereas the interest expense jumped 12 folds during the quarter. Even tax charges were up by 35% after Pantnagar factory in Uttarakhand exited the 100% tax exemption period, and remained eligible for a 30% exemption only. The tax incidence increased to 30% from 27.8% in the corresponding quarter in the previous year.

What to expect?
At a price of Rs. 4256, the stock is trading at 31 times our estimated CY13 earnings.

Nestle has been on an expansion spree to capitalize on the growing demand. In the past three years, the company has spent Rs 9.7 bn on capacity expansion. Its capital expenditure during 9mCY11 stood at 9.1 bn. The company is setting up a new plant for Maggi products at Nanjangud, Andhra Pradesh and another greenfield plant at Tahliwal in Himachal Pradesh. The long term potential remains attractive but current valuations remain expensive.

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