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Nestle: The blue chip

Dec 21, 2001

Nestle has done well in the last three quarters despite the difficult market conditions. During the nine months of 2001 the company has clocked an 18% growth in topline and an even healthier 33% growth in bottomline. If 2001 was a tough year, imagine what a good year will do to the growth numbers. Nestle achieved this with the help of increased sales (new product introductions), lower commodity prices and improved asset rotation which however, were partially offset by the costs associated with water, liquid milk/chilled dairy businesses. The lower provision for contingencies and reduction in income tax rate also contributed to the increase in net profit.

However, despite the sterling performance, the Nestle management has always been cautious of future growth. During the September quarter results, Nestle India chairman & managing director, Mr Carlo Donati commented and we quote, "The continuing excellent performance of Nestle India reflects the integrity of the Nestle culture. The focus on consumer and the professionalism of our executives has sustained innovation and renovation within the company and their pragmatic attitude has ensured excellent top-line and impressive bottom-line contribution for Nestle India. However despite these strengths, the uncertain and difficult domestic and international market environment coupled with the seasonality factors will impact our performance in the fourth quarter."

The company faces an uphill task of garnering market share both in bottled water as well as dairy products. Bottled water segment is already littered with numerous high profile players like Bisleri, Pepsi and Coke. In the dairy segment Amul seems way ahead of competition. Britannia too is gearing up its act.

However, notwithstanding the management’s reservations on growth and the tough road ahead for new businesses, the stock is a true blue chip. During the September quarter, we consolidated the financials of five leading companies in the food-processing sector. The sector showed a growth of 6% in topline and a 22% growth in bottomline. On the other hand, Nestle recorded a 14% topline growth and a 39% net profit growth during the same quarter.

It is no wonder that Nestle continues to trade at a premium to its peers. While many index heavyweights have seen volatility in valuations, Nestle continues to trade at Rs 500, a P/E of 27x FY02 projected earnings. In the short term, the stock is likely to remain range bound as investors await the company’s success rate in new businesses. Over the longer term however, Nestle is a true blue chip and cannot be avoided while building a portfolio, owing to its management focus and credibility.

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