In the traditional sense, business entities tend to age over the years and the consequences of it is that they begin to show their age due to the passage of time. Nestle too is showing its age but like old wine in old bottles, the company is aging very well. Or so it appears from a reading of its latest annual report. Its current CEO in his letter to the shareholders informs that Nestle commenced operations in India as long ago as 1912 by importing and selling finished products in the Indian market. In other words in 2011-2012, the company will be celebrating the centenary of its operations in India. Of course, as a legal entity, the Indian subsidiary is considerably younger. But nevertheless, there are not many businesses in India either of the desi or the videsi variety that can boast of such a long and increasingly profitable existence.
Nestle India continues to fire on all cylinders for the present. It may very well celebrate its birthday next year by splashing out a very liberal bonus issue of shares.In any event the bulk of its shareholding --62%---is held by the Swiss based parent. Against a paid up equity of Rs 960 m its reserves and surplus is a cool Rs 4.9 bn.
With a gross sales turnover of Rs 52 bn in 2009, Nestle will rank as among the largest FMCG MNCs in India. Economic downturns do not seem to affect Nestle what with a 19% growth in gross rupee sales (accompanied by increased volume sales too). Effective massaging of its power brands and advertising expenditure of Rs 2.7 bn to boot helped no less. And successful MNCs do not believe in holding debt either. Nestle is no exception here. It keeps a tight lid on working capital costs simply by selling cash down, squeezing trade creditors and by careful monitoring of its other big overhead-inventories. Given the level of cash generation from operations, fixed asset expansion is more than taken care of from this kitty and the balance cash remaining is spent on other niceties of its liking.
In the case of Nestle, quite some of the cash generated is returned to the shareholders each year.Its motto is to invest well in productive capacity addition and dole out dividends like confetti, not necessarily in any particular order.The gross fixed asset base at Rs 16 bn is well lubricated in the sense that accumulated depreciation is only 45% of gross block. It probably maintains a large gross block as it produces the bulk of what it sells, possibly due to quality control concerns. Besides, repairs to gross block -ongoing revenue expenditure item---appears to get some attention, and, during 2009, impairment of assets led to a further write off of gross block in the P&L account.
The board is most liberal with dividends too. An EPS of Rs 68 per share (face value Rs 10)in 2009 was more than matched with a DPS of Rs 48.5 per share-which works out to a dividend payout of 72% of post tax profits.What is most interesting in the accounting is the carried forward of Rs 1.4 bn of post tax profits in the form of 'surplus carried forward to the balance sheet'.Such a large carried forward would imply that the management plays its cards close to its chest and appears quite cautious about the future bottomline.Given the nature of its operations it also has quite some contested direct and indirect tax liabilities.
Its sales turnover is derived from 4 business heads.The biggest contributor is Milk Products and Nutrition, accounting for 44% of turnover-what with brands like Lactogen, Cerelac, Milkmaid and Nestle Diary Whitener and not including a concoction of brand extensions. Next in the pecking order is Prepared Dishes and Cooking Aids adding another 26% to sales and is spearheaded by the Maggi brand with its brand extensions including its latest pasta offering called Pazzta. The 2 other business heads Coffee and Beverages, with the Nescafe brand and Chocolate and Confectionery ring in the balance sales. Given its product mix, its biggest item of raw material expenditure is milk and, along with green coffee and wheat flour, these items account for almost 50% of raw material expenses.
The report claims that Nestle has the largest R&D facility in the
global food industry and that its Indian subsidiary is a big beneficiary of this research. It sure pays big money to the parent as its share of the R&D effort. In 2009 its share in this effort totted up to Rs 1.8 bn. This payment was apparently effected under the euphemistic heading of 'General Licence Fees'!!!!!What were the exact benefits that accrued to Nestle India has not been spelt out. Its own R&D expenditure in 2009 came to Rs 200 m or 0.4% of its turnover.
The bane of all MNCs is the strict pecking order that they have to subscribe to in their daily give and take. But how else can a company with several dozen worldwide subsidiaries survive please? So Nestle India buys and sells revenue and capital goods to and from other companies in the group. For example, its exports appear to be strictly limited to SAARC nations and Eastern Europe. Whether this is the best deal possible has not been possibly spelt out. It imports a piddling amount of finished goods from several subsidiaries too.What is truly amazing is that the company appears to have spent Rs 380 m importing IT and MIS systems from Nestle Australia. Anything goes it appears.
The current year, the annual report states, has commenced as per plan. The directors' however strike a note of caution as the prices of 2 of its major items of consumption - milk and sugar -have risen sharply with sugar prices ruling abnormally high.
Disclosure: Please note that I am not a shareholder of this company
This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.
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