• MARCH 8, 2001

Nestle: 4Q margins slides

Nestle India has reported a depressing fourth quarter results with a squeeze in operating margins. During the fourth quarter the company's exports sales witnessed a significant drop of 36% while domestic sales was higher by 10%. Nestle India has reported a depressing fourth quarter results with a squeeze in operating margins. During the fourth quarter the company's exports sales witnessed a significant drop of 36% while domestic sales was higher by 10%.

Year ended December (Rs m) FY00 FY01 Change 4QFY00 4QFY01 Change
Sales 15,439 16,775 8.7% 4,230 4,403 4.1%
Other Income 83 107 28.9% 26 32 23.1%
Expenditure 13,091 14,035 7.2% 3,544 3,830 8.1%
Operating Profit (EBDIT) 2,348 2,740 16.7% 686 573 -16.5%
Operating Profit Margin (%) 15.2% 16.3%   16.2% 13.0%  
Interest 265 149 -43.8% 48 29 -39.6%
Depreciation 319 379 18.8% 34 103 202.9%
Profit before Tax 1,847 2,319 25.6% 630 473 -24.9%
Other Adjustments 265 328 23.8% 263 128 -51.3%
Tax 597 805 34.8% 186 190 2.2%
Profit after Tax/(Loss) 985 1,186 20.4% 181 155 -14.4%
Profits before adjustment 1,250 1,553 24.2% 444 322 -27.5%
Net profit margin (%) 6.4% 7.1%   10.5% 7.3%  
No. of Shares (eoy) (m) 96.4 96.4   96.4 96.4  
Diluted Earnings per share* 13.0 16.1   18.4 13.4  
P/E (at current price)   33     40  

Revenue growth of the company in the December quarter slowed down to 4% compared to its outstanding performance in the past two quarters ( 2QFY01-15% and 3QFY01-13%). This could be due to stiff competition in both the chocolate confectionery market (from Cadbury) and in the culinary segment (from HLL).

However, if we exclude the other adjustments Nestle's profits have shown a growth of 24%, which is in line with its peers in the industry. Although, efficient working capital management and supply chain efficiencies added a gain of around 100 basis points to its operating margins YoY, the margins declined by more than 300 basis points in the fourth quarter. The reason could be attributed to depressed green coffee prices in domestic and international markets which kept the export realizations low.

The YoY growth analysis of domestic and export sales is explained below:

Particulars 1Q 2Q 3Q 4Q FY
Domestic Sales 0.1% 10.3% 7.0% 10.8% 7.3%
Export Sales 16.2% 58.0% 35.0% -36.4% 16.3%

During the year Nestle launched several new products which has resulted in 15% volume growth in domestic sales and 32% in exports sales. The new launches of the company include 'Nestle Milk', 'Nestle Slim Milk', 'Nestle Dahi', 'Nescafe Frappe', Nestle Pure Life' and 'Maggi prawn cubes'. Its initiatives to introduce smaller pack sizes at lower price points were well received by the consumers.

The depreciation cost of the company was substantially higher due to provision of higher charge of depreciation in respect of IT equipment. Also investments in bottled water plant and liquid milk could have increased its depreciation cost. Other adjustment mainly included the contingency provision resulting from various matters under litigation and product warranties.

We had projected an earnings growth of 39%, which is higher than 24% declared by Nestle. However, our sales projections are in line with the company's actual performance. Lower than expected operating margins, increase in provisions for depreciation and high tax payment has resulted in subdued performance for the full year.

At the current market price of Rs 530 Nestle trades at a P/E multiple of 33 times with a market cap to sales ratio of 3 times. The company's current valuations are in line with its peers in the industry. We may see some correction in the price on the back of its disappointing financial performance in the fourth quarter.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407