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Nestle Equity Research

HomeCompanyNestle Equity Research

Date of Research – 19 January 2016

Price-Rs. 5430.55

About the Company

Nestle India Limited (“Nestle” or the “Company”) is a subsidiary of Nestle S.A of Switzerland and is one of the biggest players in the Indian FMCG segment. Nestle is engaged in the business of manufacturing and selling milk products and nutrition beverages, prepared dishes, cooking aids, chocolates and confectionery. The Company was incorporated in India in 1956 and set up its first production facility in 1961 at Moga in Punjab. Today, it operates through seven production facilities spread across the country and four branch offices one each in Delhi, Mumbai, Chennai and Kolkata.

The Company is best known for its coffee products. The brand equity is such that its coffee range, marketed as Nescafe has almost become synonymous with the word coffee. The Company’s beverages include Nescafe Classic, Nescafe Cappuccino, Nescafe Sunrise Premium, Nescafe Sunrise and Nestea iced tea.

Nestle’s other well known brands include Maggi, Kit Kat chocolate, Polo, Lactogen, Cerelac, Milkmaid and Nestea. Its milk products include Nestle Milk, Nestle Slim Milk, Nestle milkmaid, Nestle creamy vanilla, Nestle everyday dairy whitener and Ghee and the Company has now grown its market share with Nestle Fresh ‘n’ Natural Dahi and Nestle Jeera Raita.

*Financial year starts from Jan-Dec

Key Financial Figures

Standalone (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Total Income from Operations 8,334.53 9,101.05 9,854.84 8,175.31  9,223.80 
Expenses 6,517.34 7,132.73 7,724.75 6,494.30  7,298.31  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 1,817.19 1,968.32 2,130.09 1,681.01  1,925.49  
Depreciation 277.15 329.95 337.54 347.26  353.62  
Finance Costs 18.45 36.51 14.23 3.29  217.58  
Other income 31.03 83.09 87.32 110.09  149.39  
Exceptional items 6.93 91.29 626.92  62.14  
PBT 1,552.62 1,678.02 1,774.35 813.63  1,441.54  
Tax 484.69 560.89 589.66 250.36  515.00  
PAT (before Minority Interest and share of Associates) 1,067.93 1,117.13 1,184.69 563.27  926.54  

Profitability Analysis

Standalone (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Operating Profit Margin Ratio 20.22 21.63 21.61 20.56  20.88 
Net Profit Margin Ratio 12.80 12.27 12.02 6.89 10.05 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 96.42 96.42 96.42 96.42  96.42 
Reserves & Surplus 1,701.99 2,272.33 2,740.79 2,721.42  2,917.28 
Net worth (shareholders funds) 1,798.41 2,368.75 2,837.21 2,817.84  3,013.70 
Long term borrowings 1,049.95 1,189.48 15.46 16.79  33.15 
Current liabilities 1,128.43 1,347.18 1,388.66 1,475.73  1,632.70 
Other long term liabilities and provisions 1,025.05 1,193.39 1,355.45 1,597.17  1,972.21 
Deferred Tax Liabilities 162.08 215.47 222.72 172.93  154.21 
Total Liabilities 5,163.92 6,314.27 5,819.50 6,080.46  6,805.97 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
Fixed Assets 3,548.35 3,664.02 3,421.42 3,128.64  2,917.63 
Noncurrent Investments 224.12 304.46 341.78  474.31 
Current assets 1,490.12 2,301.72 1,963.67 2,479.61  3,278.99 
Long term advances and other noncurrent assets 125.45 124.41 129.95 130.43  135.04 
Total assets 5,163.92 6,314.27 5,819.50 6,080.46  6,805.97 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 64.00 55.32 74.67 59.66  63.20 
ROE / RONW 59.00 47.16 41.76 19.99  30.74 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Standalone
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Total Income from Operations (Rs. Cr.) 8,334.53 9,101.05 9,854.84 8,175.31 9,223.80 
Growth (%) 10.91 % 9.20 % 8.28 % (17.04 %) 12.83 % 
PAT (Rs. Cr.) 1,067.93 1,117.13 1,184.69 563.27 926.54  
Growth (%) 11.06 % 4.61 % 6.05 % (52.45 %) 64.49 % 
Earnings Per Share – Basic (Rs. ) 110.76 115.87 122.87 58.42 96.10 
Earning Per Share – Diluted (Rs. ) 110.76 115.87 122.87 58.42 96.10 
Price to Earnings 41.56 45.72 57.26 98.75 69.11 

Dividend History

Nestle has maintained an average dividend yield of 1.02 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook.

Nestle’s average current ratio over the last 5 financial years has been 1.19 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Nestle’s average long term debt to equity ratio over the last 5 financial years has been 0.33 which indicates that the Company is operating with close to zero level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Nestle’s average interest coverage ratio over the last 5 financial years has been 353.55 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Nestle reported a promoter holding of 62.76 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 17.05 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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