• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Aarati Krishnan

A HOST of discretionary charges have sobered down Nestle India's profit growth for 2002. But with a 16.4 per cent growth in its reported net profits, achieved on the back of a 6.5 per cent growth in net sales, Nestle India's performance for 2002 is reasonable.

The sales performance first: Nestle India has managed a 12.4 per cent growth in domestic sales, not a mean feat considering the sluggish state of the FMCG market.

Two factors appear to have bolstered growth rates for Nestle in relation to its peers. One, it has had considerable success at pepping up volume offtake at the lower price points — Nestle Chocostik, the Rs 5 version of Maggi noodles and chocolates at Rs 5 and Rs 10 are examples.

Two, the focus on urban-oriented food products ensured that the company is less vulnerable to cutback in consumer spending. The company's key revenue drivers are coffee, chocolate, culinary products and infant and milk foods. These categories have not seen any real pricing pressure, which would threaten the margins of the marketer.

In fact, over 2001 and 2002, selling prices of branded coffee remained more or less stable while the underlying prices of the commodity dropped sharply. The only weak point in the company's sales performance for 2002 is the 24 per cent drop in export sales, which the company attributes to lower coffee prices and a shift towards bulk, rather than retail, coffee exports.

Healthy sales growth has been accompanied by a further ramp up in Nestle India's operating profit margins, from 19.5 per cent in 2001 to 22 per cent in 2002.

Only part of this growth has filtered down to the bottomline, thanks to a range of exceptional charges which Nestle has chosen to take this year.

In 2002, the company wrote off Rs 21.25 crore towards impairment of fixed assets pertaining to its water business, instant tea business and part of the chocolates and confectionery business. These write-downs indicate that Nestle now considers that part of its investments into its forays in these businesses irrecoverable.

But the write down of fixed asset values is also likely to have a beneficial impact on future earnings, since it would trim depreciation charges and other fixed costs, starting from 2003.

Nestle has also substantially stepped up its "contingency provision" and revised depreciation charged on various assets in 2002. All these exceptional charges, taken together, have inflicted a net damage of Rs 56.41 crore on the profit before taxes of Rs 371.5 crore for 2002. The damage this year was higher than last year, when it took exceptional charges of Rs 19.5 crore on a profit before tax of Rs 277 crore. As a result, Nestle India's net profit growth, at 20.7 per cent, was much lower than the 27 per cent achieved at the operating profit level.

Going forward, Nestle India's performance in 2002 appears sustainable. On the sales front, the recent surge in global coffee prices could pull up export performance, even if domestic sales do not perk up significantly. Though input costs on both cocoa and coffee have risen substantially over the past quarter, it may not be too difficult for Nestle India to pass on these costs to domestic consumers, given its product mix.

Therefore, Nestle India shareholders can hold on to their investments in the expectation of share price appreciation linked to earnings growth.

But the stock now trades at a price-earnings multiple of around 25 times its sustainable earnings for 2002, which appears to fully capture its growth potential over the next year. Fresh investments in the stock may, therefore, be avoided at this juncture.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Accept these open offers

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line