Nestle: Spicy treat

While the total sales expanded 23.1%, its operating profit margin declined to 19% in the previous quarter

Nestle reported an impressive performance in the June 2007 quarter thanks to strong sales growth in the domestic market. However, a rising operational cost structure put pressure on its operating margins in the last quarter.

As a result, the company's operating profit grew 20.4 per cent y-o-y to Rs 163.38 crore in Q2 CY07, while its total net sales expanded 23.1 per cent to Rs 838.8 crore. Its operating profit margin declined 40 basis points y-o-y to 19.5 per cent in the previous quarter.

The margins were lower in the last quarter due to adjusted raw material costs as a percentage of total net sales, which increased 210 basis points y-o-y to 48.2 per cent. In contrast, in the March 2007 quarter, the company's operating margin grew 90 basis points y-o-y to 20.7 per cent.

Meanwhile, in the June 2007 quarter, the company's net domestic sales grew 24 per cent y-o-y to Rs 756.8 crore, which, according to analysts, was the highest growth from among the large FMCG companies.

Improved domestic sales in Q2 CY07 for Nestle was due to better offtake in segments such as nutrition and health, coupled with higher price realisations.

In the March 2007 quarter too, the company's net domestic sales had grown 24.3 per cent y-o-y. In the export markets, the company's sales rose 15.7 per cent to Rs 82 crore in the June quarter.

Going forward, Nestle is expected to maintain the sales momentum. Of equal importance, is its ability to manage costs. At Rs 1,190, the stock trades at 29 times estimated CY07 earnings, given its growth potential.

TNPL: Glossy effect

Better realisations resulted in Tamil Nadu Newsprint and Papers Limited (TNPL) seeing a strong top line growth, which also helped in a slight improvement in margins.

While the volume growth was limited to around 4.5 per cent, the top line improved by 19 per cent to Rs 214 crore as the realisation went up due to higher prices on a y-o-y basis and better product mix.

And though the raw material costs increased by 500 basis points y-o-y as a percentage of sales, the company was able to control other costs better. As a result, its operating profit margin improved by 20 basis points y-o-y to 24.5 per cent.

TNPL has increased its focus on high-margin copier paper, and this product category now accounts for about 20 per cent of sales. In order to have more control over raw materials, TNPL has raised pulpwood plantation to 19,349 acres through farm forestry and captive plantation schemes and will raise it by another 15,000 acres this year.

It also plans to increase its pulp production capacity from 520 tonnes per day to 800 tpd by October 2007. This will enable the company to increase paper production by 15,000 tonnes to 245,000 tonnes a year.

By September 2009, the company wants to expand capacity to 400,000 tonnes a year. At its current price of Rs 102, the stock trades at about 5-6 times estimated FY08 earnings, and the downside is limited.