Nestle: The perfect diet

Higher volumes, better product mix help Nestle

Despite a poor last quarter in which the operating profit and operating margin (OPM) fell, Nestle has managed to turn in a fairly good performance for CY05. The top line for the full year grew at 11.2 per cent to Rs 2,477 crore, driven by higher domestic growth of 12 per cent.

This, in turn, was led by higher volumes and a better product mix. In the December quarter, sales grew at a much lower rate of 9 per cent, pulled down by falling exports of 8 per cent, resulting from lower sales of instant coffee to Russia.

Operating profit for CY05 at Rs 522 crore was up a reasonably good 16 per cent, despite the poor show in the December quarter. And, the OPM for the year too was up marginally at 21.1 per cent, despite cost pressures.

Though the company has succeeded in taking selective price increases during the course of the year, higher raw material and packaging costs (up 100 basis points in Q4CY05) continue to put pressure on margins.

Besides, a huge rise in the other expenditure during the last quarter""the company has spent more on sales and advertisements""up by 450 basis points, together with price rise in commodities such as milk solids, sugar and green coffee, resulted in a fall in the OPM by 450 basis points. The net profit growth for CY05 has been better at 23 per cent y-o-y.

Looking ahead, Nestle's new plant in Uttaranchal should be up and running in a year. That would save it excise and other taxes, thus improving profitability.

At Rs 1,146, the stock trades at nearly 32 times estimated CY06 sales and may appear a trifle expensive given that earnings growth should average 20-25 per cent in the next few years.

However, the company offers a good play on processed foods industry and with increasing urbanisation and government support, the company should do well.