Not that sweet

BS Compass

Nestle's growth in chocolates has been disappointing

Nestle recently shared details of its results for the nine months ended September at an analysts' meet.

The company's sales grew 9.5 per cent during the 9-month period on the back of an 8 per cent rise in volumes.

Growth was higher in value terms thanks to an increase in the realisations of its beverages business.

Volumes of the beverages business were lower by about two per cent during the period, but thanks to better domestic prices of coffee and higher realisations for tea exports, sales of the division rose 7.6 per cent in value terms.

Overall growth was driven by the milk and nutrition segment, which accounted for 37.5 per cent of incremental revenues, and the preparatory dishes and cooking aids division which contributed 31 per cent of incremental revenues.

The chocolates division, however, disappointed, clocking a growth of just 7.1 per cent and accounting for 12 per cent of incremental revenues. This was because of fewer launches and supply constraints for some products.

The real internal growth (RIG), a measure the company management looks at for an apples-to-apples comparison of continuing business, stood at 8.7 per cent for the nine-month period.

In 2002, the RIG was over 11 per cent and in 2001 it was over 12 per cent. This year's lower growth is on account of a slower growth in the chocolates business, the impact of the truckers' strike and the uncertainty surrounding VAT earlier in the year.

Yet, at around 9 per cent, Nestle continues to be among the faster growing FMCG companies.

The management expects a feel-good factor in the economy thanks to the good monsoons, but clearly Nestle wouldn't be the biggest beneficiary of any improvement in rural demand as its products mainly cater to the urban market. Nevertheless, Nestle can be expected continue growing at healthy rates going forward.

The Nestle stock is currently available at around 20 times 2003 earnings, which isn't particularly expensive, especially when compared to peers.

But upside may be restricted as the parent company's plans to turn the company into a 100 per cent subsidiary acts as an overhang on the stock.

Ashok Leyland

Ashok Leyland has effected a price hike of 1-1.5 per cent for its commercial vehicle models, which resulted in a five per cent jump in its stock price the day after the news came out.

The obvious benefit of this move is that the company will be compensated for the jump in input costs, especially that of steel.

Rising steel prices have been eating into the company's margins this year - despite a near 30 per cent jump in volumes in the first six months of the current fiscal, net sales grew just 15 per cent and operating profit rose 14 per cent because of rising input costs on one hand and discounts given by the company on the other.

More importantly, the hike in prices sends a signal that the trend of increasing volumes in the commercial vehicles segment will stay for a while. Otherwise, the company wouldn't have tinkered with the prices of its products.

Derivatives Market

Outstanding positions held by FIIs in the derivatives market have inched up to around Rs 3400 crore, from Rs 3100 crore same time last month.

The gross outstanding stands at close to Rs 18000 crore, which means the FII share in the total market open interest stands at less than 19 per cent.

Last month, FII share in total open interest had peaked at around 22 per cent, and since then it has ranged between 18-20 per cent.

So, relative to the market nothing much has changed, and it's not that FIIs have stepped up activity in the derivatives market.

In fact, the average of the daily trades done by FIIs in the first two weeks of the current month stands at Rs 150 crore, compared to Rs 190 crore in the first two weeks of the previous month.

Actually, it's the huge positions held by domestic players that should be a cause for concern in the derivatives market.

On an average, high net worth domestic players account for over 80 per cent of the trades done in the derivatives market.

In summary, instead of the marginal rise in FII's outstanding positions, it's the build-up in the overall market that should be watched more closely.

With contributions by Mobis Philipose