Standout data

Nestle's FY03 performance has been very impressive

Nestle has reported impressive numbers for the year ended December 2003. Sales increased 11.4 per cent to Rs 2,280 crore, thanks to impressive growth in the domestic business.

Exports also did reasonably well with a growth of 8.9 per cent, but much of this was on account of higher realisations for green coffee. What's more, adjusted for exceptionals, operating profit has increased by 14.5 per cent thanks to an improvement in margins.

According to the reported numbers, net profit has risen 30.5 per cent, but again, adjusting for all the exceptional items including the provisions for contingencies, net profit actually rose 16.5 per cent.

The double-digit growth in both revenues and profit is clearly encouraging given sluggish performance of other FMCG majors.

In the December quarter, sales increased by 17.4 per cent, again thanks to a jump in domestic sales. Except for chocolates, which took a slight hit after the quality concerns over Cadbury's, all other segments have grown for the company.

At an operating margin of almost 20 per cent and a return on net worth of 79 per cent (up from 72 per cent in 2002), the stock seems a promising investment, especially with growth also in double-digits.

But strangely, the stock has underperformed not only the market but also the BSE FMCG index the last one year.

Apart from the concerns of delisting, there have also been doubts about the high provisioning the company makes every year for anticipated litigation expenses (most of this is unused).

Given the dearth of good investment options in the FMCG sector currently, Nestle with its consistent performance clearly stands out.

JK Paper expansion plan

JK Paper's capacity utilisation during the third quarter of the current fiscal was 112 per cent. With that kind of level of activity, expanding capacity is an obvious choice, especially with the economy on an upswing.

To take advantage of these improved market conditions, JK Paper is planning an investment of Rs 60 crore in the high-end coated paper segment.

JK Paper's coated paper business is 12, 000 - 13, 000 tonne annually, a small fraction of its estimated 172, 000 tonne production capacity.

Analysts point out that the planned expansion of coated paper capacity by 50, 000 tonne is logical - the coated paper market is currently growing at 10-12 per cent as compared to 6-7 per cent in the lower segment uncoated paper.

Consumers shifting to the higher end segment is expected to accelerate in the next few quarters and J K Paper appears to be positioned well. Also price realisations in the coated paper segment are better "" Rs 44,000 per tonne as compared to Rs 37,000 per tonne in the lower end uncoated paper segment.

Moreover, imports constitute a significant share of the coated paper market, which means that there's a serious mismtach between domestic demand and supply, which JK Paper can take advantage of.

However, the increase in coated paper prices has not been following a steady upward trend, as these prices follow the trends in international market.

JK Paper's performance in the second quarter ended December was lacklustre "" net sales grew very marginally to Rs 169.39 crore and operating profits were steady at Rs 33.88 crore.

Over dependence on the lower end product segment has lead to slow growth in the topline, point out analysts. It is commendable that the company has kept raw material costs steady, as key raw material like wood have shown an upward trend on international markets.

Analysts point out that J K Paper has been able to achieve it through captive forest facilities and through prudent purchasing policy in domestic markets.

The benefits of the planned expansion should be felt in the company's result 18 - 24 months later. It should also make a difference to the stock, which has dropped around 37 per cent since December 1, compared with Bilt's drop of around 22 per cent.

Glaxo-Burroughs swap ratio

The swap ratio of 14 GlaxoSmithKline Pharmaceuticals (GSK) shares for every 10 held by Burroughs Wellcome (BW) appears to be favourable to Burroughs shareholders. Analysts point out several factors that could have led to a better valuation for BW shareholders.

One of them is that operational efficiency is expected to improve significantly in the next few quarters due to manpower reduction steps undertaken recently "" 500 plus workers at the Mulund factory were recently given a VRS.

Also a strong product pipeline at BW helped it to post better results vis-a-vis GSK-BW's net profits grew 36.63 per cent to Rs 47.97 crore in 2003, compared with a 31.39 per cent growth to Rs 120.89 crore at GSK.

On Wednesday, the market pulled down the Glaxo scrip by 9.7 per cent, while the Burroughs share fell by a comparatively lower 7 per cent.

With contributions from Mobis Philipose and Amriteshwar Mathur