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Tasty at the Top

The opportunities offered by Nestle are mouth-watering

Nestle, a Rs 2,010 crore company, is India's largest dairy products entity, and has been present in the domestic market since 1912, but was incorporated in 1959.

What has held the company steady on a high growth path has been its effort to keep pace with the changing lifestyles and its brands are known everywhere, like, Nescafe, Maggi, Milo, Kit Kat, and Milkmaid.

The company has had years of outstanding deliveries and in similar vein posted a great fourth quarter (ended December 31, 2008) with a jump in net profits of 29.35 per cent at Rs 121 crore, which compares favourably with the corresponding period in 2007 (Rs 93.6 cr). Net sales grew by 21.7 per cent to Rs 1,090 crore in Q4.

For fiscal year (December 2008 ending), net profit grew 29.1 per cent to Rs 534 crore, while this was Rs 413.8 crore for the whole of 2007. Net sales grew at 23.39 per cent to Rs 4,324.2 crore from the earlier year's Rs 3,504.35 crore. While the company ramped up its domestic sales by 25.6 per cent to Rs 3,985 crore, its exports increased marginally by 2.6 per cent at Rs 338.39 crore.

For the Q1 of 2009 (Jan-March), net sales jumped 16 per cent to Rs 1,265.85 crore over the same period in 2008. While domestic sales have been vibrant, again growing by 18.7 per cent at Rs 1,191.97 crore, exports fell 15.1 per cent to Rs 73.88 crore. Net profit for the quarter was reported at Rs 197.30 crore, increasing by 23.2 per cent over the same period in 2008.

Most FMCG companies are not able to match the fiery pace set by Nestle, either in their companies' growth chart or on the markets. Most FMCG stocks are trading at trailing price-earnings multiples of 20 times and more, yet their earnings are not growing as fast as that of Nestle. The figures, thus, make Nestle one of the few FMCG stocks that are combining high valuation with strong growth, indicating a brighter future for the stock. The growth factor remained strong even during the slowdown, when the company hiked prices to account for a rise in raw material cost, but this did not impact its financials.

But, there is a negative to the story too. A report by Citigroup says that Nestle's growth usually falls under 10 per cent during economic slowdowns. The report says that Nestle's net profit will grow, but not at the previous rates. It in indiactes the jump in net profit growth may fall to a low of 14 per cent in 2009 and 2010.

But, on the whole, prospects for the industry are good and therefore, Nestle, which leads the pack, is likely to do well. The market growing market will help too — a Dairy India 2007 study pegged the dairy sector at $62.67 billion and it was growing at 5 per cent per year. It’s slated to cross $108 billion in revenues in 2011. Another market segment, the organized snack food segment is growing at 15-20 per cent a year.

At a the current market price (CMP as on August 20, 2009) of Rs 2,207 the company is running at a P/E multiple of 37.26x.

Snapshot : Nestle
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