Nestle

Financial Analysis

Nestle India ltd.

ACC Ltd.

SUBMITTED TO: SUBMITTED BY:

MRS.RANJANA NAVNEETSINGH

MBA 3RD B

90212233197

CT INSTITUTE OF MANAGEMENT STUDIES

Financial Analysis 1

Nestle India ltd.

(All figures are in Rupees)

Major Industry: Food & Beverages

Sub Industry: Miscellaneous Food

Stock Current Price (14/12/2009): Rs. 2619.75

Market Cap: Rs. 252,585,071,991

Shares Outstanding: 96,415,716

Share face Value: Rs. 10

Stock Listing - Nestlé India Limited Industry Food Processing

ExchangeThe Bombay Stock Exchange Limited, Mumbai

Stock Code 500790Group AISIN Code INE239A01016

1. ENTERPRISE VALUE …please refer FM project_GMP_G09038.xls

Enterprise Value EV = (outstanding shares) x (share price) + Debt

– Cash balance – short term investments

For market cap calculation share price for each year is taken as that on 31st March of the year.

Debt = Market value of (Long term debt + short term debt)

Short term investments: Govt. T Bills, Commercial Papers, Mutual Fund- debt

2. FINANCIAL RATIOS

Net Worth = Total assets – Long term Liabilities

= Share Capital + Retained earnings + General Reserve

Capital Employed = Net Worth + Long term Loans


Retained earnings = Opening Balance + Net income - Dividends

Invested capital = Net worth + Deferred tax liability + Total Debt

RONW = EBIT / Net Worth ROE = PAT / Net Worth

ROCE = EBIT / Capital Employed

Net Profit Margin = PAT / Net Sales

S/TA = Net Sales / Total Assets

Net Financial Leverage = Debt / Net Worth

Operating Leverage = Total Contribution / EBIT

*** while calculating V Cost : Wages are taken 75% of Employee cost – (Salaries, wages, bonus, pension, gratuity, performance incentives- figure) as there is no break up given…

Figures 2008 2007 Ratios 2008 2007NW 4,733,497,000 4,184,241,000 RONW 1.636 1.504LT debt 8,177,000 28,711,000 ROCE 1.633 1.494CE 4,741,674,000 4,212,952,000 PAT/Sales 0.124 0.118

TA16,950,135,00

014,077,619,00

0 S / TA 2.551 2.489

Sales43,242,450,00

035,043,532,00

0Operating Leverage 2.266 2.413

EBIT 7,744,698,000 6,294,683,000Financial Leverage 0.002 0.007

Interest 16,430,000 8,545,000 EPS 55.39 42.92PBT 7,728,268,000 6,286,138,000 ROE 1.13 0.99Tax 2,387,446,000 2,148,016,000 P/ E 27.04 21.29PAT 5,340,822,000 4,138,122,000 Current Ratio 0.67 0.67Invested Capital 5,110,484,000 4,499,926,000 D / E ratio

0.17%

0.69%

Variable cost

25,696,689,750

19,853,305,192

Contribution

17,545,760,250

15,190,226,808


8. BETA CALCULATION… … please refer FM project_GMP_G09038.xls

After doing linear regression analysis of Nestle returns against market (BSE 500 index) the outcome is as under: (With five year monthly data)

Volatility of the share: 421.79

R2 value: 1.5%

Beta: 0.097

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 700

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000BSE index

Nestle

-40% -30% -20% -10% 0% 10% 20% 30% 40%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

f(x) = 0.0970825125456299 x + 0.0205509316620518R² = 0.0150391429310367

Nestle returns


Volatility of returns: If St is the share price in period t then, log relative return is

And volatility measure is

= 6.22%

10. COMPANY COST OF CAPITAL

The market rate of return estimated over 6 years of period from 2005 to 2009:

Rm = 12.18 %

Risk free rate of return is taken to be Rf = 6.90 %(www.bloomberg.com)

As D/E ratio is < 1%, for all Practical purposes I assume 100% equity

finance. And thereby the Company Cost of Capital Company Cost of

Equity

(WACC) Re = Rf + (Rm -Rf)

= 7.47 %

3. EVA CALCULATION

2008 2007Invested Capital 5,110,484,000 4,499,926,000Company CoC 7.47% 7.47%Required Income 381753154.8 336144472.2Earned income 5,340,822,000 4,138,122,000EVA 4,959,068,845 3,801,977,528

We can see the company has added huge Economic Value in last two years. It is not surprising because first of all companies systematic risk is quite low as its business is not sensitive to market risk - = .097! Apart from that R2 is very low - mere 1.5% and that means CAPM cannot predict the business risk involved effectively. In totality unique associated with company is very high. Therefore company cost of capital i.e. the expected return from company for its involved systematic risk is low.


The main value drivers are the company’s ability to dominate both suppliers and customers- as is evident from cash conversion cycle! Apart from that low cost production, better profit margin and volume sales contribute to value creation.

9. CAPITAL STRUCTURE

2008 2007 2006 2005 2004Share Capital 964,157,000 964,157,000 964,157,000 964,157,000 964,157,000Reserve & Surplus 3,769,340,000

3,220,084,000

2,924,722,000

2,577,176,000 2,229,913,000

Equity 4,733,497,0004,184,241,00

03,888,879,00

03,541,333,00

0 3,194,070,000Debt 8177000 28711000 162676000 143045000 79051000D/E 0.17% 0.69% 4.18% 4.04% 2.47%

The main source of capital has been retained earnings. The FMCG companies maintain very low debt value as the business is not capital intensive. Apart from that for expansion and growth food products companies don’t have to do any huge capital investment. Processed food producers like Nestle play on the contribution margin. From annual figures it is evident that PAT is nearly equal to capital invested and hence they are highly cash reach. For day to day operation they depend on internal generated profit and suppliers’ money.

11. OPERATING CYCLE

2008 2007Inventory

Closing balance 4,349,117,000 4,012,153,000Opening balance 4,012,153,000 2,762,185,000AV 4,180,635,000 3,387,169,000

Sundry DebtorsClosing balance 455,933,000 534,901,000Opening balance 534,901,000 557,569,000AV 495,417,000 546,235,000

Sundry CreditorsClosing balance 5,017,178,000 4,555,845,000


Opening balance 4,555,845,000 3,666,483,000AV 4,786,511,500 4,111,164,000

Purchases 21,386,673,000 17,522,681,000

Manufacturing ExpenditureMaterial cost 21,386,673,000 17,522,681,000Employee Cost 2,359,356,000 2,020,819,500Power & fuel 1,597,565,000 1,239,442,000Contract Labor 456,500,000 372,172,000Milk collection 114,490,000 308,714,000Quality testing (Laboratory) 137,557,000 99,501,000Sum 26,052,141,000 21,563,329,500COGS 25,715,177,000 20,313,361,500

Sales 43,242,450,000 35,043,532,000

Inventory Cycle in (Days) 59.33973447 60.86224011Account receivable turnover (Days) 4.181705824 5.689374433Account payable turnover (Days) 81.68997102 85.63614552

Operating Cycle 63.52144029 66.55161454Cash Cycle -18.16853072 -19.08453098

12. GROWTH

Average growth in sales is 18% and is quite possible in food products as the Indian food market is estimated at over US$ 182 billion and average growth of the industry has been 14 to 18%. Being in such high margin business Nestle maintains high net cash at hand and is fully capable to sustain growth without any external finance.


As far as future expansion is concerned company should take more debt for tax benefits. As it is a cash rich business there would never be a payout issue if debt ratio is managed judiciously.

6. VOLATILITY

I have taken quarterly reports and calculated the NET SALES, EBIT & PAT figures for each three-month period. Taking sample from 2005-Q1 to 2009-Q3… total 19… the followings are the volatility figures. The quarterly figures are annualized by multiplying (√4 =) 2 to get annual figures.

Quarterly Figures in INRSales EBIT PAT

2009 Q313,071,900,00

0 2,488,300,0001,827,600,00

0

2009 Q212,143,600,00

0 2,280,100,0001,620,200,00

0

2009 Q112,707,800,00

0 2,838,800,0001,973,000,00

0

2008 Q410,931,000,00

0 1,826,100,0001,210,900,00

0

2008 Q311,025,000,00

0 2,042,900,0001,317,500,00

0

2008 Q210,423,400,00

0 1,695,600,0001,210,900,00

0

2008 Q110,971,700,00

0 2,180,000,0001,601,500,00

02007 Q4 9,016,800,000 1,419,300,000 936,100,000

2007 Q3 8,993,100,000 1,859,900,0001,160,600,00

02007 Q2 8,420,600,000 1,437,000,000 956,900,000

2007 Q1 8,700,300,000 1,578,400,0001,084,500,00

02006 Q4 7,435,900,000 1,093,200,000 624,600,0002006 Q3 7,265,300,000 1,222,900,000 829,900,0002006 Q2 6,855,900,000 1,189,600,000 810,400,0002006 Q1 6,809,600,000 1,334,900,000 886,100,0002005 Q4 6,260,000,000 1,015,100,000 741,600,000


2005 Q3 6,304,800,000 1,075,200,000 745,900,0002005 Q2 6,237,800,000 1,184,900,000 827,700,0002005 Q1 6,203,800,000 1,180,100,000 780,500,000

Mean- Quarterly 8,935,700,000 1,628,542,105

1,112,968,421

SD – Quarterly 2,349,604,234 532,015,084 393,858,998

Mean- Annual

35,742,800,000 6,514,168,421

4,451,873,684

SD - Annual 4,699,208,469 1,064,030,167 787,717,995

7. OPERATING & FINANCIAL LEVERAGES

2008 2007 2006 2005 2004

Share Cap 964200000 964200000 96420000096420000

096420000

0

Ret earning376930000

0278770000

0249240000

021448000

0017976000

00

NW473350000

0418420000

0388890000

035413000

0031941000

00

Debt 8200000 28700000 16270000014300000

0 79100000

EBIT774470000

0629460000

0480960000

046927000

0038727000

00

Contribution

15547300000

18106600000

10193000000

9402700000

8390500000

Fin Leverage 0.0017 0.0069 0.0418 0.0404 0.0248

Op. Leverage 2.01 2.88 2.12 2.00 2.17


4. COMPETITIVE ADVANTAGE

Nestle India is one of the leading companies in the FMCG industry in India. From the financials (EVA calculations) it is highly evident that it is a value creator. From the growth rate figure what I infer is that it is performing extremely well and operational efficiency must be its core competence. From cash conversion cycle we can see the debtor’s velocity is quite low and that implies that it has dominating position among distributors. From which I infer that it must have very good brand perception among the customers and that fits well to my personal opinion- since child hood I have been fond of Maggie and Milkybar chocolates. That is the Nestle Brand. From the financial analysis I could figure the same about the Indian customer as a whole.

The product quality is the main value driver of the company. Apart from that the company thoroughly understands need of the Indian public and caters very well to the taste of the people- for example Milkmaid is widely used in desert and Kheer making during festivals. From time to time Nestle introduces innovative products into the market and thereby it never lets its products get into deep maturity phase of product life cycle and before they do it launches a new product. Another competitive advantage is cost leadership. Its pricing strategy is fair enough to offer value for money proposition that hits the Indian consumer mind set.The marketing strategy gives it competitive advantage. It as a FMCG producer focuses on mass market and maintains well diversified product portfolio- for example dairy products, infant food, sweets and confectionaries, fast food products, prepared foods etc. That gives it chance to play on volume.

5. SUSTAINABILITY

As far as sustainability is concerned what I have inferred is that it has very good prospects for not only sustainability but for growth also. Though company exports


its main (more than 90%) market is the domestic one. At the same time as India is a growing economy second most populous country it provides a very big market to food products. In India on average more than 40% of expenditure is on food. As the economy is growing per capita food consumption is on upward trend and that makes a huge potential market for food and food products. More than 70% of population in india reside in rural area and still majority of this market is yet to be discovered by organized food sector. Therefore there is no doubt that Indian market is a very sustainable domain for food FMCG business.

ACC ltd.

Major Industry: Cement and Cement products

Stock Price (14/12/2009): Rs. 858.25

Market Cap: Rs. 161,088,524,635

Shares Outstanding: 187,717,477

Share face Value: Rs. 10

Last AGM: 30th Jul 2009

Stock Listing - Nestlé India Limited Industry Cement and Cement productsIndices Bombay Stock Exchange- BSE 500Stock Code 500410Group AISIN Code INE012A01025

Share Holder Pattern (30th Sep 2009):

No. of shareholders No. of shares % of Total

Promoter and Promoter GroupIndian Bodies Corporate 1 86191067 45.92Foreign Bodies Corporate 1 541000 0.29

2 86732067 46.21Public shareholding Institutions


Mutual Funds/ UTI 113 4874551 2.6Financial Institutions/ Banks 141 36169914 19.27Central/ State Government(s) 5 397295 0.21Foreign Institutional Investors 239 18139630 9.66

498 59581390 31.74Non-institutions

Bodies Corporate 1858 9975045 5.31Individual shareholders- up to Rs. 1 lakh 133390 25182407 13.42Individual shareholders > Rs. 1 lakh 145 4241479 2.26Pakistani Citizens 172 385965 0.21Other Foreign Nationals 4 1105 0Trusts 39 628072 0.33Clearing Members/Clearing House 212 134906 0.07NRI/OCBs 2649 840561 0.45

138469 41389540 22.05GRAND TOTAL 138969 187702997 100

1. ENTERPRISE VALUE

For 2008 debentures:

1. Book value of debentures issued (Non convertible 13.5%) 200Cr

Total 2000 issued with face value of bond, Rs. = 1,000,000

Last trading price = 109.5011

Current market value of bond = (10lakh / 100) X 109.5011

Market value of Debentures =2,190,022,000

2. Book value of debentures issued (Non convertible 8.45% for 5 YEARS) 300Cr

Total 2000 issued with total face value of bond, Rs. = 1,000,

Last trading price = 101.4953

Current market value of bond = (10lakh/100) X 101.4953


Market value of Debentures =3,044,859,000

Total Market value of debt = 5,234,881,000

Similarly calculating for other years:- Both Long term and Short term debt are

Debt L /T 2008 2007 2006 2005 2004Debentures

5234881000 0

3000500000

4500000000

6500000000

Term loan

2500000000

2500000000

2500000000

2500000000

2000000000

Forex loan 0 0

1439100000

2139900000

2187000000

Others3200000

004038000

005020000

0012130000

0026666000

00

Total L/ T

8054881000

2903800000

7441600000

10352900000

13353600000

Debt S/ T 0

160300000

270000000

361300000

723700000

Calculation for EV:

O/s Shares

Share price

Market Cap Total DebtS /T investment

Cash balance as on 31-dec

EV in Cr

2004

174243883 338.7 59016403172

14077300000

2791400000 573200000 6972.91

2005

185556138 534.2 99124088920

10714200000

2937500000

1027900000

10587.29

2006

188326009 1085.55

204437299069 7711600000

5035400000

6201700000

20091.18


2007

188672305 1024.5

193294776473 3064100000

8448100000

7434800000

18047.60

2008

188729706 477.9 90193926497 8054881000

6790800000

9842400000 8162

2. FINANCIAL RATIOS

Figures 2008 2007 Ratios 2008 2007

NW 4927.73 4152.71 RONW0.413

20.556

5

LT debt 482.03 306.41 ROCE0.376

30.518

2

CE 54

10 4459.12 PAT/Sales0.167

60.208

5

TA 5409.76 4459.12 S / TA1.336

41.546

0Sales 7229.97 6894.79 EPS 64.62 76.67

EBIT 2036.12 2311.15 ROE0.245

90.346

3

Interest 39.96 73.87 P/ E7.395

53.362

4PBT 1701.98 1930.3 Current Ratio 0.89 0.86Tax 524.6 491.7 D / E ratio 0.10% 0.09%PAT 1212.79 1438.59Invested Capital 8955.47 7448.11Variable cost 2852.27 2419.63Contribution 4377.7 4475.16

8. BETA CALCULATION… … please refer FM project_GMP_G09038.xls

Volatility of shares = 112.1343

R2 value = 40.4%

Beta value =0.771


1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 700.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00

8,000.00

9,000.00

10,000.00BSE indexACC stock

-40% -30% -20% -10% 0% 10% 20% 30% 40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

f(x) = 0.771346246217393 x + 0.00751255770070104R² = 0.404678151927569

ACC ret vs Market ret

10. COMPANY COST OF CAPITAL

Cost of Equity:

Re = Rf + (Rm -Rf)

Rf = 6.9 %


Rm = 12.18 %

Re = 10.97 %

Cost of debt: … debt is taken at market value

Term loan from bank is @ 8.25% where as coupon rate is @ 13.5 % & 8.45 %

Amount

Weight -We

return Re

After tax

We x Re

Equity4927.73 0.85950628

10.97% -

0.094288

Total Debt 805.48 - - - Value 5733.21 - - -

Debenture1200.02 0.03488796

13.50% 0.47% 0.31%

Debenture2500.05

0.087219899 8.45% 0.74% 0.48%

Bank Loan250

0.043605589 8.25% 0.36% 0.23%

Others32

0.005581515 8.25% 0.05% 0.03%

Company Cost of Capital =10.48%

3. EVA CALCULATION

2008 2007

Invested Capital5744.5

5 4790.57Company Cost of Capital 10.48% 10.48%Required Income 601.90 501.94

Earned income1212.7

9 1438.59EVA 610.89 936.65

… figures are in crore except % figures


The Company is really creating value.

9. CAPITAL STRUCTURE

Debt Structure

1. Term loan from bank 250 Cr.

2. Long term Debentures: for 2008Name of the Instrument

Description In NSDL

Issue price

Face Value

Issue Date/Date of Allotment

Coupon Rate

Payment mode

Maturity No. of Issues

Secured Non Convertible Debenture

ACC LIMITED 11.30 NCD 10DC13 FVRS10LAC

1000000 1000000 10/12/2008 11.30% Annually on 10th Dec.

Dec 2013 2000

Secured Non Convertible Debenture

ACC LIMITED, 8.45 NCD 07OT14 FVRS10LAC

1000000 1000000 7/10/2014 8.45% Annually on 10th Dec.

Dec 2014 3000

And similar for other years also…

3. D/E ratio

2009 2008 2007 2006 2005

D/E ratio2.90548

243.0472

12.4160

24.5090

54.2623

4

Company is in a high capital intensive business. Therefore it is imperative to take debt to avail tax shield.

11. OPERATING CYCLE … figures are in Crore


2008 2007Inventory Closing balance 793.27 730.86Opening balance 730.86 624.13AV 762.065 677.495

Sundry Debtors Closing balance 213.96 289.29Opening balance 289.29 213.96AV 251.625 251.625

Sundry Creditors Closing balance 1753 1207.5Opening balance 1537.2 854.5AV 1645.1 1031

Purchase 1166.62 1091.05

Manufacturing Expenditure 3,194.39 2,709.65COGS 1,104.21 984.32

Sales 7,308.62 6,990.68

Inventory Cycle in (Days) 251.90 251.22Account receivable turnover (Days) 12.57 13.14Account payable turnover (Days) 514.70 344.91

Operating Cycle 264.47 264.36Cash Cycle -250.23 -80.55

12. GROWTH … figures are in Crore

Annual data % GrowthSALE EBIT PAT SALE EBIT PAT

2008 7719.6 1664.7 1099.6 0.33% 0.00% 0.00%


9 7 2

20077693.9

41664.7

81099.6

231.49

% -2.84%-

11.35%

20065851.2

4 1713.51240.4

338.42

%189.41

%203.56

%

20054227.2

2 592.06 408.63

Due to downturn the growth of the company has stumbled a bit but as there is a very high potential for growth in infrastructure expenditure it seems company can start the growth phase again.

As far as future forecasting is concerned company should continue with present capital structure.

6. VOLATILITY

All figures are in Rs. Crores

SALE EBIT PAT2009 Q3 2,005.47 703.98 435.632009 Q2 2,119.86 772.3 485.622009 Q1 2,081.70 674 404.762008 Q4 2,069.52 528.38 300.392008 Q3 1,852.56 486.15 283.442008 Q2 1,785.74 413.63 271.422008 Q1 1,766.34 470.55 357.542007 Q4 1,763.73 417.28 431.182007 Q3 1,636.85 448.57 292.422007 Q2 1,842.66 544.4 351.242007 Q1 1,634.76 507.14 363.752006 Q4 1,592.33 468.52 358.462006 Q3 1,357.67 366 224.682006 Q2 1,424.70 455.62 405.582006 Q1 1,336.40 326.56 235.422005 Q4 1,084.02 157.36 192.482005 Q3 992.82 140.05 203.43


2005 Q2 1,128.25 213.3 139.362005 Q1 1,110.60 165.14 165.522004 Q4 953.28 120.37 53.08

Mean - Quarterly 1576.96 418.97 297.77SD - Quarterly 381.48 188.06 112.91

Mean -Annual 6307.85 1675.86 1191.08SD - Annual 762.95 376.11 225.83

4. COMPETITIVE ADVANTAGE

Competitive advantages are:

High entry barrier in the industry.

Dominant position vis a vis buyers and suppliers as is evident from cash conversion cycle. Good profit margin .Product quality (whitest among grey cement )and innovation- for example decorative cement

Brand name

Better cement based product portfolio

Advanced production technology

Quality man power and management practices

5. SUSTAINABILITY

As far as ACC is concerned what I discern is there is a very high degree of chance of sustainability as there is a huge potential for growth in infrastructure spending in India. For example power sector- for huge deficit of power India is planning to increase the production capacity to 40,000GW capacity in next 40 years. And especially after indo-US nuclear deal more than 10 Nuclear power plants are in pipe line. These plants need enormous infrastructure. Similarly housing & real estate, road etc are in deficit in India. So blindly I can say that there is huge potential of growth for cement industry. Therefore sustainability for ACC is nearly out of question!

Nestle

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