Nestle India Disappoints With Its Results

Nestle India, one of the largest FMCG companies in India, yesterday posted its March quarter numbers. The company follows the December year ending and hence this was its first quarter. FMCG companies, under normal circumstances, are considered to be defensive bets because the consumption demand in India is expected to remain robust. However, this has not been reflected by Nestle India. The company reported topline growth of 13 per cent to Rs 2,047 crore while its net profit showed a subdued performance by growing at 7.84 per cent to Rs 275.73 crore.

For Nestle India, an aggregate of 95 per cent of the sales comes from the domestic market while the remaining is derived from exports. The EBITDA of the company increased by 18 per cent to Rs 452 crore while the EBITDA margin improved by 96 basis points to 22.11 per cent. The company was able to maintain high margins largely due to higher realizations and a wide product portfolio and channel mix.

The depreciation expense increased substantially from Rs 32 crore to Rs 52 crore and this had an impact on the bottom line. Also, the company paid a higher amount of tax, which increased by 24 per cent to Rs 127 crore. This was due to the end of the first five years of the income tax holiday at 100 per cent of the profits from its Pantnagar factory. From April 2011 to the next five years the tax holiday will continue at the rate of 30 per cent of the profits. The company has seven factories located in Punjab, Tamil Nadu, Karnataka, Haryana, Goa and Uttarakhand. It has gone on stream with its eighth factory at Tahilwal in Himachal Pradesh during the quarter.

Further, during the March quarter, Nestle India borrowed USD 21 million from Nestle SA through external commercial borrowing (ECB) for five years, approved by the Reserve Bank of India (RBI). The total amount outstanding as on March 31, 2012 was Rs 803.06 crore. In a statement to the media, the management said, “As anticipated, 2012 is already confirming to be a challenging year. Low consumer confidence and the volatile economic environment are creating pressure across sectors.”

The stock is currently available at a trailing price to earnings multiple of 41 times which is very high as compared to some of its peers like HUL which is trading at P/E multiple of 34 times and ITC at 30 times, etc. Yesterday the stock plunged by 4 per cent to Rs 4,733. It would be best to adopt a ‘wait and watch’ approach for the counter before entering it.