Nestle India Ltd’s December 2009 results revealed a focus on volume growth, even at the cost of lower margins. The company’s recently released 2009 annual report shows how that may well make for a sustainable growth strategy. In 2009, Nestle’s net sales growth was 18.6%, with volumes contributing 15%.
The shift in its strategy appears to have been pronounced in the December quarter, as in the first three quarters its volume growth was lower, at about 12%.
In most categories, except beverages, volumes are growing ahead of value sales. In milk products, for example, price realizations are up by 5.4% over 2008 and volumes are up by 13%. Nestle’s chocolate sales were lagging in volume terms, but have recovered. Beverages have been an exception due to flagging exports. In this category, price realizations have risen, but just enough to prevent a decline in sales.
While Nestle’s strategy may have the effect of hurting margins in the near term, its ability to manage its purchases well and an eventual decline in prices could see margins come back to normal levels. Its major raw material costs include wheat, milk and milk powder, vegetable oils, green coffee beans and sugar. Products such as wheat and sugar have already seen prices come off their peak.
While Nestle has been focusing on reducing its operational costs, it has little control over some key cost elements such as salaries, advertising, freight and the royalty that it pays to its parent. Advertising grew by 38% during 2009, twice the rate at which sales grew, as it sought to drive growth in a highly competitive consumer market. It will have to maintain advertising expenditure at these levels to ensure that growth does not falter.
Nestle’s annual report also shows that its cash generating ability has not eroded. Its net cash from operations rose by 29% to Rs928 crore, enough to fund its capital expenditure, pay dividends and still have some cash left over. Its return on average capital employed of 82% for 2009 explains why investors like this company and give it a valuation of over 40 times its historical earnings per share.
In 2010, a key revaluation trigger for the company will be a moderation in its raw material price complex. With volumes growing at a steady rate, even a small reduction in costs will see margins improve and profits jump.
Thursday, April 8, 2010
Nestle India’s profitability hinges on lower raw material prices
Industry Research Reports
LIC Term Insurance or Pvt Life Insurance Term Plan ? Which is the best term insurance in India ? Which Insurance company has the best cla...
આજકાલ કોઈપણ સમસ્યા હોય લોકો એન્ટિબાયોટિક્સ અંગ્રેજી દવાઓ લેવાનું વધુ પસંદ કરતાં હોય છે કારણ કે આજની પેઢીને આપણા જુનવાણી નુસખા વિશે જાણ હોત...
http://www.livemint.com/2007/12/13162756/SBI-UTI-MFs-to-manage-post-of.html New Delhi: Government has appointed PSU mutual funds UTI MF a...
સુરતી લોચો બનાવવાની રીત Surati Locho - સુરતી લોચો લોચો એ ગુજરાતની સૌથી સ્વાદિષ્ટ ચટપટી ખાવાની ચીજો પૈકીની એક ચીજ છે. લોચો બનાવવાની ...
i-Develop Multibagger Stock Performance last year Enter Date Exit Date Bse Code Scri...
NTPC and RIL are fighting a case in the Bombay High Court over gas pricing for the former's Kawas and Gandar power plants....
Global private equity giant The Blackstone Group has announced that it has bought a majority stake in CMS Computers Ltd. Black...
નવાઝ શરીફ સાથે મુલાકાત બપોરે પાકિસ્તાનના વડાપ્રધાન નવાઝ શરીફ અને નરેન્દ્ર મોદી વચ્ચે વાતચીત થઈ ગઈ હતી. બંને નેતાએ લગભગ 26 સેકન્ડ સુધી ...