Nestle steady despite eroding margins

The convenience and the rising awareness about the health benefits of packaged foods have spiked their demand, as has marketing efforts by food companies. The latest result released by Nestle Pakistan reflects this rising demand for packaged food. The total sales of the packaged food giant in CY11 rose by 26 percent relative to CY10. Of this, export sales rose by 33 percent year on year during the same period, jumping from Rs.4 billion in CY10 to Rs.5.3 billion in CY11. Growth was seen across all segments (milk, juices, others), however, it was led by the milk and nutritional products segment. The Companys efforts to improve procurement and production efficiency, and broaden its target market have enabled it to achieve such a growth rate. In 2011 alone, the Company invested Rs.8.9 billion in infrastructure development, including installing milk chillers for improving milk collection and upgrading of existing plants to increase milk capacity. In addition, the Company also expanded its product line in CY11 by launching powdered Milkpak and Nesvita, new flavours of juices and a fitness cereal. A Company official while talking to BR Research said, "The products that Nestle launched in CY10 were a great success. And keeping the success in mind, Nestle offered a variety of new products in CY11." When asked about Nestles plans to expand its target market, BR Research was told that the Company launched Nido Bunyad 2 years back to cater to the comparatively price sensitive group. Despite large investments made in improving efficiency, gross margins declined from 27 percent in CY10 to 26 percent in CY11. Rising milk prices and energy costs are the main cause behind the spike in production cost and consequent decline in profitability margins. Company sources claimed that input costs rose by roughly 21 percent in CY11, whereas the Company, on average, raised the prices of its products by 15 percent, hence absorbing some of the cost increase. At the same time, Nestles finance costs also rose marginally, owing to a high interest rate environment during most of CY11. The fact that only 4 percent of the total milk consumed in Pakistan is processed combined with the huge population, increasing awareness and rising price competitiveness of Nestle promise a bright future for the firm in the long-run. However, energy shortages and rising fuel costs would continue to put pressure on the Company in the near future.

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NESTLE PAKISTAN
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                                     CY11     CY10    chg
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Sales (Rs mn)                      64,824   51,487    26%
Gross profit margin                  25.8%    27.0%   -4%
Distribution and selling exp/sales   10.6%    11.1%   -5%
Operating profit margin              13.0%    13.3%   -2%
Finance cost/sales                    1.6%     1.0%   61%
Operating expenses/sales              1.6%     1.6%    3%
Net profit margin                     7.2%     8.0%  -10%
EPS (Rs)                           102.94    90.69    14%
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Source: KSE notice
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