Nestle Pakistan Limited (NESTLE), over the years, has become one of the biggest FMCG company in Pakistan. The Company is serving Pakistani consumers since 1988, when its parent company, the Switzerland-based Nestlé SA, first acquired a share in Milkpak Ltd.
The principal activities of the company are to manufacture process and sell food products and ancillary equipment. The food products include dairy, confectionery and culinary products, coffee and beverage and drinking water. The major brands include Milkpak UHT, Nestle Everyday, and Nescafe.
Historical financial performance
Over the years, Nestle Pakistan has witnessed a steady growth in its top line on the back of growing demand from the ongoing urbanisation in the country. In 2011, Nestle recorded a top line growth of 26 percent, and this turnover of the Company was powered by strong volume growth across all the key product categories. Export sales during 2011 increased by 30 percent as the Company continued to develop its distribution in Afghanistan. Nestle did face higher input cost particular in fresh milk, sugar, and fruit pulp and these cost adversely affected their Gross Profit margin which reduced by 115 bps as compared to 2010. Additionally, during the year, the Company has invested close to Rs 9 billion in the capacity enhancement, and infrastructure improvement projects and the net profit of the Company increased by 13.5 percent year-on-year.
Nestle in CY12-13
Nestle Limited, kept its grip on the market during 2012. In the calendar year, Nestle posted a bottom line growth of close to 26 percent year-on-year. The increase in profit primarily came on account of volumetric growth in its sales. The top line during CY12 clocked in Rs 79.1 billion, a 22 percent year-on-year increase. The export sales, on the other hand, reached Rs 6.0 billion and given a 15 percent year-on-year growth.
CY13 was a slow and a challenging year for Nestle on many fronts. Right from the start in the first quarter, its sales grew only 1.2 percent; that was the lowest quarterly sales growth since CY10. However, despite this slow growth, the Company reported a top line of 9 percent and it improved its Gross Margins by 80 bps. The full year bottom line remained flat over last year at Rs 5.8 billion. During the year, the Company has further diversified its product line by introducing multiple new product lines.
Nestle in CY14
Nestle Pakistan came back in 2014 and enjoyed a healthy bottom line expansion. The profits increased by a sharper: 35 percent to Rs 7.9 billion from Rs 5.8 billion in the year ago. On the other hand, the firm reported a revenue rise of 12 percent to Rs 96 billion compares to Rs 86 billion in CY13. The growth was fuelled by effective product mix and higher sales. The Gross Profit margin, however, saw little improvement over last year.
However, it's interesting to find out that how a 12 percent growth in top line leads to a 35 percent expansion in bottom line. It is more important after showing little improvement in gross margin have witnessed during 2014. Nestle has achieved this by reaching brilliant operating efficiencies during the year. Distribution cost is the main success here which has only increased by 3 percent during the year; these costs dropped by nearly 100 basis points as a percentage of net sales to about 11.49 percent in CY14. Nestle was also able to get additional support from other income which was 2.7 times the CY13 figure, about $525 million in CY14. Thanks to that, Nestle closed the year with 8.2 percent net margin.
Performance snapshot CY15
Nestle has entered CY15 with a strong sales record and higher operating efficiencies, and the Company kept the momentum going. Nestle Pakistan crossed Rs 100 billion turnover milestone with a top line growth of 6.8 percent. The food company reported a net profit of Rs 8.76 billion or Rs 193.18 per share for 2015. The bottom line was 11 percent higher when compared with Rs 7.92 billion or Rs 174.85 per share it earned in 2014. Gross Profit margin improved by 481 bps primarily due to the significant decline in the commodity and fuel prices. The Company has over the years increased its focus on operational costs which has helped the net profit margin to increase by 30 bps.
Traditionally, the Milk and nutrition products are the main source of revenue for the Nestle but in 2015, the Company witnessed 5 percent growth in this segment. The beverages grew by 14 percent year-on-year and the other operations declined by 26 percent year-on-year. Despite the fact that 2015 result of Engro Foods' already set the stage for a declining trend in the dairy sector but according to market Nestlé's result was even lower than their expectations. Both Nestle and EFOODS has suffered slow growth in their fourth quarters. Similar to EFOODS the tea whitener segment which is one of its flagship product came under immense pressure from competition by Tarang and a new entry by Dalda's CupShup.
Outlook
Although the competition is growing around Nestle, however, it has a firm foot on the ground. Over the years, the Company has invested quite significantly in its product development and enhancing its market share. The Company has the potential to continue its growth on account of an unprecedented hike in consumption of packaged food and drinks by a middle class that is rapidly expanding in numbers, the food producing giants the likes of Engro and Nestle have been faring remarkably well over the course of the last five years.
Since last two years, Nestle has enjoyed low input cost, and so far it looks that the decline in global commodity market along with lower fuel cost would continue for next two quarters at least.
It will certainly help the margins of Nestle. However, once again the budget is right around the corner, and talk of 100 percent duty on the import of dry milk has already started. If that happens, the firm's profitability will be tested.
That having been said, the consumer sector of Pakistan has enormous potential, and field remains wide open for the food producers the likes of Nestle, which continue to round up consumers with their novel products and selling ideas.
In this regard, Nestle professional and their breakfast cereals are going to be the high growth product categories to watch out for in the coming quarters.
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