Nestle Pakistan Limited

Nestle Pakistan Limited (PSX: NESTLE) is a subsidiary of Nestle S.A based in Vevey, Switzerland and is the leading company in Pakistan in the food and beverages category. They operate in various segments such as dairy, juices, drinks, nectars, coffee, breakfast cereals, and infant nutrition.

Due to the nature of their products, water stands at the core of their input. With the fast depleting water resources as a result of climate change, water management is more important today than before. Nestle Pakistan, being the leading company in the sector took the initiative to reduce water use per ton of product. Over the last ten years, they successfully managed to reduce water use by 40 percent. Moreover, focus on water is a key constituent of its Creating Shared Value (CSV) strategy.

Innovation and investment are constant parts of Nestle Pakistan's business operations. Over the years, in pursuit of satisfying consumer needs and driving customer satisfaction, they have continuously added to their production capacity, improved their quality and processes to reduce costs and wastage. Nestle Pakistan has four factories in Karachi, Islamabad, Sheikhupura and Kabirwala in which it has invested each year. Further investments were planned for 2019 amounting to approximately PKR 4.1 billion.

Shareholding More than 50 percent of the shares of Nestle Pakistan are held by its parent company Nestle S.A, latter based in Vevey, Switzerland, while IGI Investments (PVT.) Limited holds nearly 10 percent in the same category of associated companies, related parties and undertaking. The next major shareholder is the local general public owning almost 13 percent shares in the company. The rest of the division is shown in the table.

Historical financial performance

Nestle Pakistan has continuously recorded higher top-line than the preceding years, albeit at a declining growth rate, with the exception of CY14 (and CY16, 9 percent) where top-line increased by almost 12 percent as compared to 9 percent in CY13. This was due to both, an incline in sales volumes as well as selling price. While gross margins remained flat due to a corresponding increase in cost of sales, net margin was lifted mainly due to income generated from exchange gain on foreign currency loan and transactions, which was absent in CY13.

Sales continued to increase in CY15, although the rate of increase reduced from nearly 12 percent in CY14 to almost 7 percent in CY15, adversely affected by energy crises which hampered daily operations of the business. Despite this, the company managed to increase gross margins due to a stable exchange rate and favourable raw material costs and fuel prices in addition to controlling wastage in the value chain. However, bottom-line increased only marginally as the increased profitability was marred by a reduction in 'other income'.

Profitability and top-line continued to exhibit an upward trend in CY16 with the latter increasing by 9 percent year-on-year. This was achieved through effective product mix and better distribution as can be seen by higher distribution costs. CY16 saw some economic stability which translated into positive figures- gross and net margins increased to 35 percent and 10 percent respectively. Lower raw material costs led to better gross margins whereas controlling costs allowed for an improved bottom-line.

CY17 saw the peak of gross and net margins after which it took a downward course in the following year; both increased to near 37 percent and 12 percent respectively. Moreover, Pakistan's economy continued to grow, experiencing better law and order situation, improvement in the energy crisis and a stable currency. Nestle's top-line grew by almost 9 percent due to continuous innovation and a profitable product mix. It also launched several products in CY17, some of which include Nestle Milo Concentrate, Nestle Fruita Vitals exotix mixes, Nescafe classic sachet, Nestle Nesvita yogurt, etc.

CY18 experienced major political and economic instability. Increased imports caused a trade deficit which led to pressure on the foreign reserves of the country which in turn led to rupee depreciation. This, combined with high prices in the international market resulted in inflation thereby raising prices in the local market as well. This can be seen in higher cost of sales and lower margins. Although top-line grew by 2 percent in CY18, mostly driven by price, it is a major drop in growth rate compared to nearly 9 percent of CY17.

Quarterly performance CY19 has been a particularly grueling year for nearly all the sectors. While Nestle Pakistan was so far boasting a higher top-line each year, 9MCY19 saw a fall in top-line due to the unfavourable macroeconomic environment- inflation, falling disposable income and higher input costs. All the factors in addition to higher energy prices and imposition of water charge, led to lower margins for the period.

Future outlook The economic slowdown of 2019 has adversely affected majority of the sectors, however in the second half some correction was seen, where the market index regained growth, the exchange rate stabilized and business environment saw positive sentiments. While uncertainty still prevails and GDP growth rate has been lower than before, it may take a while for disposable income to recover. In view of this, Nestle Pakistan can sustain profits with their cost control measures; focus on consumer needs and quality enhancement.

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Nestle: Shareholding pattern as at December 30, 2018
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Shareholder category                                     %
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Directors, their spouse(s), and minor children        4.47
Associated companies, undertakings and related       78.45
Financial insitution                                  1.03
Insurance companies                                   0.02
Funds                                                 0.23
Joint stock companies                                 0.01
Charitable trust                                      0.04
Foreign investors                                     2.89
Local general public                                 12.74
Public sector companies and corporations              0.02
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Total                                                  100
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Source: Company accounts

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Nestle Pakistan nine months ended September 30, 2019
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Rs (mn)                              9MCY19      9MCY18       YoY
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Net revenue                          87,053      90,892    -4.22%
Cost of sales                      (63,114)    (62,178)     1.51%
Gross profit                         23,939      28,714   -16.63%
Distribution and selling expens    (10,493)    (11,308)    -7.21%
Administration expenses             (2,507)     (2,359)     6.27%
Operating profit                     10,939      15,047   -27.30%
Finance cost                        (2,311)     (1,289)    79.29%
Other operating expenses            (1,123)     (1,219)    -7.88%
Other operating income                  256         200    28.00%
Profit before taxation                7,761      12,739   -39.08%
Taxation                            (2,297)     (4,111)   -44.13%
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Profit after taxation                 5,464       8,628   -36.67%
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