Despite having incurred a sizeable increase in distribution and selling cost on common size grounds and having spent over Rs 14 billion for capacity expansions in 2012, Nestle’s top line growth failed to rise accordingly. If it weren’t for a significant improvement in gross profit margins, Nestlé’s bottom line could have been lot thinner.
The firm’s gross margins improved significantly over the period on account of sustained sales of high-margin products including ambient dairy, beverages and culinary products. However, the margins largely increased as a result of ongoing initiatives to cut down expenses and improve efficiencies as well as lower milk collection costs.
Over the course of the last few years, Nestle has been consistently investing heavily in projects targeting production optimization. During 2012, the firm’s capital expenditure amounted to Rs14.4 billion, most of which was spent on capacity expansions and strengthening infrastructure in the firm’s Sheikhupura and Kabirwala factories.
However, one addition which is very likely to impact product line efficiencies for the firm’s ambient and chilled dairy in the coming quarters, is going to be the one made to the firm’s milk powder drying facility located in Sheikhupura.
With installed capacity having been increased by 30,000 tons, the project that came at a cost of $104 million helped Nestle set up additional filling lines and improve its power generation and waste water treatment facilities in a bid to optimize efficiencies and bring down costs for the firm’s highest grossing dairy products.
Citing Pakistan as a market that promised a fruitful potential, Magdi Batato, CEO Nestle Pakistan, in a conversation with BR Research, had earlier indicated that one unrealised avenue of future growth remained the infant nutrition sector that offered untapped potential to the firm.
In a bid to capture a larger slice of this very attractive pie, Nestle has already acquired Wyeth Pakistan’s infant nutrition division in the end of 2012. This acquisition, which was a part of Nestlé’s global acquisition of Pfizer’s infant nutrition business, has further strengthened the firm’s product portfolio in the Pakistani market.
Already possessing 99 percent share of the branded weaning food category, Nestlé’s bottom line is very likely going to benefit from Wyeth’s specialty infant milk formulas in the coming quarters.
Likewise, there also remains a tremendous room for growth in the firm’s higher margin products including cereals and juices which are increasingly becoming attractive to the Pakistani consumers.
With investments of approximately Rs6 billion planned in 2013 in a bid to meet the hiking consumer demand, things for Nestle therefore continue to remain rightfully rosy as it heads to the half year mark.
The one main thing of course that Nestlé’s managers have to re-focus on is improving sales. Clearly, 1.15 percent year-on-year growth in topline despite higher focus on distribution and selling expenses is not impressive performance in a sector that offers great potential.
===============================================================
NESTLE PAKISTAN
===============================================================
Rs (mn) 1QCY12 1QCY13 % Chg
===============================================================
Sales 20,194 20,427 1.15%
Cost of sales 14,690 13,968 -4.91%
Gross profit 5,503 6,459 17.37%
Gross profit margin 27.25% 31.62% -
Distribution & other selling expense 2,064 2,620 26.94%
Distribution & other selling expense
(as a percentage of sales) 10% 13%
Administrative expenses 465 491 5.59%
Finance cost 430 413 -3.95%
NPAT 1,665 1,892 13.63%
Earning per share (Rs) 36.71 41.72 -
---------------------------------------------------------------
Source: KSE Notice
===============================================================