Food products: NESTLE PAKISTAN LIMITED – Analysis of Financial Statements – Financial Year 2004 – Financial Year 2010

Nestle Pakistan Limited (NPL), formerly known as Nestle Milkpak Limited, is a subsidiary of Nestle SA. – a company of Swiss origin headquartered in Vevey, Switzerland. It is listed on the Karachi and Lahore stock exchanges. For 9 years in a row, the company has won a place among the top 25 companies of the KSE.

Its principal activities include manufacturing, processing and selling food products and ancillary equipment. The food products include dairy, confectionery, infant nutrition and culinary products, coffee, beverage and drinking water. The major brands include MILKPAK UHT, EVERYDAY, LACTOGEN, NESLAC, CERELAC, NESTLE PURE LIFE, NESCAFE, MAGGI and KITKAT.

Nestle has been serving Pakistani consumers since 1988, when its parent company, the Switzerland-based Nestle SA, first acquired a share in Milkpak Ltd. Nestle Pakistan is headquartered in Lahore and operates four production facilities. Two of its factories in Sheikhupura and Kabirwala are multi-product factories.

To preserve the quality of raw milk in hot weather conditions in Punjab the company has made substantial investment in setting up an extensive cold chain by installing over 2200 chilling units all over the milk shed area.

Nestle Pakistan now operates the biggest milk collection system, the basic unit of which is the village milk collection centre (VMC) where farmers from over 3,000 villages deliver milk. In line with its parent company’s global philosophy, it is committed to excellence in product safety, quality, and value. From spreading awareness about nutrition and wellness to digging wells in the Thar desert and succoring earthquake victims, it is committed to serving our country and its people.

Its vast sales and distribution network throughout the country ensures the availability of its products nationwide.

Nestle also exports its products to Afghanistan, Turkmenistan and other Central Asian Republics. In FY06, its exports to Afghanistan increased by 35% to Rs 1.3 billion due to the progressive business climate and strong development of the retail sector.

Industry overview and performance in FY09

Nestle Pakistan is a member of the growing Fast Moving Consumer Goods Market in Pakistan and it has several competitors in all its product markets. Nestle Pakistan faces the biggest competition from Unilever Pakistan, which is involved in many of the same products as Nestle Pakistan and in many more.

The industry overall performed fairly well during FY10. Profit margin for the industry was 7.67%, while Gross Profit Margin was even higher, standing almost 30%.

The Quick Ratio showed an improvement as compared to FY09 standing at 0.34 and Current Ratio at 0.83, which is almost the same as in FY09.

Asset Management ratios showed decrease in the Operating Cycle of the industry, which declined from 53 days in FY09 to 45 days in FY10. This indicates increase of liquidity in the market with the companies being able to convert the sales into cash in a comparatively lesser time. This is also supported by the decrease in Inventory Turnover from 49 days in FY09 to 42 days in FY10.

Debt Management is again quite similar because all the multinationals operating in Pakistan and controlling the major chunks of the market are fairly established and have the same capital structure with very few differences. The major change was in Times interest earned from 11times in FY09 to 23times in FY10. This shows an increase in the industry’s profits.

Market ratios indicate that investor confidence in the companies is high with continuously rising share prices. Furthermore, companies on average in the industry have shown consistent growth in EPS, Dividend Payout and Book Value.

Financial performance (FY04-10)

Net sales for Nestle Pakistan continued the rising trend since 2004 by increasing 25% (YoY) in FY10 from Rs 41.155 billion to Rs 51.5 billion. Increase in sales was contributed by milk and nutrition 25% (YoY) from Rs 35.559 billion to Rs 44.44 billion and beverages by 27% (YoY) from Rs 5.225 billion to Rs 6.641 billion. The sales of other operations also witnessed an increase of 9.26% as the sales went up from Rs 0.37 billion to Rs 0.405 billion in FY10 unlike in FY09 when it declined significantly by falling 10.48% (YoY) in FY09 from Rs 0.414 billion to Rs 0.370 billion.

Export sales also went up by 24.5% to Rs 4.0 billion (2009: 3.3 billion).

Increase in sales can be partly attributed to diversification of the portfolio, with introduction of several new brands such as Nesquik Milk Enhancer, Nestle Creations, Cerelac Fruit Cereals, Maggi Umda Maza, MAGGI Noodles (Bar-B-Q, Masala & Karara), NESTLÉ Peach Nectar, LACTOGEN low lactose, NIDO 1+, NIDO 3+ and NESTLÉ Pure Life-5 liters. and improvement of NAN and partly to pricing movements with respect to food inflation in the country

Another reason for the increase in sales was that Nestle tried to penetrate the rural market through their PPPs (popularly positioned products). They started Motor bike operations in places where it was difficult for vans to reach.

CGS witnessed an increase of 28.55% (YoY) in FY09 from Rs 29.256 billion to Rs 37.608 billion, which was largely caused by supply constraints and inflation in key commodities in the country. The main contributors to this rise were costs of raw materials mostly fresh milk and sugar, salaries and repairs costs, royalty and technical assistance fee also increased by more than 26%. The fuel and power also increased by more than 50% due to the ever-increasing costs of fuel and electricity. The expense on information technology also increased by more than 40%.

Profitability

Gross Profit for Nestle Pakistan rose 16.64% (YoY) in FY10 from Rs 11.898 billion to Rs 13.9 billion owing to the significant increase of almost 25% in net sales. Net operating expenses came from Rs 7.270 billion to Rs 7.89 billion increasing the EBIT to Rs 6.2 billion from Rs 4.628 billion, an increase of 34.16% YoY. This significant rise can be contributed to tightly-controlled operations of the company and a rise in other operating income generated by Nestle Pakistan.

Nestle Pakistan’s PAT in FY10 was Rs 4.11 billion as compared to FY09 when it was Rs 3.005 billion, an increase of almost 37% (YoY) as a result of the higher EBIT.

An assessment of Nestle Pakistan’s profitability, as demonstrated by the diagram below, shows an upward trend in all profitability ratios:

The profit margin rose from 7.30% in FY09 to almost 8% in FY10. This was higher than the industry average of 7.67%. The gross profit margin decreased from 28.91% in FY09 to 27% in FY10 but again this was less than the industry’s GPM, which stood at 30%. An overview of the Return on Assets (ROA) and Return on Equity (ROE) forged a similar upward trend thereby sustaining the profitability of Nestle Pakistan. ROA increased to 17% in FY10 from 16.17% in FY09 attributed to a 37% increase in PAT accompanied by 23.5% rise in total assets between FY09 and FY10. The industry average ROA stood at 21%. ROE statistics indicate an increase from 67.88% in FY09 to 73.68 in FY10 as the total equity increased by 26.1% in FY10. ROE for the industry was 82.65%. Overall, Nestle Pakistan’s profitability ratios, gross profit and net profit margin remained almost equal to the industry average whereas the ROA and ROE remained below the industry average showing high competition from the competitors.

Liquidity

Quick Ratio for Nestle Pakistan from 0.26 in FY09 to 0.28 in FY10. This is because although current assets of the company showed an increase in FY10 (22.02% YoY), the increase was mostly attributed to stores and spares and stock in trade, which reduced liquidity of the current assets. The trade debts of the company decreased significantly by 48%. Furthermore, current liabilities rose from Rs 8.083 billion in FY09 to Rs 9.806 billion (YoY increase of 21.32%). The current ratio remained the same 0.85 in FY10 as in FY09 as the increase in current assets was more than offset by the increase in current liabilities.

Asset management

The inventory turnover decreased from 42 days in FY09 to 39 days in FY10, which means it took Nestle Pakistan an average of 39 days to convert its inventories into cash ie 2 less days than in the previous year. However, this was below the industry average of 43 days. Day Sales Outstanding more than halved from 2.11 days in FY09 to 0.88 days in FY10, indicating a tighter collection policy from the debtors. This was also lower than the industry average of 2.44 days.

Moving further, the Total Asset Turnover for Nestle Pakistan rose from 2.21 in FY09 to 2.24 in FY10 indicating slightly higher profitability of the asset base employed by Nestle Pakistan. Total Asset Turnover for the industry was 2.62, which is slightly better. Assets of the company Sales to Equity Ratio decreased from 9.30 in FY09 to 9.22 in FY10.

Debt management

The debt to asset ratio stood at 0.76 in FY10 showing little change since FY07. The debt to equity ratio declined from 3.20 in FY09 to 3.11 in FY10 implying a slight shift from debt financing for assets of the company supported by increased interest rates in the economy and instability of the equity market. On the other hand, the long-term debt to equity ratio also fell slightly from 1.37 in FY’09 to 1.36 in FY10, indicating company’s preference for equity over long-term borrowing. The company preferred short-term running finance as it witnessed a significant increase of 267%. The Times Interest Earned (TIE) ratio increased from 10.47 in FY09 to 12.10 owing to the high EBIT in FY10.

Market ratios

Market ratios for Nestle Pakistan indicate a 37% increase in Earnings per Share from Rs 66.27 in FY09 to Rs 90.69. The industry’s EPS was much higher, standing at an average of Rs 168.35.

Dividend per Share also increased by 50% rising from Rs 20 in FY09 to Rs 30 in FY10. The reason for this is the high increase in profits of the company. The Book Value per Share for Nestle Pakistan registered an increase from its value of Rs 97.62 in FY09 to Rs 123.09 in FY10. This rise can largely be accounted for by the 23.5% increase in total assets without any change in the number of issued ordinary shares, which stood at 45,349,600 shares at the end of 2010.

The price of Nestle Pakistan’s shares on 31st December 2010 rose from Rs 1246 to Rs 2375, which is a significant increase of 90.61%.

Future outlook

Nestle Pakistan has maintained a firm position in the Pakistani foods market with the leading position in several categories and is expected to continue its strong operations on the basis of its current and past performance.

Nestle Pakistan’s future operations seem promising with several projects and investments already in line. The company plans to approximately Rs 8 billion in 2011 for milk collection field development, upgrading of existing production facilities and increase in production capacity. The company also plans to continue with its Corporate Social Responsibility efforts in the coming year.

Nestle Pakistan has also decided to contribute significantly to the Port Grand Project being initiated in Karachi with a Coffee Shop and Beverages Bar offering at the complex.

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NESTLE PAKISTAN LIMITED (NPL) – FINANCIALS
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Balance Sheet (PKR ‘000) 2003 2004 2005 2006 2007 2008 2009 2010
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Property, plant and equipment 2,149,781 2,351,281 3,298,880 6,941,332 9,074,428 9,464,373 10,700,874 11,370,611
Capital work-in-progress 294,480 824,595 1,788,475 1,107,052 971,183 1,382,401 914,956 3,076,472
Long term loans and advances 11,013 20,287 47,691 66,008 80,670 98,544 113,490 125,674
Long term security deposits 4,314 5,036 5,338 6,088 6,088 5,036 5,026 9,817
Total non-current assets 61,238 71,234 230,687 207,116 179,140 153,324 125,622 152,226
Stores and spares 205,443 261,852 249,921 329,346 436,573 804,647 868,984 1,050,804
Stock in trade 863,136 1,693,783 1,492,983 1,907,300 2,393,306 2,488,573 3,895,038 4,602,019
Trade debts 28,906 30,806 47,298 238,291 344,053 456,813 241,715 126,499
Advances, deposits, 146,491 281,297 916,331 2,109,314 2,022,387 1,488,103 1,503,009 2,048,936
prepayments, other receivables
Cash and bank balances 62,675 93,338 858,995 34,663 406,225 419,327 315,770 505,516
Total current assets 1,334,744 2,364,112 3,569,152 4,627,685 5,623,823 5,684,078 6,845,528 8,352,923
Total Assets 3,840,243 5,611,222 8,887,214 12,927,902 15,848,574 16,684,176 18,586,980 22,952,232
Total non-current liabilities 1,139,382 1,748,141 2,610,132 5,172,334 5,758,347 6,988,758 6,076,895 7,563,787
Total current liabilities 1,496,740 2,302,851 4,413,700 5,224,488 5,978,522 5,306,571 8,083,130 9,806,572
Total liabilities 2,636,122 4,050,992 7,023,832 10,396,822 11,736,869 12,295,329 14,160,025 17,370,359
Total Equity 1,204,121 1,560,230 1,863,382 2,531,080 4,111,705 4,388,847 4,426,955 5,581,873
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Income Statement (PKR ‘000) 2003 2004 2005 2006 2007 2008 2009 2010
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Sales – net 10,461,254 12,801,355 17,142,363 22,030,958 28,235,393 34,183,847 41,155,822 51,487,302
Cost of goods sold (7,446,497) (9,242,534) (12,354,618) (15,778,330) (20,291,270) (25,231,532) (29,256,902) (37,608,733)
Gross profit 3,014,757 3,558,821 4,787,745 6,252,628 7,944,123 8,952,315 11,898,920 13,878,569
Profit from operations / EBIT 1,211,942 1,474,348 1,817,184 2,453,229 3,134,190 2,784,809 4,628,307 6,209,261
Finance cost (61,480) (59,024) (180,108) (447,774) (584,434) (557,325) (442,050) (513,081)
Profit before taxation 1,150,462 1,415,324 1,637,076 2,005,455 2,549,756 2,227,484 4,186,257 5,696,180
Taxation (391,625) (425,392) (484,145) (642,165) (744,544) (674,590) (1,181,124) (1,583,331)
Profit after taxation 758,837 989,932 1,152,931 1,363,290 1,805,212 1,552,894 3,005,133 4,112,849
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PROFITABILITY RATIOS 2003 2004 2005 2006 2007 2008 2009 2010
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Profit Margin 7.25% 7.73% 6.73% 6.19% 6.39% 4.54% 7.30% 7.99%
Gross profit margin 28.82% 27.80% 27.93% 28.38% 28.14% 26.19% 28.91% 26.96%
Return on Assets 19.76% 17.64% 12.97% 10.55% 11.39% 9.31% 16.17% 17.92%
Return on Equity 63.02% 63.45% 61.87% 53.86% 43.90% 35.38% 67.88% 73.68%
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LIQUIDITY RATIOS 2003 2004 2005 2006 2007 2008 2009 2010
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Quick Ratio 0.18 0.18 0.41 0.46 0.47 0.45 0.26 0.28
Current Ratio 0.89 1.03 0.81 0.89 0.94 1.07 0.85 0.85
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ASSET MANAGEMENT RATIOS 2003 2004 2005 2006 2007 2008 2009 2010
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Inventory Turnover(Days) 36.77 55.00 36.60 36.55 36.08 34.68 41.67 36.52
Day Sales Outstanding (Days) 0.99 0.87 0.99 3.89 4.39 4.81 2.11 0.88
Operating cycle (Days) 37.77 55.86 37.60 40.44 40.47 39.49 43.79 40.41
Total Asset Turnover 2.72 2.28 1.93 1.70 1.78 2.05 2.21 2.24
Sales/Equity 8.69 8.20 9.20 8.70 6.87 7.79 9.30 9.22
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DEBT MANAGEMENT RATIOS 2003 2004 2005 2006 2007 2008 2009 2010
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Debt to Asset 0.69 0.72 0.79 0.80 0.74 0.74 0.76 0.76
Debt to Equity Ratio 2.19 2.60 3.77 4.11 2.85 2.80 3.20 3.11
Long Term Debt to Equity 0.95 1.12 1.40 2.04 1.40 1.59 1.37 1.36
Times Interest Earned 19.71 24.98 10.09 5.48 5.36 5.00 10.47 12.10
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MARKET RATIOS 2003 2004 2005 2006 2007 2008 2009 2010
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Earning per share 16.76 21.87 25.42 30.06 39.81 34.24 66.27 90.96
Price/Earnings Ratio 22.43 23.78 30.29 34.76 45.22 38.96 18.80 26.19
Dividend per share 4.00 5.00 15.00 5.00 10.00 25.00 20.00 30.00
Book value per share 26.60 34.46 41.09 55.81 90.67 96.78 97.62 123.09
No of Shares issued (in thousands) 45273.00 45273.00 45349.60 45349.60 45349.60 45349.60 45349.60 45350.00
Market prices(Year End) 376.00 520.00 770.00 1045.00 1800.00 1334.00 1246.00 2375.00
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