Nestle: rising high on consumerism

When it comes to fast moving consumables, the Countrys middle class is buying like never before. Consequently, Nestle is one of the many food producers enjoying the ride of a lifetime. And in a sector where up is the only place to go, Nestle continues to reign supreme, boasting a remarkable 25 percent accretion in its bottom line at the end of CY12.

With the dairy segment continuing to act as the Companys backbone, the year saw Nestle benefitting equally from a volumetric uptick as well as the fact that inflationary costs have been easy to pass onto consumers.

Gross margins rose by 1.4 percentage points over the year and the strength of the top line also boosted the Companys earnings, despite rising competition in the segment.

The year also saw the firm upping its ante, introducing a number of products in its ambient and chilled dairy and juices segment. Additionally, market penetration for Nestle Koko Krunch and Fitnesse breakfast cereal improved over the year, capturing precious revenue from a segment that has been explored only tentatively by other food producers in the country.

Companys selling expenses climb up by 28 percent year-on-year as a result of continued investments in advertisement campaigns and brand activation activities for the various new products launched during the year.

Despite the fact that Pakistan is in the middle of a laggard phase of industrial growth, the food producers have largely been able to retain a strong grip on their margins during CY12, with the sectors combined profits having risen by a cumulative 44 percent by the end of the nine month-mark in 2012.

Going forward, any macroeconomic improvement abetted by the monetary easing and declining inflation is only going to improve the sectors profitability on the whole.

Consequently, Nestles growth momentum is also set to remain on track in the coming quarters, what with the rising middle income populace increasingly valuing convenience over anything else and a room in the market for innovative products fuelled by the driving demand by a consumer that has a wider disposable income.

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Nestle Pakistan Ltd.

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Rs (mn)                             CY11       CY12     % chg

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Sales                             64,824     79,088     22.0%

Cost of sales                     48,099     57,564     19.7%

Gross profit                      16,725     21,523     28.7%

Gross profit margin               25.80%     27.21%         –

Distribution and other

selling expense                   6,862      8,787     28.1%

Administrative expenses            1,405      1,770     26.0%

Finance cost                       1,050      1,828     74.1%

NPAT                               4,668      5,864     25.6%

Earning per share (Rs)            102.94     129.32     25.6%

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Engro Corporation’s analyst briefing takeaways

Engro Corporation held its analyst briefing on Friday to discuss its 2011 financial result. The company posted earnings of Rs8.1bn (EPS: Rs20.50) compared to a profit after tax of Rs6.8bn (EPS: Rs17.27) in 2010, up 19%YoY. Engro Fertilizers, Engro Foods, Engro Powergen and Engro Vopak were the major growth drivers as these subsidiaries recorded profits of Rs4.6bn, Rs0.9bn, Rs1.7bn and Rs3.5bn, respectively. However, losses posted by Engro Polymer and Avanceon resulted in a profitability drag during the period. One of the key takeaways from the analyst briefing was the urea price hike of Rs549/bag that was attributable to offset production losses due to 198 days of gas related shutdowns. Although the management is continuously looking for alternate gas supply solution to their Enven plant, there has not been any concrete development on the issue. As the likelihood of the resumption of gas supply on continuous basis to SNGPL based plants seems dim, the urea prices may not come down and exorbitant margins enjoyed by other urea plants like FFC and FFBL will continue. Consequently, we have an ‘Overweight’ stance on the sector.

After tax profits (Rsmn)
2011 2010
Engro Fertilizers 4,588 3,730
Engro Foods 891 176
Engro Polymer -706 -770
Engro Powergen 1,718 1,100
Engro Eimp 858 1,734
Engro Vopak 3,484 1,109
Avanceon -169 -196
EngroCorp.(Cons.) 8,060 6,790
EPS(Rs) 20.5 17.27
Source: Company presentation

UNILEVER PAKISTAN LIMITED – Analysis of Financial Statements Financial Year 2004 – 1Q Financial Year 2011

Unilever Pakistan Limited formerly known as Lever Brothers Pakistan Limited (LBPL) is a subsidiary of Unilever PLC, UK. ULEVER was incorporated in Pakistan in 1948 as Lever Brothers Pakistan Limited and merged with Lipton in 1989 and Brooke Bond in 1997.

It became the largest ice-cream manufacturers in Pakistan through an amalgamation with Polka in May 1999. Following these acquisitions, including US-based Bestfoods, Unilever’s foods business is the world’s third largest after Nestle and Kraft. It is a global leader in culinary foods, ice cream, margarine and tea-based beverages. It is the largest FMCG in Pakistan and is listed on all stock exchanges of the country.

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COMPANY SNAPSHOT
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Name of company UNILEVER PAKISTAN LIMITED
Nature of Business Fast Moving Consumer Goods
Ticker ULEVER
Net Sales CY ’09 Rs 38,187,582,000
Net Sales CY’10 Rs 44,671,507,00
Share price (avg.) – year end Rs.4360
Market Capitalization – year end Rs 57964 million
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ULEVER has adapted Unilever global brands such as Lifebuoy, Lux, Surf and Walls to local consumer needs at affordable prices. Since 1998, ULEVER has been entrusted with the responsibility of developing the Afghanistan business through a dedicated sales and distribution network. A wide-range of products are offered for export. In June 07, Unilever Overseas Holding Limited, the ultimate parent company, purchased all the shares held by the Government of Punjab. This has increased Unilever’s shareholding in the Company from 67.04% to 70.4%.

FINANCIAL PERFORMANCE (1Q11)

During the first quarter that ended April 2011, the company witnessed a 54% growth in the profit after tax as compared to 1Q10. The company registered more than 18% increase in sales. The Home and Personal Care segment registered an increase of 23% in the sales. The beverages segment’s sales increased by 11%, ice cream by 19% and spread’s sales increased by 37% during 1Q11 as compared to the corresponding period last year.

The beverages segment had to face the same problem of smuggling and counterfeiting. Despite this, it continued to grow and kept increasing the company’s earnings.

Ice cream segment also continued to grow with increased innovation and introduction of new products such as ‘Mango Ice Cream’ and ‘2 in 1 Chocolate Caramel’ which further increased the profitability of the segment and hence the company.

The net profit margin increased from 8.7% in 1Q10 to 11% in 1Q11 due to the increased sales of the company. The decrease of more than 55% in the finance cost was also one of the reasons for the increased profitability of the company. The PAT increased from Rs 896 million in 1Q10 to Rs 1350 million in 1Q11. The gross profit margin also increased by 7.7% in the given period. Although there was an increase of more than 14% in the COGS of the company, the increase in sales of more than 18% offset the increase in COGS resulting in an increase of 27.85% in the gross profit of the company during 1Q11.

The return on assets and return on equity also increased significantly due to the increased profitability of the company. The ROA increased from 4.5% in 1Q10 to 5.5% in 1Q11, an increase of 27%; whereas ROE registered an increase of 152% rising from 15% in 1Q10 to 38% in 1Q11.

LIQUIDITY

The liquidity of the company saw a decline as indicated by a decline in both the current and quick ratio of the company.

The quick ratio declined from 0.35 in 1Q10 to 0.34 in 1Q11, a decrease of 3.8%; whereas the current ratio declined from 0.94 to 0.79 in 1Q11, a decrease of more than 16%.

The current assets of the company increased by 36% whereas the current liabilities grew by almost 62%. The decrease in the quick ratio can be attributed to 24% increase in the inventories of the company as compared to 1Q10. The major increase in the current liabilities is because of the significant increase in dividend payable and trade and other payable. The decrease in the liquidity of the company is further supported by the increase in inventory turnover days, day sales outstanding and the operating cycle of the company. These are discussed in detail in the coming section.

ASSET MANAGEMENT

Inventory Turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. The ITO for Unilever Pakistan increased from 164 days in 1Q10 to 171 days in 1Q11. The increased ratio indicates that the company was unable to sell off its inventory in a short period of time resulting in increased amount of inventories and hence the reduced liquidity. This is further supported by the increase in days sales outstanding (DSO) which shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid risks of bad debts. The DSO increased from 19 days in 1Q10 to 21 days in 1Q11 which is also indicated by the rising trade debts of the company (29% increase as compared to 1Q10).

The operating cycle of the company also followed the trend of ITO and DSO and increased from 183 days to 192 days in 1Q11 indicating that the company had to face problems in converting its sales into cash.

The Total Asset Turnover also shrank, declining from 0.8 in 1Q10 to 0.75 in 1Q11. This decline can be attributed to the high growth of assets (26.5%) of the company as compared to the sales (18.68%). The Sales to Equity ratio, however, increased by 94% from 2.65 in 1Q10 to 5.13 in 1Q11 as the total equity declined by 39% due to the decrease in reserves of the company.

DEBT MANAGEMENT

As far as the debt management of the company is concerned, both D/A and D/E rose in the first quarter of 2011 as compared to the corresponding period of last year. The D/A ratio increased from 0.7 to 0.85, an increase of 22% indicating that the percentage of debt as compared to the assets increased in the given period. The total debts of the company rose by 55% whereas the total assets of the company grew by 26.5%. The D/E ratio also increased by 153% rising from 2.3 in 1Q10 to 5.8 in 1Q11. This indicates that the company’s debt is rising faster than the equity, which is alarming for the company.

The long-term debt to equity ratio also increased by 58% rising from 0.26 to 0.41 in 1Q11 indicating that the company preferred long-term debt for financing rather than equity.

The Times Interest Earned ratio increased by a great 228% signifying the rise in company’s profitability and a significant decline in the finance cost of the company. The TIE ratio improved from 21 times in 1Q10 to 68 times in 1Q11. The EBIT increased by 45.45% whereas the finance cost decreased by 55.6% resulting in an increase in the given ratio.

MARKET VALUE

The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company’s price per share and its earnings per share (EPS). The P/E ratio of the company decreased by 7.7%. The EPS improved significantly by 54% as it rose from Rs 43.7 in 1Q10 to Rs 67.6 in 1Q11 showing the increase in the profits of the company.

The end-of-quarter market prices of the company’s share also increased from Rs 3468.52 at the end of 1Q10 to Rs 4940.67 at the end of 1Q11 showing the continuous improvement in the company’s performance and the growing confidence of the investors in the company.

SEGMENTS AT A GLANCE

Unilever comprises of 4 segments:

— Home and Personal Care – represents laundry and a wide range of cleaning, skin care, hair care and oral care products

— Beverages – represents tea

— Ice Cream – represents ice cream

— Other – represents margarine

The graph above shows the sector wise percentage of the gross sales. Home care and personal care had the most sales with 55%, beverages coming next with 30%. Ice cream had a share of 12% in the total shares and spreads with 3%.

HOME AND PERSONAL CARE

The home and personal care business sales grew by more than 15% on account of robust performance in the key categories. In three years, the cumulative growth if this business stands at 110%. Due to the volume lost because of the floods and increase in material costs, the gross margin declined slightly. However, the decline was partly offset by effective advertising and lower operating costs and hence the company registered a gross margin of 16.1% in the year 2010.

The graph on the right shows the net sales and the profit through the years for home and personal care business.

BEVERAGES

Sales growth was 13.5%, which was mainly price-led. Free availability of smuggled tea through Afghan trade remained a point of concern for all local branded players. Gross margins were under pressure during the year as tea prices hit record high due to increase in global demand, stagnant supply and currency devaluation.

ICE CREAM AND SPREADS

Despite severe power shortages in the summer season, Wall’s delivered a growth of 33.3% in 2010 all from volume. This growth was achieved by bringing in new flavours such as “Badami” and “Cornetto double chocolate” which attracted the consumers most. The cumulative growth over the last three years has been 80%. The spreads also witnessed a growth of 20.2% mainly because of volume that it sold. The graph below shows the sales and profit margin through the years of the ice cream segment of Unilever Pakistan.

FINANCIAL PERFORMANCE (FY04-10)

Pakistan faced multiple challenges during 2010. Low GDP growth, double-digit inflation, deteriorating security environment, continuing devaluation of the Rupee and debilitating power cuts along with gas load shedding impacted business in general. The ever-worsening security conditions of the country also had a great impact on the businesses. Furthermore, the devastating floods that started in mid-July wreaked havoc in the country and affected all kinds of businesses. In addition to the generally difficult operating environment that impacted all businesses in 2010, rampant smuggling of tea affected the growth and profitability of the business. Despite this, the company delivered a 7.10% high profit after tax, which is low as compared to the growth of 54% in FY’09, on the back of 17% growth in sales (FY09: 23.4%).

Despite high COGS, overall gross profit improved by around 9.31%. The gross margin level dropped a little from 35% in FY09 to 32.6% in FY10. Return on Asset showed a decrease from 40% in FY09 to 35% in FY10 whereas return on equity decreased from 93% to 92% in FY10. Overall PAT increased from Rs 3056 million in FY09 to Rs 3273 million n FY10, an increase of 7.1%.

The current ratio was on a decline since 2003 till 2008 but it picked up in 2009. However, it remained the same in FY10 at 0.83 with no improvement. Short-term borrowings decreased from Rs 3233 million in FY08 to Rs 1038 million in FY09. Quick ratio, a better measure of liquidity followed a trend similar to current ratio, declining till FY08 and an increase in FY09. The ratio also witnessed an increase in FY10 as it went up to 0.36 from 0.28 in FY09. Till FY08, there was a positive growth in current assets but the growth in current liabilities was far more. In FY09, the current assets increased but the decline in current liabilities was large enough to improve the overall liquidity ratios. However, in FY10, both the current assets and the current liabilities went up. The increase however was almost the same with current assets up by 25.63% and current liabilities by 26.36%. This is the reason why the current ratio was same for both the years.

Inventory Turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. ITO had been on a slight rise from FY06 to FY08. The slight increase is indicative of ULEVER’s declining operational efficiency with growth in net sales lagging behind the growth in inventory kept by the company. Especially in FY’08 the growth in inventories has been exponential, with a rise of 54.5%. However, ITO decreased from 58 days in FY09 to 46 days in FY’10. Stock in trade increased from Rs 3649 million in FY09 to Rs 3811 million. The decrease in ITO shows that ULEVER is able to efficiently turn its inventory into sales.

Day sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid risks of bad debts. DSO has slightly been improving over the years. It showed an increase in FY09 from 3 to 4 days. It remained the same, 4 days in FY10 too. DSO is still very negligible compared to ITO. The operating cycle of ULEVER hence followed the same trend as that of ITO in the respective years.

TATO of ULEVER has remained flat at 3 over the period under review, reflecting that the company is anticipating any increase in its sales and responding to it in a timely fashion by enhancing its assets base accordingly. It has declined slightly in FY07 and FY08. The sales/equity, on the other hand, shows a rising trend after 2004 on account of declining equity base in the subsequent years. However in FY09, equity base increased due to the increase in reserves resulting in a decline in sales/equity ratio. In FY10, however, it increased to 12.55 due to 17% increase in sales as compared to 7% increase in equity.

As far as debt management is concerned, both D/A and D/E ratios after 2004 (the decline in 2004 is because the ULEVER retired significant amounts of debt in that year) show ULEVER’s increased reliance on debt financing rather than equity financing. The trend lines in particular show that D/A (0.63 to 0.80) ratio for the last four years has remained almost stable over the years whereas D/E ratio has increased significantly (1.8 to 4.13) owing to increasing long term debts (as further evident by the long-term debt to equity ratio) to finance the expansion. However, the situation reversed in FY09. Long-term debt to equity ratio was maintained at a level of 0.31 whereas debt to equity declined from 4.13 to 2.47 in FY09 resulting from a decline in current liabilities (mainly short-term borrowings). In FY10, both the ratios increased very slightly but more or less remained the same.

The TIE ratio has decreased from a level of 107 times in FY04 to only 20 times in FY09. Even though this ability increased in 2006 (owing to comparatively lower finance costs), a massive surge in finance costs (70.64%) vis-à-vis a 3% increase in EBIT, was responsible for a plunge in FY07 TIE ratio. Finance costs also rose sharply in FY08, mainly due to markup on short-term borrowings and exchange loss, which caused further decline in TIE. This ratio slightly improved in FY09 due to lower finance costs. There was a decrease in bank charges, exchange losses and the interest on short-term loans. In FY10, the ratio increased to 34 times from 20 times in FY09 because of 55% decrease in finance cost of the company. The short-term borrowings also witnessed a nosedive as it decreased by 72%. The finance cost also decreased by almost 56%. The main reasons for the decrease were 42% decrease in mark-up of short-term borrowings as the amount of borrowing and the rate (KIBOR) were also less. There was also a86% decline in the exchange loss, which caused the finance cost of the company to decline.

The (P/E) ratio shows that how much investors are willing to pay per rupee of the reported profits, depends on the company’s price per share and its earnings per share (EPS). ULEVER’s EPS has been erratic (fluctuating between 120 and 130) till FY07, driven mainly by any changes in company’s profit after tax (as its number of shares have been constant so far). In FY08, the growth in profit after tax caused EPS to cross the 130 mark and went till Rs 149. This figure further increased to Rs 230 in FY09, an increase of 54%. In FY10, the EPS increased to Rs246, an increase of 7%. This increase was due to the 7% increase in the net profit of the company. The P/E ratio also increased to 18 in FY10 from 10 in FY09.

The year-end market prices of ULEVER have been increasing till FY07. Consequently, the P/E ratio also followed a rising trend driven by the increases in market price of shares, reflecting the investor’s confident in ULEVER. In FY08 the market prices went down due to the ongoing stock crisis in the country, coupled with the global recession. The market price improved in FY09 to Rs 2300 (FY08: Rs 1808). The market price further improved to Rs 4360, an improvement of 89.6%. The huge improvement in the market price shows that UNILEVER was performing well and investors had confidence in the shares.

The book value per share of the company increased slightly from Rs 248 in FY09 to Rs 269 in FY10. There was no change in the number of shares or the share capital but reserves increased from Rs 2622 million in FY09 to Rs, 2891 million mainly because of the increase in unappropriated profits. Dividend per share also increased from Rs 229 in FY09 to Rs 246 in FY10. Total profit distributed by way of dividend amounts to 99.9% (FY09: 99.6%).

FUTURE OUTLOOK

After some respite, there is a growing fear that with the surge in price of oil, sugar, tea and other food items, inflation will increase. Continuing rupee devaluation, down trading of consumers due to lower disposable income and increase in acts of terrorism will put pressure on business performance. The destruction caused by the floods is also going to show its impact in the coming year.

Also, smuggling of black tea through Afghan transit trade is an on-going threat to the tea category. Counterfeiting of the popular brands continues to impact results generally. With no reprieve in the ongoing power crisis, the ice cream and spreads businesses are likely to come under pressure.

Unilever, however, performed quite well during the last year. For example, even due to load shedding, the ice cream sector’s sales increased. Seeing it performance, it is expected to perform well in the coming years as well.

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2004 2005 2006 2007 2008 2009 2010
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Liquidity
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Current Ratio times 1 1 0.9 0.7 0.7 0.8 0.83
Quick Ratio times 0.5 0.5 0.4 0.2 0.2 0.3 0.36
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Asset Management
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Inventory Turnover days 64 59 54 63 64 58 34.15
Debtors Turnover days 6 2 2 3 3 4 4.21
Operating Cycle days 70 61 56 66 67 62 38.37
Total Asset Turnover times 3 3 3 3 3 3 3.31
Sales/Equity times 8.66 9.57 11.47 11.78 13.97 11.60 12.55
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Profitability
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Gross Profit Margin % 30 38 37 39 35 35 32.63
Net Profit Margin % 9 9 8 7 6 8 7.33
Return on Assets % 37 43 39 31 26 27 35.40
Return on Equity % 82 87 90 85 90 93 91.94
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Debt Management
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Debt/Asset times 0.64 0.68 0.71 0.75 0.80 0.71 0.74
Debt/Equity times 1.79 2.14 2.51 3.08 4.13 2.47 2.79
Long-term Debt/Equity times 0.04 0.20 0.19 0.25 0.31 0.31 0.27
Times Interest Earned times 107 141 223 84 18 20 34.00
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Market Value
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Earnings per share Rs 130 121 124 127 149 230 246.00
Price/Earnings ratio times 11 15 16 18 12 10 18.00
Dividend per share Rs 135 120 122 123 123 229 246.00
Book Value per share Rs 158 139 138 149 167 248 269.00
Number of shares issued No. in ‘000 13,294 13,294 13,294 13,294 13,294 13,294 13294
Market Price – year end Rs 1,475 1,775 2,000 2,280 1,808 2,300 4360.00
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Analysis of Financial Statements – UNILEVER PAKISTAN LIMITED – Financial Year 2004- Financial Year 2010

Unilever Pakistan Limited, formerly known as Lever Brothers Pakistan Limited (LBPL) is a subsidiary of Unilever PLC, UK. ULEVER was incorporated in Pakistan in 1948 as Lever Brothers Pakistan Limited and merged with Lipton in 1989 and Brooke Bond in 1997.

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COMPANY SNAPSHOT
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Name of company Unilever Pakistan Limited
Nature of Business Fast Moving Consumer Goods
Ticker ULEVER
Net Sales CY ’09 Rs 38,187,582,000
Net Sales CY’10 Rs 44,671,507,00
Share price (avg.) – year end Rs 4360
Market Capitalization – year end Rs 57964 million
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ULEVER has adapted Unilever global brands such as Lifebuoy, Lux, Surf and Walls to local consumer needs at affordable prices. Since 1998, ULEVER has been entrusted with the responsibility of developing the Afghanistan business through a dedicated sales & distribution network. A wide range of products are offered for export. In June 07, Unilever Overseas Holding Limited, the ultimate parent company, purchased all the shares held by the Government of Punjab. This has increased Unilever’s shareholding in the Company from 67.04% to 70.4%.

Segments at a glance

Unilever comprises of 4 segments:

— Home and Personal Care – represents laundry and a wide range of cleaning, skin care, hair care and oral care products

— Beverages – represents tea

— Ice Cream – represents ice cream

— Other – represents margarine

The graph above shows the sector wise percentage of the gross sales. Home care and personal care had the most sales with 55% with beverages coming next with 30%. Ice creams had a share of 12% in the total shares and spreads with 3%.

Home and Personal Care

The home and personal care business sales grew by more than 15% on account of robust performance in the key categories. In three years, the cumulative growth if this business stands at 110%. Due to the volume lost because of the floods and increase in material costs, the gross margin declined slightly. However, the decline was partly offset by effective advertising and lower operating costs and hence the company registered a gross margin of 16.1% in the year 2010.

The graph on the right shows the net sales and the profit through the years for home and personal care business.

Beverages

Sales growth was 13.5% which was mainly price-led. Free availability of smuggled tea through Afghan trade remained a point of concern for all local branded players. Gross margins were under pressure during the year as tea prices hit record high due to increase in global demand, stagnantsupply and currency devaluation.

Ice cream& Spreads

Despite severe electricity crisis in the summer season, Wall’s delivered a growth of 33.3% in 2010 all from volume. This growth was achieved by bringing in new flavours such as “Badami” and “Cornetto double chocolate” which attracted consumers.. The cumulative growth over the last three years has been 80%. The spreads also witnessed a growth of 20.2% mainly because of volume that it sold. The graph below shows the sales and profit margin through the years of the ice cream segment of Unilever Pakistan.

Financial Performance: FY’04 – FY’10

Pakistan faced multiple challenges during 2010. Low GDP growth, double digit inflation, deteriorating security environment, continuing devaluation of the Rupee and debilitating power cuts along with gas load shedding impacted business in general. The ever worsening security conditions of the country also had a great impact on the businesses. Furthermore, the devastating floods that started in mid-July wreaked havoc in the country and affected all kinds of businesses. In addition to the generally difficult operating environment that impacted all businesses in 2010, rampant smuggling of tea affected the growth and profitability of the business. Despite this, the company delivered a 7.10% high profit after tax, which is low as compared to the growth of 54% in FY’09, on the back of 17% growth in sales (FY09: 23.4%).

Despite high COGS, overall gross profit improved by around 9.31%. The gross margin level dropped a little from 35% in FY09 to 32.6% in FY10. Return on Asset showed a decrease from 40% in FY09 to 35% in FY10 whereas return on equity decreased from 93% to 92% in FY10. Overall PAT increased from Rs 3056 million in FY09 to Rs 3273 million n FY10, an increase of 7.1%.

The current ratio was on a decline since 2003 till 2008 but it picked up in 2009. However, it remained the same in FY10 at 0.83 with no improvement.. Short term borrowings decreased from Rs 3233 million in FY08 to Rs 1038 million in FY09.Quick ratio, a better measure of liquidity followed a trend similar to current ratio, declining till FY08 and an increase in FY09. The ratio also witnessed an increase in FY’10 as it went up to 0.36 from 0.28 in FY’09. Till FY’08,there was a positive growth in current assets but the growth in current liabilities was far more. In FY’09, the current assets increased but the decline in current liabilities was large enough to improve the overall liquidity ratios. However, in FY’10, both the current assets and the current liabilities went up. The increase however was almost the same with current assets up by 25.63% and current liabilities by 26.36%. This is the reason why the current ratio was same for both the years.

Inventory Turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory.ITO had been on a slight rise from FY06 to FY08. The slight increase is indicative of ULEVER’s declining operational efficiency with growth in net sales lagging behind the growth in inventory kept by the company. Especially in FY’08 the growth in inventories has been exponential, with a rise of 54.5%. However, ITO decreased from 58 days in FY09 to 46 days in FY’10. Stock in trade increased from Rs 3649 million in FY09 to Rs 3811 million. The decrease in ITO shows that ULEVER is able to efficiently turn its inventory into sales.

Day sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid risks of bad debts. DSO has slightly been improving over the years. It showed an increase in FY09 from 3 to 4 days. It remained the same, 4 days in FY’10 too.DSO is still very negligible compared to ITO. The operating cycle of ULEVER hence followed the same trend as that of ITO in the respective years.

TATO of ULEVER has remained flat at 3 over the period under review, reflecting that the company is anticipating any increase in its sales and responding to it in a timely fashion by enhancing its assets base accordingly. It has declined slightly in FY’07 and FY’08. The Sales/Equity, on the other hand, shows a rising trend after ’04 on the account of declining equity base in the subsequent years. However in FY09, equity base increased due to the increase in reserves resulting in a decline in sales/equity ratio. In FY’10, however, it increased to 12.55 due to 17% increase in sales as compared to 7% increase in equity.

As far as debt management is concerned, both D/A and D/E ratios after 2004 (the decline in 2004 is because the ULEVER retired significant amounts of debt in that year) show ULEVER’s increased reliance on debt financing rather than equity financing. The trend lines in particular show that D/A (0.63 to 0.80) ratio for the last four years has remained almost stable over the years whereas D/E ratio has increased significantly (1.8 to 4.13) owing to increasing long term debts (as further evident by the long term debt to equity ratio) to finance the expansion. However, the situation reversed in FY09. Long term debt to equity ratio was maintained at a level of 0.31 whereas debt to equity declined from 4.13 to 2.47 in FY09 resulting from a decline in current liabilities (mainly short term borrowings). In FY’10, both the ratios increased very slightly but more or less remained the same.

The TIE ratio has decreased from a level of 107 times in FY04 to only 20 times in FY09.Even though this ability increased in 2006 (owing to comparatively lower finance costs), a massive surge in finance costs (70.64%) vis-à-vis a 3% increase in EBIT, was responsible for a plunge in FY’07 TIE ratio. Finance costs also rose sharply in FY’08, mainly due to markup on short term borrowings and exchange loss, which caused further decline in TIE. This ratio slightly improved in FY09 due to lower finance costs. There was a decrease in bank charges, exchange losses and the interest on short term loans. In FY’10, the ratio increased to 34times from 20 times in FY’09 because of 55% decrease in finance cost of the company. The short-term borrowings also witnessed a nose dive as it decreased by 72%. The finance cost also decreased by almost 56%. The main reasons for the decrease were 42% decrease in mark-up of short-term borrowings as the amount of borrowing and the rate (KIBOR) were also less. There was also a86% decline in the exchange loss which caused the finance cost of the company to decline.

The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company’s price per share and its earnings per share (EPS). ULEVER’s EPS has been erratic (fluctuating between 120 and 130) till FY07, driven mainly by any changes in company’s profit after tax (as its no. of shares have been constant so far). In FY’08, the growth in profit after tax caused EPS to cross the 130 mark and went till Rs 149. This figure further increased to Rs 230 in FY09, an increase of 54%.In FY10, the EPS increased to Rs 246, an increase of 7%. This increase was due to the 7% increase in the net profit of the company. The P/E ratio also increased to 18 in FY’10 from 10 in FY’09.

The year-end market prices of ULEVER have been increasing till FY07. Consequently, the P/E ratio also followed a rising trend driven by the increases in market price of shares, reflecting the investor’s confident in ULEVER. In FY08 the market prices went down due to the ongoing stock crisis in the country, coupled with the global recession.The market price improved in FY09 to Rs 2300 (FY08: Rs 1808). The market price further improved to Rs 4360, an improvement of 89.6%. The huge improvement in the market price shows that UNILEVER was performing well and investors had confidence in the shares.

The book value per share of the company increased slightly from Rs 248 in FY09 to Rs 269 in FY’10. There was no change in the number of shares or the share capital but reserves increased from Rs 2622 million in FY09to Rs, 2891 million mainly because of the increase in unappropriated profits. Dividend per share also increased from Rs 229 in FY09 to Rs 246 in FY10. Total profit distributed by way of dividend amounts to 99.9% (FY09: 99.6%).

Future Outlook

After some respite, there is a growing fear that with the surge in price of oil, sugar, tea and other food items, inflation will increase. Continuing rupee devaluation, down trading of consumers due to lower disposable income and increase in acts of terrorism will put pressure on business performance. The destruction caused by the floods is also going to show its impact in the coming year.

Also, smuggling of black tea through Afghan transit trade is an on-going threat to the tea category. Counterfeiting of the popular brands continues to impact results generally. With no reprieve in the on-going electricity crisis, the ice cream and spreads businesses are likely to come under pressure.

Unilever, however, performed quite well during the last year. For example, even due to load shedding, the ice cream sector’s sales increased. Seeing it performance, it is expected to perform well in the coming years as well.

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2004 2005 2006 2007 2008 2009 2010
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Liquidity
Current Ratio times 1 1 0.9 0.7 0.7 0.8 0.83
Quick Ratio times 0.5 0.5 0.4 0.2 0.2 0.3 0.36
Asset Management
Inventory Turnover days 64 59 54 63 64 58 34.15
Debtors Turnover days 6 2 2 3 3 4 4.21
Operating Cycle days 70 61 56 66 67 62 38.37
Total Asset Turnover times 3 3 3 3 3 3 3.31
Sales/Equity times 8.66 9.57 11.47 11.78 13.97 11.60 12.55
Profitability
Gross Profit Margin % 30 38 37 39 35 35 32.63
Net Profit Margin % 9 9 8 7 6 8 7.33
Return on Assets % 37 43 39 31 26 27 35.40
Return on Equity % 82 87 90 85 90 93 91.94
Debt Management
Debt/Asset times 0.64 0.68 0.71 0.75 0.80 0.71 0.74
Debt/Equity times 1.79 2.14 2.51 3.08 4.13 2.47 2.79
Long-term Debt/Equity times 0.04 0.20 0.19 0.25 0.31 0.31 0.27
Times Interest Earned times 107 141 223 84 18 20 34.00
Market Value
Earnings per share Rs 130 121 124 127 149 230 246.00
Price/Earnings ratio times 11 15 16 18 12 10 18.00
Dividend per share Rs 135 120 122 123 123 229 246.00
Book Value per share Rs 158 139 138 149 167 248 269.00
Number of shares issued No in ‘0 13,294 13,294 13,294 13,294 13,294 13,294 13294
Market Price – year end Rs 1,475 1,775 2,000 2,280 1,808 2,300 4360.00
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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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