Nestle India Fundamental Analysis: Dividend stock available at attractive valuation

July 16, 2017 1 Ankit Shrivastav

Food is life, as it act as fuel and provides nutrition to our body. From infants, to grown ups to elders, we all need food to keep ourselves going. With rising population, there are more mouths to feed and more bodies to be nourished. That’s why food, is not just a basic necessity but is also basic human right.

There are many companies that are working towards providing best nutrition to their customers by providing best quality products made from the fresh and best ingredients. These companies have earned their reputation by being very strict in terms of their quality control and hygiene practices followed while processing the food. One of the leaders in the food processing segment in India is Nestle India.

Product categories:

Nestle India is the market leader in the FMCG segment with its main focus on food products. Company make food products for various categories such as milk and nutrition, prepared dishes and cooking aids, and chocolate and confectionery.

Milk and nutrition:

In this category, company makes milk based products such as condensed milk (Milkmaid), skimmed milk (Nestle a+ slim milk), milk powder, (Everyday). Company also make baby food under brand names such as Nestle NaN, Lactogen, Cerelac, Nestum. Company is the market leader in the baby foods segment with 63% market share.

Prepared dishes, cooking aides:

In this category, Company makes products under brand name Maggi. These products include, Ketchup and sauces, (tomato sauce, hot and sweet sauce, tamarind sauce etc), instant noodles (Maggi 2 minute noodles, Atta, oats, chicken flavoured noodles ). Recently company went under a huge setback, when FSSAI (Food Safety and Standards Authority of India) found lead content beyond permissible levels and all the Maggi instant noodles were taken off the shelf. After few months company re-launched its instant product to the market, this time with all the compliances in place.

This had a huge setback to the company‚Äôs profitability, as company had 75% market share in instant noodles segment. Company learned its lesson and launched an aggressive marketing campaign which also includes launch of many new flavours of instant noodles under sub brand name ‚ÄúHot Heads‚ÄĚ and many other Indian flavours using Indian spices.

Company now has 60% market share in the instant noodles segment and is planning to increase it beyond the previous 75%.

Company also has cooking aids named ‚ÄúMaggi masala e magic‚ÄĚ and ‚ÄúMaggi Bhuna Masala‚ÄĚ, a ready to use masala added to cook tasty vegetables.

Chocolate and confectionery:

Company also owns some of the very well known brands in the chocolates, such as Kit Kat, Munch, Bar-one. Alpino, Milkybar. Company has also launched new variety in Munch (Munch nuts) and Kit Kat (Kit Kat Senses, a dark chocolate)

Segment-wise Revenues:

Milk and nutrition products contribute the most to the topline of the company, this segment includes baby food, milk and milk products. Almost 45% of the company’s revenue come from the milk and nutrition segment. The second highest contributor to company’s revenue is the prepared dishes and cooking aids segment. One of the top contributors of revenue in this segment is Magi brand. This segment of the company contributes 29% to the revenue of Nestle India. The third category is the chocolate and confectionery business which includes brands like Munch and Kit Kat. Almost 13% of company’s revenue comes from this segment. Similarly, beverages segment which includes, brand like Nestea and Nescafe also contributes 13% to the total revenue of the company.

Having looked at the business and products of the company, let’s now look at the past financial performance of Nestle India and future expansion plans of the company.

Basic EPS:

Basic EPS is a measure of how much profit a company is making on per share basis. In other words, it’s a measure of how much money each share of the company will receive if all the profits earned during the year is distributed to its shareholders.

Ban on Maggi instant noodles had a huge impact on the financial performance of the company. Before the ban, company’s EPS was growing at an average rate of 7.5% CAGR. Company’s earnings are slowly getting back on track, and is predicted to good in the future. While in 2012 Company’s Basic EPS was Rs. 110 per share, in 2016, it went down to Rs. 96.10 per share.

Cash EPS:

Cash EPS is a measure that looks at how much cash flow the company has generated during the financial year. Cash EPS shows how much cash the business is generating in a year. Cash EPS not only includes Cash received by the business for the products sold or services provided, it also includes any upfront payments, such as cash advance received by the business.

Company’s Cash ePS has also been hit by the ban. While in 2012 company’s Cash EPS was Rs. 139.5 per share, in 2016 it went down to 132.77 per share.

Revenue From Operation/Share:

Revenue from operations is a measure of how much revenue a company is generating from its core business. Revenue from operations does not include income from non operating activities such as sales of assets, sale of subsidiaries, income from investments made etc. Revenue from operations/share measures how much revenue a company is generating from its core business on per share basis.

Nestle India’s Revenue From Operations/Share in 2012 was Rs. 864.4 per share while in 2016b it improved to Rs. 956.63 per share.

Net Profit Margin:

Net Profit margin is the key ratio which is used to compare profitability of two or more companies working in the same sector. Net profit margin is a measure of how much percentage of total sales remains with the company as profit after all the expenses are paid.

In the year 2012, company’s Net Profit Margin was 12.81% while in 2016 it was 10.04%.

ROCE:

ROCE or Return on Capital Employed, is a measure of how efficiently the capital of a company is being used to generate profit. ROCE is expressed in percentage terms. A company with ROCE of 20% means out of every 100 rupees employed as capital, company is able to make a return of rupees 20.

Company’s ROCE went down from 26.53% in 2012 to 17.91% in 2016, However it is still better than what it was in the year 2015, when the profit margin was low at 6.88%.

Debt/Equity:

Debt to equity ratio tells us how much of the total financing of the company comes from creditors (those who lend money at an interest) and investors (those who invest in the shares of a company). Higher debt to equity ratios is an indication that majority of company is financed by loans and other debt (such as debentures and bonds).

Nestle India is currently a zero debt company.

Dividend percentage to Net profit:

The dividend payout ratio measures the percentage of net income that is distributed to shareholders in the form of dividends during the year. In other words, this ratio shows the portion of profits the company decides to keep to fund operations and the portion of profits that is given to its shareholders.

Despite all the setbacks, company’s Dividend Payout ratio as a percentage of net profit has been increasing. In 2012, company’s Dividend Payout Ratio (%NP) was 43.78% while in 2016 it was 65.55%.

Dividend/Share:

Dividend per share is the amount of dividends a shareholder receives on per share basis. Dividend per share includes all the interim dividends paid during the financial year as well as the final dividend paid at the end of the financial year. Dividend per share is calculated by dividing total dividends paid during the year from total number of shares outstanding.

Company’s dividend per share has seen a good growth in the past 5 years. While in 2012, company paid dividend of Rs. 48 per share, in 2016 dividend per share of Nestle India was Rs. 63 per share.

Future Expansion plans:

Post Maggi instant noodles debacle, company is now focussing on a portfolio of products instead of depending on handful of products for its revenues. Over the next few quarters, company will focus on many sectors such as Nespresso, a coffee machine, pet care, healthcare and skincare. Company is also very aggressively gaining market share in instant noodles segment. To take on rivals like Patanjali and ITC, company is going to launch 25 products in various categories.

Company is also focussing on educated middle class and working women, as they are key decision makers in daily purchases, and is looking to tap the rising awareness towards health and nutrition, while keeping an eye on profitability of the company.

What makes Nestle a good investment:

  • More than 100 Years old company in processed food segment.
  • Market leader in most of the product segments in India.
  • Strong brand recognition and distribution network across the country.
  • Good dividend paying stock. Has a healthy dividend history.
  • Company targeting urban educated middle class customers, who do not have much time to cook food.
  • Came up with multiple new products in various categories to take on rivals like Patanjali.
  • Recent Maggi debacle had a huge dent on company‚Äôs earnings, as the earnings improve in the future, stock price will appreciate.

    

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