Nestle OLD

Nestle India Limited 2007

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University Business School

[2009-03-28]

Assignment FINANCIAL MANAGEMENT

Capital Structure Analysis of Nestle India Limited

Submitted By- Submitted To-

Gagan Gopal Dr. Suveera Gill

Gagan Gopal, University Business School 2009

ANSWER NO 1

Executive Summary-

Nestlé India is a subsidiary of Nestlé S.A. of Switzerland. With seven factories and a large number of co-packers, Nestlé India is a vibrant Company that provides consumers in India with products of global standards and is committed to long-term sustainable growth and shareholder satisfaction.

The Company insists on honesty, integrity and fairness in all aspects of its business and expects the same in its relationships. This has earned it the trust and respect of every strata of society that it comes in contact with and is acknowledged amongst India's 'Most Respected Companies' and amongst the 'Top Wealth Creators of India'.

Nestlé’s relationship with India dates back to 1912, when it began trading as The Nestlé Anglo-Swiss Condensed Milk Company (Export) Limited, importing and selling finished products in the Indian market.

After India’s independence in 1947, the economic policies of the Indian Government emphasized the need for local production. Nestlé responded to India’s aspirations by forming a company in India and set up its first factory in 1961 at Moga, Punjab, where the

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Government wanted Nestlé to develop the milk economy. Progress in Moga required the introduction of Nestlé’s Agricultural Services to educate, advise and help the farmer in a variety of aspects. From increasing the milk yield of their cows through improved dairy farming methods, to irrigation, scientific crop management practices and helping with the procurement of bank loans. Nestlé set up milk collection centres that would not only ensure prompt collection and pay fair prices, but also instil amongst the community, a confidence in the dairy business. Progress involved the creation of prosperity on an on-going and sustainable basis that has resulted in not just the transformation of Moga into a prosperous and vibrant milk district today, but a thriving hub of industrial activity, as well.

The Company continuously focuses its efforts to better understand the changing lifestyles of India and anticipate consumer needs in order to provide Taste, Nutrition, Health and Wellness through its product offerings. The culture of innovation and renovation within the Company and access to the Nestlé Group's proprietary technology/Brands expertise and the extensive centralized Research and Development facilities gives it a distinct advantage in these efforts. It helps the Company to create value that can be sustained over the long term by offering consumers a wide variety of high quality, safe food products at affordable prices.

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Nestlé India manufactures products of truly international quality under internationally famous brand names such as NESCAFÉ, MAGGI, Cerelac, Lactogen, Eclairs, MILKYBAR, MILO, KIT KAT, BAR-ONE, MILKMAID and NESTEA and in recent years the Company has also introduced products of daily consumption and use such as NESTLÉ Milk, NESTLÉ SLIM Milk, NESTLÉ Fresh 'n' Natural Dahi and NESTLÉ Jeera Raita.

Nestlé India is a responsible organization and facilitates initiatives that help to improve the quality of life in the communities where it operates.

Beginning with its first investment in Moga in 1961, Nestlé’s regular and substantial investments established that it was here to stay. In 1967, Nestlé set up its next factory at Choladi (Tamil Nadu) as a pilot plant to process the tea grown in the area into soluble tea. The Nanjangud factory (Karnataka), became operational in 1989, the Samalkha factory (Haryana), in 1993 and in 1995 and 1997, Nestlé commissioned two factories in Goa at Ponda and Bicholim respectively. Nestlé India has commissioned in 2006 its 7th factory at Pant Nagar in Uttarakhand.

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Key Figures

Rupees in Millions

2003 2004 2005 2006 2007

Gross Sales 22,798.3 23,728.2 26,438.9 29,441.9 36,471.8

Domestic Sales # 20,226.9 21,292.8 23,847.1 26,646.1 33,174.1

Export Sales 2,571.4 2,435.4 2,591.8 2,795.8 3,297.7

EBITDA * 4,446.8 4,509.9 5,220.5 5,415.2 6,962.7 Additional Employee Cost - - - - 753.7

Other Income 278.3 144.5 237.4 206.1 254.4

Impairment of fixed assets 22.2 23.3 (26.4) 3.9 11.8

Provision for contingencies 229.6 266.9 223.2 144.9 (590.4)

Profit before taxation 3,991.5 3,864.9 4,690.6 4,805.3 6,286.1 Net Profit 2,630.8 2,519.2 3,095.7 3,151.0 4,138.1

Earnings per Share (Rs.) 27.29 26.13 32.11 32.68 42.92 Dividends per Share (Rs.) 20.00 24.50 25.00 25.50 33.00 # Domestic Sales include excise duty also

* EBITDA - Earnings before Interest, Tax, Depreciation and Amortisation.

Final Balance Sheet of 2008 financial year is not public yet. Next investors meet is on May 05,2009 and audited Balance Sheet is expected to be out soon, before March31. Company follows a calendar financial year starting from January.

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The Unaudited results for the Quarter ended December 31, 2008

The Company has posted a net profit of Rs 1210.90 million for the quarter ended December 31, 2008 as compared to Rs 936.10 million for the quarter ended December 31, 2007. Total Income has increased from Rs 9053.00 million for the quarter ended December 31, 2007 to Rs 11030.10 million for the quarter ended December 31, 2008.

The Audited results for the Year ended December 31, 2008

The Company has posted a net profit of Rs 5340.80 million for the Year ended December 31, 2008 as compared to Rs 4138.10 million for the Year ended December 31, 2007. Total Income has increased from Rs 35297.90 million for the Year ended December 31, 2007 to Rs 43581.30 million for the Year ended December 31, 2008.

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Despite recession and global meltdown, Nestle India is doing very well and posting huge profits. Its share price has also remained stable when whole market crashed. Company’s dividend per share has grown at a 21% CAGR in the last 10 years. Its earnings per share clocked in a growth of 19% CAGR during the same period. This points out that the company had become more generous while rewarding its shareholders in this decade. Given this long history, there is very little chance that the company might stop paying dividends to its shareholders in the future.

During 2008 Nestle India paid interim dividend of 220% and has announced a final dividend of 120% on March09, 2009. So dividend for financial year 2008 is 340%, continuing the company history of high dividend payout and profitability for investors.

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ANSWER NO 2

(a)CAPITAL EXPENDITURE FOR THE FIVE YEARS:

Year 2003 2004 2005 2006 2007Amt. Of capital expenditure(Rs. 000)

7,21,499 6,14,197 13,89,966

14,09,007

13,94,886

(b)Capital Expenditure is increasing and it nearly doubled in five years.

(c)No, Capital Spending is not consistent but there is overall increase.

Note: Capital expenditure is taken from Balance Sheet, Fixed Assets.

So, we can interpret from this that the company is executing good investments on capital expenditure each year and has a long term prospect. Company set a new manufacturing facility in Pantnagar in 2006 that’s the reason for high Capital Expenditure recently.

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ANSWER NO 3

(a)ACCOUNT BALANCES FOR PROPERTIES, PLANT AND EQUIPMENT FOR THE FIVE YEARS:

Year 2003 2004 2005 2006 2007ACCOUNT BALANCES (Rs.000)

39,13,694 39,72,158

42,79,802

50,60,462

57,67,830

(b)PERCENT OF PROPERTIES, PLANT AND EQUIPMENT REPLACED EVERY YEAR:

Year 2003 2004 2005 2006 2007PERCENT OF REPLACEMENT

5.38% 6.17% 13.27% 11.46% 11.48%

FORMULA: PURCHASE-SALE

INITIAL INVESTMENT

It shows that the company is growing constantly and new assets are added with upgradation of technology as well. Higher values in recent years are due to new facility.

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ANSWER NO 4

Years Nestle Dabur ITC Emami Marico2003 0.01 0.14 0.01 1.02 0.05

2004 0.02 0.14 0.03 0.43 0.23

2005 0.04 0.04 0.01 0.32 0.80

2006 0.04 0.04 0.01 0.10 0.91

2007 0.01 0.03 0.01 0.12 1.09

Debt/Equity ratio of company is very good and the company has improved it consistently over the past. A look at FMCG sector companies shows that Nestle is leading the sector with ITC. But, they are not using the means of financing as effectively as they could.

ANSWER NO 5

BETA MEASURE OF Nestle (March 2009) is 0.58

(Source: reuters.com)

Dabur- 0.4

ITC -0.5

Emami-0.4

Merico-0.4

Beta of all FMCG companies comes less than 1 because the market has fallen considerably during the period but FMCG has not fallen that steeply and have

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been the reason behind the strength of economy during recession. Beta for these companies was more than 1 in the past.

ANSWER NO 6

WACC of company-

The weighted average cost of capital is defined by:

Where

And the following table defines each symbol:

Symbol Meaning Units

c weighted average cost of capital %

y required or expected rate of return on equity, or cost of equity" %

b required or expected rate of return on borrowings, or cost of debt %

t ͨ corporate tax rate %

D total debt and leases (including current portion of long-term debt and notes payable) currency

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E total market value of equity and equity equivalents currency

K total capital invested in the going concern currency

OrWACC = wd (1-T) rd + we re

wd = debt portion of value of corporationT = tax raterd = cost of debt (rate)we = equity portion of value of corporationre = cost of internal equity (rate)

WACC calculation for Nestle India Limited

Year 2007Tax rate 0.34Interest Rate 10.97Dividend/price 21.29Weight of debt 0.01Weight of Equity

0.99

WACC 21.15

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WACC comes too high for Nestle India Limited because the company is running very high in profits. They are distributing very high dividends thrice a year i.e. 330% annually.

ANSWER NO 7

(i) Five Year High Debt Equity Ratio was .04

(ii) Five Year low Debt Equity Ratio was .01

(iii) Comparison of Debt Equity Ratio of the selected company with that of other companies in the same industry - SECTOR- 0.61

Years Nestle Dabur ITC Emami Marico2003 0.01 0.14 0.01 1.02 0.05

2004 0.02 0.14 0.03 0.43 0.23

2005 0.04 0.04 0.01 0.32 0.80

2006 0.04 0.04 0.01 0.10 0.91

2007 0.01 0.03 0.01 0.12 1.09

These companies are doing better than industry (except Marico) and are very rich and efficient. They have very low D/E Ratio suggesting that their funds are much greater than

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what was required because of high profitability. Dividend payout ratio is also more than 1.

ANSWER NO 8

DuPont identity for the company

ROE = 4138122000/964157160 = 4.292

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ROE is pretty good for the company as each Rupee invested in Equity gives a return of 4.3 Rs. It’s an ideal company to invest.

Answer 9 - Comment on the following:-(A) Working capital position –

Year 2003 2004 2005 2006 2007

Nestle w.cap.

(in 000)

-12,83,293 -26,00,597 -22,26,330 -23,34,987 -31,99,152

Working capital= current assets – current liabilities

Here we see that working capital of Nestle is negative. It shows that company is working on other’s money. The company operations are very efficient and it is still earning huge profits. So we can comment that the company is using its position and brand name to a good extent in operations and is running quiet well.

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(B) Cash position

Year 2003 2004 2005 2006 2007

Nestlé’s cash position

(in 000)

7,99,323 16,43,112 14,10,719 15,41,292 13,21,618

Cash position= Cash and cash equivalents at the end of the period (taken from the cash flow statement)

Cash position of the company is very sound. It has increased substantially during last five years. Last year company had Rs. 132 crore in cash and cash equivalents available on closing i.e. December 31st.

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(C) Short term financing (Rs. 000)

Year 2003 2004 2005 2006 2007

Nestle short term financing

49,23,285 61,82,349 68,53,295 76,88,725 95,77,693

Note: It includes Sundry Creditors, Accruals and Advances from the customers

957 crores of short term financing available again shows the company’s ability to use its brand and very efficient

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operations. Also it has doubled in last five years showing the efficiency.

(e) Inventory management policy

Year 2003 2004 2005 2006 2007

Nestle Inventory Turnover

11.76 12.42 12.02 12.01 10.02

Avg. Age of Inventory

31.03 29.39 30.37 30.39 36.43

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Note: calculated by dividing sales with inventory.

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Nestle OLD

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