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 Karachi and Lahore stock exchanges. For the 5 years in a row, the company has won a place among top 25 companies of the KSE.
Its principal activities are to manufacture, process and sell food products and ancillary equipment. The food products include dairy, confectionery, infant nutrition and culinary products, coffee, beverages and drinking water. The major brands include Milkpak UHT, Nestle Everyday, Lactogen and Nescafe.
Nestle has been serving the Pakistani consumers since 1988, when its parent company, the Switzerland-based Nestle SA, first acquired a share in Milkpak Ltd.
Nestle also exports its products like Maggi Noodles, Cerelac, Lactogen 1 and 2, UHT cream, Frost, Nido, Polo, Nestle Pure Life drinking water and fruit pulps to Afghanistan, Turkmenistan and other Central Asian Republics. In FY06, its exports to Afghanistan increased by 35% to PKR 1.3 billion due to the progressive business climate and strong development of the retail sector.
The new key product launches in FY07 include Maggi Atta noodles, Maggi recipe mixes, Nido yogurt, Cerelac baby biscuits, and a new mango addition to the Nestle juices range.
FINANCIAL PERFORMANCE (DEC03-DEC07):
FY07 was a good year for NPL as its top line reached a new landmark of PKR 28 billion following an excellent growth of 28% compared to FY06. Primary contribution came from its pillar product categories, milks, baby food and juices. Fresh milk volume grew by 29% over the same period last year, however, this was still not sufficient to meet production requirements for the year.
The increasing sales trend (CAGR of 28% during FY03-FY07) is primarily attributed to continued focus on sales and marketing efforts, innovative strategies and a sound distribution network.
This robust growth in sales translated into a solid increasing operating profit of Rs 3.53 billion, an increase of 33%. However, this primarily relates to higher fixed cost absorption from inventory that led to lower profitability in FY'06. In addition, efforts in 2007 include a favorable movement in sales mix and rigorous fixed cost control.
Higher financing costs and a larger tax burden was offset with some of the gain from operating profit. As a result, net profit improved by 32.4% versus same period last year and reached Rs 1.8 billion, translating into an EPS of Rs. 39.81 from Rs 30.06
Overall, the profit and net profit margins remained stable. Overall profit margin showed a slight increase but a slight decline in gross profit margin was witnessed. This was mainly due to cost pressure on fresh milk as both local and international prices have increased dramatically coupled with investment in commercial and operation infrastructure to support future growth and the resulting inflationary impact on its cost. This increased COGS trickled down in the form of slightly lower gross margin in FY07.
ROE continued its falling trend due to higher retained earnings resulting in higher increase in equity base (65%) than increase in the profit after tax (32%). In contrast to ROE, the ROA showed a slight improvement mainly due to low increase in assets base (23%).
All the liquidity ratios show its improved liquidity positioning in recent years. The current ratio has fluctuated from 1.03 in 2004 to 0.94 in 2007. A decline in company's ability to payoff its short-term obligations in 2005 shows that its current liabilities rose far more than its current assets, mainly due to higher trade payables and short term running finances. However, a slight improvement is witnessed in subsequent years due to increase in trade debts and other receivables.
Quick ratio, a better measure of liquidity followed a positive trend. Previously NPL's quick ratio was below that of industry but started to increase after 2004 and was above the industry in 2006. In FY07, the minimal rise in QR can be attributed to the increase in quick assets due to higher cash and bank balances and current portion of long term loans and advances, as against rise in CL.
Inventory Turnover (ITO) ratio depicts how quickly company is able to sell off its inventory. The trend line indicates a relatively constant ITO over the 5-year period except a sharp rise in 2004 mainly due to a very high proportionate increase (by 83%) in inventory than its sales increase (22%). Reasonable ITO over the rest of the years shows that NPL is able to efficiently turn its inventory into sales. Also it is lower than the rest of the industry in the respective years.
Days 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 for NPL has been very low (almost a day) over the 1st three years under consideration. However, it increased to 4 days in 2006 due to a very high proportionate increase in trade debts (403% - almost 5 times) than in net sales (29%). It remained at the same level in FY07, indicating that perhaps the company is deliberately pursuing easy credit policy to attract large number of creditors.
The operating cycle of NPL hence followed the same trend as that of ITO in respective years being much higher than the industry average in 2004 but is below the industry trend over the rest of the years.
TATO has declined slightly over the period under review (from 2.72 to 1.78), that the company has been enhancing its assets base by investing in fixed assets and intangible assets. The sales/equity, on the other shows an erratic trend and is highest in FY05 on account of smaller increase in equity base (19% mainly due to lower accumulated profits in that year) compared to increase in sales (4%). Moreover, the robust sales in FY07 have been mitigated by a higher increase in equity base in FY07 pulling the ratio towards decline. Both TATO and sales/equity ratios of NPL are slightly below the industry's ratio.
As far as debt management is concerned, both D/A and D/E ratios of NPL show its increased reliance on debt financing rather than equity financing. The trend lines in particular show that D/A (0.69 to 0.74) ratio has remained almost stable over the years where as D/E ratio has increased significantly (2.2 to 4.1) owing to increasing long term debts (mainly due to long term finances and deferred taxation). This is further evident by the long term debt to equity ratio which increased by 98.2% in FY06. All these ratios showed decline in FY07 mainly due to higher equity in that year. Otherwise these are in line with the industry's trend towards higher leveraging.
The TIE ratio has increased in 2004 but nose-dived in 2005 due to high financial costs offsetting the moderate increase in EBIT, thus having an adverse impact on NPL's interest covering ability. This ability further decreased in 2007 (though less abruptly than in FY05) owing to comparatively lower finance costs but still were high enough to mitigate the effect of increase in EBIT. Looking at this, we can that infer that NPL's interest covering ability has been affected adversely due to rising interest rates making its TIE ratio below the industry average.
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 the earnings per share (EPS).
Both the EPS and year-end market prices of NPL have been increasing over the 5-year period, with increase in prices being greater than that in EPS as shown by the trend line. Consequently, the P/E ratio also followed a rising trend driven by the increases in market price of shares, reflecting the investor's confidence in NPL. Also its P/E ratio is higher than the average industry.
NPL's book value per share shows a positive trend on the account of expanding equity base (due to increase mainly in accumulated profits) compared to very slight changes in the no. of shares. This reflects that now investors/shareholders are willing to pay more for a share of the company.
Company's DPS reflects regular dividends to its shareholders. However, unlike book value per share, it showed a slight decline after FY05. The reason being, the company continues to invest heavily in the future. Overall both DPS and BPS of NPL are decent, showing a good return to shareholders of NPL.
FUTURE OUTLOOK:
NPL is one of the fastest growing FMCGs (fast moving consumer goods) companies in the food and beverage segment. A dynamic growth and investment strategy resulted in diversified and strong portfolio of products with high franchise value. Large proportions of inputs are imported. Amidst rising rural incomes and changing lifestyles, the demand growth in the food sector is robust with profits growing on the back of volume gains. Thus, this sector is likely to continue to experience high earning growth.
Healthy competition in industry would be benefiting the shareholders due to increased demand for overall market. NPL has a strong competitive edge of continuous innovation, global and local scale delivering cost advantages, and deep local roots.
In FY07, the demand for NPL's dairy products outpaced its availability due to low natural growth of fresh milk production. This coupled with high demand led to not only significant increase in fresh milk prices but also high usage of expensive imported milk powders. Currently active development initiatives in collaboration with the Government ministries and other institutions are being taken by NPL, to increase the quality and quantity of quality production of fresh milk to address short term supply constraints and for the long term industry success.
The management of the company is confident being the market leader to perform satisfactorily in the coming year if the company don't loose the sight of quality, achieve cost reductions through improved efficiency and maintain growth momentum. Moreover, company also has plans to under take geographical and product diversification strategy. Hence one can foresee an overall positive outlook for the company.
=========================================================================================================
Nestle Pakistan Limited (NPL) - Financials
=========================================================================================================
Balance Sheet (PKR '000) 2003 2004 2005 2006 2007
---------------------------------------------------------------------------------------------------------
Property, plant and equipment 2,149,781 2,351,281 3,298,880 6,941,332 9,074,428
Capital work-in-progress 294,480 824,595 1,788,475 1,107,052 971,183
Long term loans and advances 11,013 20,287 47,691 66,008 80,670
Long term security deposits 4,314 5,036 5,338 6,088 6,088
Total non-current assets 61,238 71,234 230,687 207,116 179,140
Stores and spares 205,443 261,852 249,921 329,346 436,573
Stock in trade 863,136 1,693,783 1,492,983 1,907,300 2,393,306
Trade debts 28,906 30,806 47,298 238,291 344,053
Advances, deposits, prepayments 146,491 281,297 916,331 2,109,314 2,022,387
,other receivables
Cash and bank balances 62,675 93,338 858,995 34,663 406,225
Total current assets 1,334,744 2,364,112 3,569,152 4,627,685 5,623,823
Total Assets 3,840,243 5,611,222 8,887,214 12,927,902 15,848,574
Total non-current liabilities 1,139,382 1,748,141 2,610,132 5,172,334 5,758,347
Total current liabilities 1,496,740 2,302,851 4,413,700 5,224,488 5,978,522
Total liabilities 2,636,122 4,050,992 7,023,832 10,396,822 11,736,869
Total Equity 1,204,121 1,560,230 1,863,382 2,531,080 4,111,705
---------------------------------------------------------------------------------------------------------
Income Statement(PKR'000) 2003 2004 2005 2006 2007
---------------------------------------------------------------------------------------------------------
Sales-net 10,461,254 12,801,355 17,142,363 22,030,958 28,235,393
Cost of goods sold (7,446,497) (9,242,534) (12,354,618) (15,778,330)(20,291,270)
Gross profit 3,014,757 3,558,821 4,787,745 6,252,628 7,944,123
Profit from operations/EBIT 1,211,942 1,474,348 1,817,184 2,453,229 3,134,190
Finance cost (61,480) (59,024) (180,108) (447,774) (584,434)
Profit before taxation 1,150,462 1,415,324 1,637,076 2,005,455 2,549,756
Taxation (391,625) (425,392) (484,145) (642,165) (744,544)
Profit after taxation 758,837 989,932 1,152,931 1,363,290 1,805,212
---------------------------------------------------------------------------------------------------------
PROFITABILITYRATIOS 2003 2004 2005 2006 2007
---------------------------------------------------------------------------------------------------------
Profit Margin 7.25% 7.73% 6.73% 6.19% 6.39%
Gross profit margin 28.82% 27.80% 27.93% 28.38% 28.14%
Return on Assets 19.76% 17.64% 12.97% 10.55% 11.39%
Return on Equity 63.02% 63.45% 61.87% 53.86% 43.90%
---------------------------------------------------------------------------------------------------------
LIQUIDITYRATIOS 2003 2004 2005 2006 2007
---------------------------------------------------------------------------------------------------------
Quick Ratio 0.18 0.18 0.41 0.46 0.47
Current Ratio 0.89 1.03 0.81 0.89 0.94
---------------------------------------------------------------------------------------------------------
ASSETMANAGEMENTRATIOS 2003 2004 2005 2006 2007
---------------------------------------------------------------------------------------------------------
Inventory Turnover(Days) 36.77 55.00 36.60 36.55 36.08
Day Sales Outstanding(Days) 0.99 0.87 0.99 3.89 4.39
Operating cycle(Days) 37.77 55.86 37.60 40.44 40.47
Total Asset Turnover 2.72 2.28 1.93 1.70 1.78
Sales/Equity 8.69 8.20 9.20 8.70 6.87
---------------------------------------------------------------------------------------------------------
DEBTMANAGEMENTRATIOS 2003 2004 2005 2006 2007
---------------------------------------------------------------------------------------------------------
Debt to Asset 0.69 0.72 0.79 0.80 0.74
Debt to Equity Ratio 2.19 2.60 3.77 4.11 2.85
Long Term Debt to Equity(%) 0.95 1.12 1.40 2.04 1.40
Times Interest Earned 19.71 24.98 10.09 5.48 5.36
---------------------------------------------------------------------------------------------------------
MARKETRATIOS 2003 2004 2005 2006 2007
---------------------------------------------------------------------------------------------------------
Earning per share 16.76 21.87 25.42 30.06 39.81
Price/Earnings Ratio 22.43 23.78 30.29 34.76 38.88
Dividend per share 4.00 5.00 15.00 5.00 10.00
Book value per share 26.60 34.46 41.09 55.81 90.67
No. of Shares issued(in thousands) 45273.00 45273.00 45349.60 45349.60 45349.60
Market prices(Year End) 376.00 520.00 770.00 1045.00 1547.50
=========================================================================================================