Financial Analysis

Nestle India ltd.

ACC Ltd.

SUBMITTED TO:

SUBMITTED BY:

MRS.RANJANA

NAVNEETSINGH
MBA 3RD B
90212233197

Financial Analysis

CT INSTITUTE OF MANAGEMENT STUDIES

Nestle India ltd.

(All figures are in Rupees)
Major Industry:

Food & Beverages

Sub Industry:

Miscellaneous Food

Stock Current Price (14/12/2009):

Rs. 2619.75

Market Cap:

Rs. 252,585,071,991

Shares Outstanding:

96,415,716

Share face Value:

Rs. 10

Stock Listing - Nestl India Limited

Industry
Food Processing
The Bombay Stock Exchange Limited,
Exchange
Mumbai
Stock Code
500790
Group
A
ISIN Code
INE239A01016
1. ENTERPRISE VALUE

please refer FM project_GMP_G09038.xls

Enterprise Value EV = (outstanding shares) x (share price) + Debt

Cash balance short term investments

Financial Analysis

For market cap calculation share price for each year is taken as that on 31st March
of the year.
Debt = Market value of (Long term debt + short term debt)
Short term investments: Govt. T Bills, Commercial Papers, Mutual Fund- debt

2. FINANCIAL RATIOS
Net Worth = Total assets Long term Liabilities
= Share Capital + Retained earnings + General Reserve
Capital Employed = Net Worth + Long term Loans
Retained earnings = Opening Balance + Net income - Dividends
Invested capital = Net worth + Deferred tax liability + Total Debt
RONW
PAT / Net Worth

= EBIT / Net Worth

ROE

ROCE

= EBIT / Capital Employed

Net Profit Margin = PAT / Net Sales

S/TA

= Net Sales / Total Assets

Net Financial Leverage = Debt / Net Worth

Operating Leverage

= Total Contribution / EBIT

*** while calculating V Cost : Wages are taken 75% of Employee cost (Salaries,
wages, bonus, pension, gratuity, performance incentives- figure) as there is no
break up given
Figures
NW
LT debt
CE

2008
2007
4,733,497,000 4,184,241,000
8,177,000
28,711,000
4,741,674,000 4,212,952,000

Ratios
RONW
ROCE
PAT/Sales

2008 2007
1.636 1.504
1.633 1.494
0.124 0.118

Financial Analysis

TA
Sales
EBIT
Interest
PBT
Tax
PAT
Invested
Capital
Variable
cost
Contributio
n

16,950,135,00 14,077,619,00
0
0
43,242,450,00 35,043,532,00
0
0
7,744,698,000
16,430,000
7,728,268,000
2,387,446,000
5,340,822,000

6,294,683,000
8,545,000
6,286,138,000
2,148,016,000
4,138,122,000

5,110,484,000 4,499,926,000
25,696,689,75 19,853,305,19
0
2
17,545,760,25 15,190,226,80
0
8

8. BETA CALCULATION
refer FM project_GMP_G09038.xls

S / TA
Operating
Leverage
Financial
Leverage
EPS
ROE
P/ E
Current Ratio
D / E ratio

2.551 2.489
2.266 2.413
0.002 0.007
55.39 42.92
1.13 0.99
27.04 21.29
0.67 0.67
0.17 0.69
%
%

please

After doing linear regression analysis of Nestle returns against market (BSE 500
index) the outcome is as under: (With five year monthly data)
Volatility of the share:

421.79

R2 value:

1.5%

Beta:

0.097

Volatility of returns: If St is the share price in

period t then, log relative return is

Financial Analysis

And volatility measure

is

= 6.22%

10. COMPANY COST OF CAPITAL

The market rate of return estimated over 6 years of period from 2005 to
2009:
Rm = 12.18 %
Risk free rate of return is taken to be
(www.bloomberg.com)

Rf = 6.90 %

As D/E ratio is < 1%, for all Practical purposes I assume 100% equity
finance. And thereby the Company Cost of Capital Company Cost of
Equity

(WACC ) Re

= Rf + (Rm -Rf)

= 7.47 %
3. EVA CALCULATION
Invested Capital
Company CoC
Required Income
Earned income
EVA

2008
5,110,484,000
7.47%
381753154.8
5,340,822,000
4,959,068,845

2007
4,499,926,000
7.47%
336144472.2
4,138,122,000
3,801,977,528

We can see the company has added huge Economic Value in last two years. It is
not surprising because first of all companies systematic risk is quite low as its
business is not sensitive to market risk - = .097! Apart from that R2 is very low mere 1.5% and that means CAPM cannot predict the business risk involved

Financial Analysis

effectively. In totality unique associated with company is very high. Therefore

company cost of capital i.e. the expected return from company for its involved
systematic risk is low.
The main value drivers are the companys ability to dominate both suppliers and
customers- as is evident from cash conversion cycle! Apart from that low cost
production, better profit margin and volume sales contribute to value creation.
9. CAPITAL STRUCTURE
2008
964,157,000

Share Capital
Reserve &
Surplus

3,769,340,000

Equity
Debt
D/E

4,733,497,000
8177000
0.17%

2007
964,157,000
3,220,084,00
0
4,184,241,00
0
28711000
0.69%

2006
964,157,000
2,924,722,00
0
3,888,879,00
0
162676000
4.18%

2005
964,157,000
2,577,176,00
0
3,541,333,00
0
143045000
4.04%

2004
964,157,000
2,229,913,000
3,194,070,000
79051000
2.47%

The main source of capital has been retained earnings. The FMCG companies
maintain very low debt value as the business is not capital intensive. Apart from
that for expansion and growth food products companies dont have to do any huge
capital investment. Processed food producers like Nestle play on the contribution
margin. From annual figures it is evident that PAT is nearly equal to capital
invested and hence they are highly cash reach. For day to day operation they
depend on internal generated profit and suppliers money.

11. OPERATING CYCLE

Closing balance
Opening balance
AV

2008

2007

Inventory
4,349,117,000
4,012,153,000
4,180,635,000

4,012,153,000
2,762,185,000
3,387,169,000

Financial Analysis

Closing balance
Opening balance
AV

Sundry Debtors
455,933,000
534,901,000
495,417,000

534,901,000
557,569,000
546,235,000

Closing balance
Opening balance
AV

Sundry Creditors
5,017,178,000
4,555,845,000
4,786,511,500

4,555,845,000
3,666,483,000
4,111,164,000

21,386,673,000

17,522,681,000

Manufacturing Expenditure
Material cost
21,386,673,000
Employee Cost
2,359,356,000
Power & fuel
1,597,565,000
Contract Labor
456,500,000
Milk collection
114,490,000
Quality testing (Laboratory)
137,557,000
Sum
26,052,141,000
COGS
25,715,177,000

17,522,681,000
2,020,819,500
1,239,442,000
372,172,000
308,714,000
99,501,000
21,563,329,500
20,313,361,500

Sales

43,242,450,000

35,043,532,000

59.33973447

60.86224011

4.181705824

5.689374433

81.68997102

85.63614552

63.52144029
-18.16853072

66.55161454
-19.08453098

Purchases

Inventory Cycle in (Days)

Account receivable
turnover (Days)
Account payable turnover
(Days)
Operating Cycle
Cash Cycle

Financial Analysis

12. GROWTH
Average growth in sales is 18% and is
quite possible in food products as the Indian
food market is estimated at over US$ 182 billion
and average growth of the industry has been 14
to 18%. Being in such high margin business
Nestle maintains high net cash at hand and is
fully capable to sustain growth without any external finance.
As far as future expansion is concerned company should take more debt for tax
benefits. As it is a cash rich business there would never be a payout issue if debt
ratio is managed judiciously.
6. VOLATILITY
I have taken quarterly reports and calculated the NET SALES, EBIT & PAT
figures for each three-month period. Taking sample from 2005-Q1 to 2009-Q3
total 19 the followings are the volatility figures. The quarterly figures are
annualized by multiplying (4 =) 2 to get annual figures.
Quarterly Figures in INR
Sales
13,071,900,00
2009 Q3
0
12,143,600,00
2009 Q2
0
12,707,800,00
2009 Q1
0
10,931,000,00
2008 Q4
0
11,025,000,00
2008 Q3
0

EBIT
2,488,300,000
2,280,100,000
2,838,800,000
1,826,100,000
2,042,900,000

PAT
1,827,600,00
0
1,620,200,00
0
1,973,000,00
0
1,210,900,00
0
1,317,500,00
0

Financial Analysis

2008 Q1
2007 Q4

10,423,400,00
0 1,695,600,000
10,971,700,00
0 2,180,000,000
9,016,800,000 1,419,300,000

2007 Q3
2007 Q2

8,993,100,000 1,859,900,000
8,420,600,000 1,437,000,000

2007 Q1
2006 Q4
2006 Q3
2006 Q2
2006 Q1
2005 Q4
2005 Q3
2005 Q2
2005 Q1

8,700,300,000
7,435,900,000
7,265,300,000
6,855,900,000
6,809,600,000
6,260,000,000
6,304,800,000
6,237,800,000
6,203,800,000

2008 Q2

MeanQuarterly
SD
Quarterly
MeanAnnual
SD - Annual

1,578,400,000
1,093,200,000
1,222,900,000
1,189,600,000
1,334,900,000
1,015,100,000
1,075,200,000
1,184,900,000
1,180,100,000

1,210,900,00
0
1,601,500,00
0
936,100,000
1,160,600,00
0
956,900,000
1,084,500,00
0
624,600,000
829,900,000
810,400,000
886,100,000
741,600,000
745,900,000
827,700,000
780,500,000

8,935,700,000 1,628,542,105

1,112,968,42
1

2,349,604,234

532,015,084

393,858,998

35,742,800,00
0 6,514,168,421
4,699,208,469 1,064,030,167

4,451,873,68
4
787,717,995

7. OPERATING & FINANCIAL LEVERAGES

Share Cap
Ret earning

2008

2007

2006

964200000
376930000

964200000
278770000

964200000
249240000

2005
96420000
0
21448000

2004
96420000
0
17976000

Financial Analysis

NW

0
473350000
0

0
418420000
0

10

0
388890000
0

00
35413000
00

00
31941000
00
79100000

8200000

28700000

162700000

14300000
0

EBIT

774470000
0

629460000
0

480960000
0

46927000
00

38727000
00

Contributi
on

155473000
00

181066000
00

101930000
00

94027000
00

83905000
00

Fin
Leverage

0.0017

0.0069

0.0418

0.0404

0.0248

Op.
Leverage

2.01

2.88

2.12

2.00

2.17

Debt

4. COMPETITIVE ADVANTAGE
Nestle India is one of the leading companies in the FMCG industry in India. From
the financials (EVA calculations) it is highly evident that it is a value creator. From
the growth rate figure what I infer is that it is performing extremely well and
operational efficiency must be its core competence. From cash conversion cycle
we can see the debtors velocity is quite low and that implies that it has dominating
position among distributors. From which I infer that it must have very good brand
perception among the customers and that fits well to my personal opinion- since
child hood I have been fond of Maggie and Milkybar chocolates. That is the Nestle
Brand. From the financial analysis I could figure the same about the Indian
customer as a whole.

Financial Analysis

11

The product quality is the main value driver of the company.

Apart from that the company thoroughly understands need of the Indian public
and caters very well to the taste of the people- for example Milkmaid is widely
used in desert and Kheer making during festivals.
From time to time Nestle introduces innovative products into the market and
thereby it never lets its products get into deep maturity phase of product life cycle
and before they do it launches a new product.
Another competitive advantage is cost leadership. Its pricing strategy is fair
enough to offer value for money proposition that hits the Indian consumer mind
set.
The marketing strategy gives it competitive advantage. It as a FMCG producer
focuses on mass market and maintains well diversified product portfolio- for
example dairy products, infant food, sweets and confectionaries, fast food
products, prepared foods etc. That gives it chance to play on volume.

5. SUSTAINABILITY
As far as sustainability is concerned what I have inferred is that it has very good
prospects for not only sustainability but for growth also. Though company exports
its main (more than 90%) market is the domestic one. At the same time as India is
a growing economy second most populous country it provides a very big market to
food products. In India on average more than 40% of expenditure is on food. As
the economy is growing per capita food consumption is on upward trend and that
makes a huge potential market for food and food products. More than 70% of
population in india reside in rural area and still majority of this market is yet to be
discovered by organized food sector. Therefore there is no doubt that Indian
market is a very sustainable domain for food FMCG business.
ACC ltd.

Financial Analysis

Major Industry:

12

Cement and Cement products

Stock Price (14/12/2009):

Rs. 858.25

Market Cap:

Rs. 161,088,524,635

Shares Outstanding:

187,717,477

Share face Value:

Rs. 10

Last AGM:

30th Jul 2009

Stock Listing - Nestl India Limited

Industry
Cement and Cement products
Indices
Bombay Stock Exchange- BSE 500
Stock Code
500410
Group
A
ISIN Code
INE012A01025
Share Holder Pattern (30th Sep 2009):
No. of
shareholders
Promoter and Promoter Group
Indian Bodies Corporate
Foreign Bodies Corporate
Public shareholding
Institutions
Mutual Funds/ UTI
Financial Institutions/ Banks
Central/ State Government(s)
Foreign Institutional Investors

No. of shares

% of Total

1
1
2

86191067
541000
86732067

45.92
0.29
46.21

113
141
5
239
498

4874551
36169914
397295
18139630
59581390

2.6
19.27
0.21
9.66
31.74

1858
133390

9975045
25182407

5.31
13.42

Non-institutions
Bodies Corporate
Individual shareholders- up to Rs.

Financial Analysis

1 lakh
Individual shareholders > Rs. 1
lakh
Pakistani Citizens
Other Foreign Nationals
Trusts
Clearing Members/Clearing
House
NRI/OCBs
GRAND TOTAL

13

145
172
4
39

4241479
385965
1105
628072

2.26
0.21
0
0.33

212
2649
138469
138969

134906
840561
41389540
187702997

0.07
0.45
22.05
100

1. ENTERPRISE VALUE
For 2008 debentures:
1.

Book value of debentures issued (Non convertible 13.5%) 200Cr

Total 2000 issued with face value of bond, Rs.

2.

= 1,000,000

Last trading price

= 109.5011

Current market value of bond

109.5011

= (10lakh / 100) X

Market value of Debentures

=2,190,022,000

Book value of debentures issued (Non convertible 8.45% for 5 YEARS)

300Cr
Total 2000 issued with total face value of bond, Rs.

= 1,000,

Last trading price

= 101.4953

Current market value of bond

101.4953

= (10lakh/100) X

Market value of Debentures

=3,044,859,000

Total Market value of debt

= 5,234,881,000

Financial Analysis

14

Similarly calculating for other years:- Both Long term and Short term debt
are

Debt
L /T
Debentu
res
Term
loan
Forex
loan

2008
5234881
000
2500000
000

0
4038000
00

2006
3000500
000
2500000
000
1439100
000
5020000
00

2005
45000000
00
25000000
00
21399000
00
12130000
00

2004
65000000
00
20000000
00
21870000
00
26666000
00

0
2500000
000

Others

0
3200000
00

Total L/
T

8054881
000

2903800
000

7441600
000

10352900
000

13353600
000

1603000
00

2700000
00

36130000
0

72370000
0

Debt S/
T

2007

Calculation for EV:

O/s
Shares
200
4
200
5
200
6

17424388
3
18555613
8
18832600
9

Share
price

Market Cap

338.7

59016403172

534.2

99124088920
20443729906
9

1085.55

Total Debt
1407730000
0
1071420000
0
7711600000

S /T
investment
279140000
0
293750000
0
503540000
0

Cash
balance
as on 31dec
573200000
102790000
0
620170000
0

EV in
Cr
6972.91
10587.2
9
20091.1
8

Financial Analysis

200
7
200
8

18867230
5
18872970
6

1024.5

19329477647
3

3064100000

477.9

90193926497

8054881000

844810000
0
679080000
0

15

743480000
0
984240000
0

18047.6
0
8162

2. FINANCIAL RATIOS
Figures
NW
LT debt
CE
TA
Sales
EBIT
Interest
PBT
Tax
PAT
Invested
Capital
Variable cost
Contribution

2008
4927.73
482.03
54
10
5409.76
7229.97

2007
4152.71
306.41

Ratios
RONW
ROCE

2008
2007
0.4132 0.5565
0.3763 0.5182

4459.12
4459.12
6894.79

PAT/Sales
S / TA
EPS

2036.12
39.96
1701.98
524.6
1212.79

2311.15
73.87
1930.3
491.7
1438.59

ROE
P/ E
Current Ratio
D / E ratio

0.1676
1.3364
64.62
0.245
9
7.3955
0.89
0.10%

8955.47
2852.27
4377.7

7448.11
2419.63
4475.16

8. BETA CALCULATION
refer FM project_GMP_G09038.xls
Volatility of shares

= 112.1343

R2 value

= 40.4%

Beta value

=0.771

please

0.2085
1.5460
76.67
0.346
3
3.3624
0.86
0.09%

Financial Analysis

16

10. COMPANY COST OF CAPITAL

Cost of Equity:
Re

= Rf + (Rm -Rf)

Rf

= 6.9 %

Rm

= 12.18 %

Re = 10.97 %
Cost of debt: debt is taken at market value
Term loan from bank is @ 8.25% where as coupon rate is @ 13.5 % & 8.45
%
Amoun Weight
t
-We
Equity
Total Debt
Value
Debenture1
Debenture2
Bank Loan
Others

return After We x
Re
tax
Re
10.97
0.09428
4927.73 0.85950628
%
8
805.48
5733.21
13.50
200.02 0.03488796
% 0.47%
0.31%
0.08721989
500.05
9 8.45% 0.74%
0.48%
0.04360558
250
9 8.25% 0.36%
0.23%
0.00558151
32
5 8.25% 0.05%
0.03%

Financial Analysis

17

10.48
Company Cost of Capital = %

3. EVA CALCULATION

Invested Capital
Company Cost of
Capital
Required Income

2008
5744.5
5

2007
4790.57

10.48%
10.48%
601.90
501.94
1212.7
Earned income
9
1438.59
EVA
610.89
936.65
figures are in crore except % figures
The Company is really creating value.

9. CAPITAL STRUCTURE
Debt Structure
1.

Term loan from bank 250 Cr.

2.

Long term Debentures: for 2008

Name of the
Instrument

Description In
NSDL

Secured Non
Convertible
Debenture

ACC LIMITED
11.30 NCD
10DC13
FVRS10LAC

Issue
price
1000000

Face
Value
1000000

Issue Date/Date
of Allotment
10/12/2008

Coupon
Rate
11.30%

Payment
mode
Annually on
10th Dec.

Maturity
Dec 2013

No. of
Issues
2000

Financial Analysis
Secured Non
Convertible
Debenture

ACC LIMITED,
8.45 NCD
07OT14
FVRS10LAC

1000000

1000000

7/10/2014

8.45%

Annually on
10th Dec.

18
Dec 2014

And similar for other years also

3. D/E ratio

D/E ratio

2009
2008
2007
2006
2005
2.90548 3.0472 2.4160 4.5090 4.2623
24
1
2
5
4

Company is in a high capital intensive business. Therefore it is imperative to take

debt to avail tax shield.

11. OPERATING CYCLE

figures are in Crore

2008

2007

Inventory
Closing balance
Opening balance
AV

793.27
730.86
762.065

730.86
624.13
677.495

Sundry Debtors
Closing balance
Opening balance
AV

213.96
289.29
251.625

289.29
213.96
251.625

3000

Financial Analysis

Sundry Creditors
Closing balance
Opening balance
AV

1753
1537.2
1645.1

1207.5
854.5
1031

Purchase

1166.62

1091.05

Manufacturing Expenditure
COGS

3,194.39
1,104.21

2,709.65
984.32

Sales

7,308.62

6,990.68

251.90

251.22

12.57

13.14

514.70

344.91

264.47
-250.23

264.36
-80.55

Inventory Cycle in (Days)

Account receivable turnover
(Days)
Account payable turnover
(Days)
Operating Cycle
Cash Cycle

12. GROWTH

2008
2007
2006
2005

Annual data
SALE EBIT
7719.6 1664.7
9
7
7693.9 1664.7
4
8
5851.2
4 1713.5
4227.2
2 592.06

figures are in Crore

PAT
1099.6
2
1099.6
2
1240.4
3
408.63

% Growth
SALE EBIT

PAT

0.33% 0.00% 0.00%

31.49
% -2.84% 11.35%
38.42 189.41 203.56
%
%
%

19

Financial Analysis

20

Due to downturn the growth of the company has stumbled a bit but as there is a
very high potential for growth in infrastructure expenditure it seems company can
start the growth phase again.
As far as future forecasting is concerned company should continue with present
capital structure.
6. VOLATILITY
All figures are in Rs. Crores

2009 Q3
2009 Q2
2009 Q1
2008 Q4
2008 Q3
2008 Q2
2008 Q1
2007 Q4
2007 Q3
2007 Q2
2007 Q1
2006 Q4
2006 Q3
2006 Q2
2006 Q1
2005 Q4
2005 Q3
2005 Q2
2005 Q1
2004 Q4

SALE
EBIT
PAT
2,005.47
703.98
435.63
2,119.86
772.3
485.62
2,081.70
674
404.76
2,069.52
528.38
300.39
1,852.56
486.15
283.44
1,785.74
413.63
271.42
1,766.34
470.55
357.54
1,763.73
417.28
431.18
1,636.85
448.57
292.42
1,842.66
544.4
351.24
1,634.76
507.14
363.75
1,592.33
468.52
358.46
1,357.67
366
224.68
1,424.70
455.62
405.58
1,336.40
326.56
235.42
1,084.02
157.36
192.48
992.82
140.05
203.43
1,128.25
213.3
139.36
1,110.60
165.14
165.52
953.28
120.37
53.08

Financial Analysis

Mean - Quarterly
SD - Quarterly

1576.96
381.48

418.97
188.06

297.77
112.91

Mean -Annual
SD - Annual

6307.85
762.95

1675.86
376.11

1191.08
225.83

21

4. COMPETITIVE ADVANTAGE
Competitive advantages are:
High entry barrier in the industry.
Dominant position vis a vis buyers and suppliers as is evident from cash
conversion cycle. Good profit margin .Product quality (whitest among grey cement
)and innovation- for example decorative cement
Brand name
Better cement based product portfolio
Advanced production technology
Quality man power and management practices

5. SUSTAINABILITY
As far as ACC is concerned what I discern is there is a very high degree of
chance of sustainability as there is a huge potential for growth in infrastructure
spending in India. For example power sector- for huge deficit of power India is
planning to increase the production capacity to 40,000GW capacity in next 40
years. And especially after indo-US nuclear deal more than 10 Nuclear power
plants are in pipe line. These plants need enormous infrastructure. Similarly
housing & real estate, road etc are in deficit in India. So blindly I can say that there
is huge potential of growth for cement industry. Therefore sustainability for ACC
is nearly out of question!

Financial Analysis

22