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Financial Analysis

Nestle India ltd.


ACC Ltd.

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Financial Analysis 1

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 - Nestlé India Limited
Industry Food Processing
Exchange The Bombay Stock Exchange Limited, 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
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

O/s Share L/ T debt S/ T Short term Cash balance


Shares price Market Cap (bank loan) debt Total Debt investment as on 31-dec
2008 96,415,716 1,498.05 144,435,563,354 8,177,000 0 8,177,000 348,992,000 1,936,893,000
2007 96,415,716 913.6 88,085,398,138 28,711,000 0 28,711,000 944,014,000 377,604,000
2006 96,415,716 1,186.00 114,349,039,176 162,676,000 0 162,676,000 777,732,000 763,560,000
2005 96,415,716 638 61,513,226,808 143,045,000 0 143,045,000 1,044,276,000 366,485,000
2004 96,415,716 627.05 60,457,474,718 79,051,000 0 79,051,000 1,548,637,000 94,453,000

2008 2007 2006 2005 2004


Enterprise Value
(INR) 142,157,855,354 86,792,491,138 112,970,423,176 60,245,510,808 58,893,435,718
Financial Analysis 2

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 = EBIT / Net Worth ROE = PAT / Net Worth


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 2008 2007 Ratios 2008 2007


NW 4,733,497,000 4,184,241,000 RONW 1.636 1.504
LT debt 8,177,000 28,711,000 ROCE 1.633 1.494
CE 4,741,674,000 4,212,952,000 PAT/Sales 0.124 0.118
TA 16,950,135,000 14,077,619,000 S / TA 2.551 2.489
Sales 43,242,450,000 35,043,532,000 Operating Leverage 2.266 2.413
EBIT 7,744,698,000 6,294,683,000 Financial Leverage 0.002 0.007
Interest 16,430,000 8,545,000 EPS 55.39 42.92
PBT 7,728,268,000 6,286,138,000 ROE 1.13 0.99
Tax 2,387,446,000 2,148,016,000 P/ E 27.04 21.29
PAT 5,340,822,000 4,138,122,000 Current Ratio 0.67 0.67
Invested Capital 5,110,484,000 4,499,926,000 D / E ratio 0.17% 0.69%
Variable cost 25,696,689,750 19,853,305,192
Contribution 17,545,760,250 15,190,226,808

8. BETA CALCULATION… … please refer FM project_GMP_G09038.xls

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
Financial Analysis 3

10000
9000 BSE index

8000 Nestle

7000
6000
5000
4000
3000
2000
1000
0
1 3 5 7 9 11131517192123252729313335373941434547495153555759616365676971

20%
y = 0.0971x + 0.0206
Nestle returns R² = 0.015
15%

10%

5%

0%
-40% -30% -20% -10% 0% 10% 20% 30% 40%
-5%

-10%

-15%

-20%

Volatility of returns: If St is the share price in period t


then, log relative return is

And volatility measure is


= 6.22%
Financial Analysis 4

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 Rf = 6.90 % (www.bloomberg.com)
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
2008 2007
Invested Capital 5,110,484,000 4,499,926,000
Company CoC 7.47% 7.47%
Required Income 381753154.8 336144472.2
Earned income 5,340,822,000 4,138,122,000
EVA 4,959,068,845 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 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 company’s 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 2007 2006 2005 2004
Share Capital 964,157,000 964,157,000 964,157,000 964,157,000 964,157,000
Reserve & Surplus 3,769,340,000 3,220,084,000 2,924,722,000 2,577,176,000 2,229,913,000
Equity 4,733,497,000 4,184,241,000 3,888,879,000 3,541,333,000 3,194,070,000
Debt 8177000 28711000 162676000 143045000 79051000
D/E 0.17% 0.69% 4.18% 4.04% 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 don’t 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.
Financial Analysis 5

11. OPERATING CYCLE


2008 2007
Inventory
Closing balance 4,349,117,000 4,012,153,000
Opening balance 4,012,153,000 2,762,185,000
AV 4,180,635,000 3,387,169,000

Sundry Debtors
Closing balance 455,933,000 534,901,000
Opening balance 534,901,000 557,569,000
AV 495,417,000 546,235,000

Sundry Creditors
Closing balance 5,017,178,000 4,555,845,000
Opening balance 4,555,845,000 3,666,483,000
AV 4,786,511,500 4,111,164,000

Purchases 21,386,673,000 17,522,681,000

Manufacturing Expenditure
Material cost 21,386,673,000 17,522,681,000
Employee Cost 2,359,356,000 2,020,819,500
Power & fuel 1,597,565,000 1,239,442,000
Contract Labor 456,500,000 372,172,000
Milk collection 114,490,000 308,714,000
Quality testing (Laboratory) 137,557,000 99,501,000
Sum 26,052,141,000 21,563,329,500
COGS 25,715,177,000 20,313,361,500

Sales 43,242,450,000 35,043,532,000

Inventory Cycle in (Days) 59.33973447 60.86224011


Account receivable turnover
(Days) 4.181705824 5.689374433
Account payable turnover
(Days) 81.68997102 85.63614552

Operating Cycle 63.52144029 66.55161454


Cash Cycle -18.16853072 -19.08453098
Financial Analysis 6

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 EBIT PAT
2009 Q3 13,071,900,000 2,488,300,000 1,827,600,000
2009 Q2 12,143,600,000 2,280,100,000 1,620,200,000
2009 Q1 12,707,800,000 2,838,800,000 1,973,000,000
2008 Q4 10,931,000,000 1,826,100,000 1,210,900,000
2008 Q3 11,025,000,000 2,042,900,000 1,317,500,000
2008 Q2 10,423,400,000 1,695,600,000 1,210,900,000
2008 Q1 10,971,700,000 2,180,000,000 1,601,500,000
2007 Q4 9,016,800,000 1,419,300,000 936,100,000
2007 Q3 8,993,100,000 1,859,900,000 1,160,600,000
2007 Q2 8,420,600,000 1,437,000,000 956,900,000
2007 Q1 8,700,300,000 1,578,400,000 1,084,500,000
2006 Q4 7,435,900,000 1,093,200,000 624,600,000
2006 Q3 7,265,300,000 1,222,900,000 829,900,000
2006 Q2 6,855,900,000 1,189,600,000 810,400,000
2006 Q1 6,809,600,000 1,334,900,000 886,100,000
2005 Q4 6,260,000,000 1,015,100,000 741,600,000
2005 Q3 6,304,800,000 1,075,200,000 745,900,000
2005 Q2 6,237,800,000 1,184,900,000 827,700,000
2005 Q1 6,203,800,000 1,180,100,000 780,500,000

Mean- Quarterly 8,935,700,000 1,628,542,105 1,112,968,421


SD - Quarterly 2,349,604,234 532,015,084 393,858,998

Mean- Annual 35,742,800,000 6,514,168,421 4,451,873,684


SD - Annual 4,699,208,469 1,064,030,167 787,717,995
Financial Analysis 7

7. OPERATING & FINANCIAL LEVERAGES

2008 2007 2006 2005 2004


Share Cap 964200000 964200000 964200000 964200000 964200000
Ret earning 3769300000 2787700000 2492400000 2144800000 1797600000
NW 4733500000 4184200000 3888900000 3541300000 3194100000

Debt 8200000 28700000 162700000 143000000 79100000

EBIT 7744700000 6294600000 4809600000 4692700000 3872700000

Contribution 15547300000 18106600000 10193000000 9402700000 8390500000

Fin Leverage 0.0017 0.0069 0.0418 0.0404 0.0248

Op. Leverage 2.01 2.88 2.12 2.00 2.17

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 debtor’s 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.

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.
Financial Analysis 8

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.
Financial Analysis 9

ACC ltd.

Major Industry: 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 - Nestlé 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 No. of shares % of Total
Promoter and Promoter Group
Indian Bodies Corporate 1 86191067 45.92
Foreign Bodies Corporate 1 541000 0.29
2 86732067 46.21
Public shareholding Institutions
Mutual Funds/ UTI 113 4874551 2.6
Financial Institutions/ Banks 141 36169914 19.27
Central/ State Government(s) 5 397295 0.21
Foreign Institutional Investors 239 18139630 9.66
498 59581390 31.74
Non-institutions
Bodies Corporate 1858 9975045 5.31
Individual shareholders- up to Rs. 1 lakh 133390 25182407 13.42
Individual shareholders > Rs. 1 lakh 145 4241479 2.26
Pakistani Citizens 172 385965 0.21
Other Foreign Nationals 4 1105 0
Trusts 39 628072 0.33
Clearing Members/Clearing House 212 134906 0.07
NRI/OCBs 2649 840561 0.45
138469 41389540 22.05
GRAND TOTAL 138969 187702997 100
Financial Analysis 10

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. = 1,000,000
Last trading price = 109.5011
Current market value of bond = (10lakh / 100) X 109.5011
Market value of Debentures =2,190,022,000

2. 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 = (10lakh/100) X 101.4953
Market value of Debentures =3,044,859,000

Total Market value of debt = 5,234,881,000

Similarly calculating for other years:- Both Long term and Short term debt are
Debt L /T 2008 2007 2006 2005 2004
Debentures 5234881000 0 3000500000 4500000000 6500000000
Term loan 2500000000 2500000000 2500000000 2500000000 2000000000
Forex loan 0 0 1439100000 2139900000 2187000000
Others 320000000 403800000 502000000 1213000000 2666600000

Total L/ T 8054881000 2903800000 7441600000 10352900000 13353600000

Debt S/ T 0 160300000 270000000 361300000 723700000

Calculation for EV:

S /T Cash balance
O/s Shares Share price Market Cap Total Debt EV in Cr
investment as on 31-dec
2004 174243883 338.7 59016403172 14077300000 2791400000 573200000 6972.91
2005 185556138 534.2 99124088920 10714200000 2937500000 1027900000 10587.29
2006 188326009 1085.55 204437299069 7711600000 5035400000 6201700000 20091.18
2007 188672305 1024.5 193294776473 3064100000 8448100000 7434800000 18047.60
2008 188729706 477.9 90193926497 8054881000 6790800000 9842400000 8162
Financial Analysis 11

2. FINANCIAL RATIOS

Figures 2008 2007 Ratios 2008 2007


NW 4927.73 4152.71 RONW 0.4132 0.5565
LT debt 482.03 306.41 ROCE 0.3763 0.5182
CE 5410 4459.12 PAT/Sales 0.1676 0.2085
TA 5409.76 4459.12 S / TA 1.3364 1.5460
Sales 7229.97 6894.79 EPS 64.62 76.67
EBIT 2036.12 2311.15 ROE 0.2459 0.3463
Interest 39.96 73.87 P/ E 7.3955 3.3624
PBT 1701.98 1930.3 Current Ratio 0.89 0.86
Tax 524.6 491.7 D / E ratio 0.10% 0.09%
PAT 1212.79 1438.59
Invested Capital 8955.47 7448.11
Variable cost 2852.27 2419.63
Contribution 4377.7 4475.16

8. BETA CALCULATION… … please refer FM project_GMP_G09038.xls

Volatility of shares = 112.1343


R2 value = 40.4%
Beta value =0.771

10,000.00
BSE index
9,000.00
ACC stock
8,000.00
7,000.00
6,000.00
5,000.00
4,000.00
3,000.00
2,000.00
1,000.00
0.00
1 3 5 7 9 11 13 1517 19 21 2325 27 2931 33 3537 39 4143 45 4749 51 53 5557 59 6163 65 6769 71
Financial Analysis 12

40%
y = 0.7713x + 0.0075
R² = 0.4047
30%
ACC ret vs Market ret
20%

10%

0%
-40% -30% -20% -10% 0% 10% 20% 30% 40%
-10%

-20%

-30%

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 %
return After
Amount Weight -We Re tax We x Re
Equity 4927.73 0.85950628 10.97% - 0.094288
Total Debt 805.48 - - -
Value 5733.21 - - -
Debenture1 200.02 0.03488796 13.50% 0.47% 0.31%
Debenture2 500.05 0.087219899 8.45% 0.74% 0.48%
Bank Loan 250 0.043605589 8.25% 0.36% 0.23%
Others 32 0.005581515 8.25% 0.05% 0.03%

Company Cost of Capital = 10.48%


Financial Analysis 13

3. EVA CALCULATION
2008 2007
Invested Capital 5744.55 4790.57
Company Cost of Capital 10.48% 10.48%
Required Income 601.90 501.94
Earned income 1212.79 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 Description In Issue Face Issue Coupon Payment Maturity No. of
Instrument NSDL price Value Date/Date of Rate mode Issues
Allotment
Secured ACC LIMITED 1000000 1000000 10/12/2008 11.30% Annually on Dec 2013 2000
Non 11.30 NCD 10th Dec.
Convertible 10DC13
Debenture FVRS10LAC
Secured Non ACC LIMITED, 1000000 1000000 7/10/2014 8.45% Annually on Dec 2014 3000
Convertible 8.45 NCD 10th Dec.
Debenture 07OT14
FVRS10LAC

And similar for other years also…

3. D/E ratio
2008 2007 2006 2005 2004
D/E ratio 2.9054824 3.04721 2.41602 4.50905 4.26234

Company is in a high capital intensive business. Therefore it is imperative to take debt to avail tax
shield.
Financial Analysis 14

11. OPERATING CYCLE … figures are in Crore


2008 2007
Inventory
Closing balance 793.27 730.86
Opening balance 730.86 624.13
AV 762.065 677.495

Sundry Debtors
Closing balance 213.96 289.29
Opening balance 289.29 213.96
AV 251.625 251.625

Sundry Creditors
Closing balance 1753 1207.5
Opening balance 1537.2 854.5
AV 1645.1 1031

Purchase 1166.62 1091.05

Manufacturing Expenditure 3,194.39 2,709.65


COGS 1,104.21 984.32

Sales 7,308.62 6,990.68

Inventory Cycle in (Days) 251.90 251.22


Account receivable turnover (Days) 12.57 13.14
Account payable turnover (Days) 514.70 344.91

Operating Cycle 264.47 264.36


Cash Cycle -250.23 -80.55

12. GROWTH … figures are in Crore


Annual data % Growth
SALE EBIT PAT SALE EBIT PAT
2008 7719.69 1664.77 1099.62 0.33% 0.00% 0.00%
2007 7693.94 1664.78 1099.62 31.49% -2.84% -11.35%
2006 5851.24 1713.5 1240.43 38.42% 189.41% 203.56%
2005 4227.22 592.06 408.63

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.
Financial Analysis 15

As far as future forecasting is concerned company should continue with present capital structure.

6. VOLATILITY All figures are in Rs. Crores

SALE EBIT PAT


2009 Q3 2,005.47 703.98 435.63
2009 Q2 2,119.86 772.3 485.62
2009 Q1 2,081.70 674 404.76
2008 Q4 2,069.52 528.38 300.39
2008 Q3 1,852.56 486.15 283.44
2008 Q2 1,785.74 413.63 271.42
2008 Q1 1,766.34 470.55 357.54
2007 Q4 1,763.73 417.28 431.18
2007 Q3 1,636.85 448.57 292.42
2007 Q2 1,842.66 544.4 351.24
2007 Q1 1,634.76 507.14 363.75
2006 Q4 1,592.33 468.52 358.46
2006 Q3 1,357.67 366 224.68
2006 Q2 1,424.70 455.62 405.58
2006 Q1 1,336.40 326.56 235.42
2005 Q4 1,084.02 157.36 192.48
2005 Q3 992.82 140.05 203.43
2005 Q2 1,128.25 213.3 139.36
2005 Q1 1,110.60 165.14 165.52
2004 Q4 953.28 120.37 53.08

Mean - Quarterly 1576.96 418.97 297.77


SD - Quarterly 381.48 188.06 112.91

Mean -Annual 6307.85 1675.86 1191.08


SD - Annual 762.95 376.11 225.83

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
Financial Analysis 16

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!

7. OPERATING & FINANCIAL LEVERAGES

2008 2007 2006 2005 2004


Equity 187.88 187.83 187.76 185.54 179.23
Paid in Cap 858.02 856.7 846.29 752.36 556.95
Ret Earnings 3778.35 3117.84 2130.72 1213.83 944.24
NW 4824.25 4162.37 3164.77 2151.73 1680.42

Debt 805.488 314.7 940.97 1205.61 1628.36

EBIT 1664.77 1664.78 1713.5 592.06 698.65

Variable cost 2882.73 2621 1711.39 1557.59 2143.57


Contribution 4836.96 5072.94 4139.85 2669.63 2977.88

FL 0.167 0.076 0.297 0.560 0.969

OL 2.91 3.05 2.42 4.51 4.26