Professional Documents
Culture Documents
TABLE OF CONTENTS
Page
S.No. Topic Number
1. Executive Summary 3
2. Drivers of growth in FMCG sector in India 3
Size of Market for Consumer Goods and Growth
3. 4
Prospects
4. Company's corporate strategy to increase its ROE 5
Three major risks that could threaten company’s
5. 6
profitability
6. Competitor analysis across similar industry 8
7. Ratio Analysis 8
8. Interpretation 9
9. Conclusion
9. References 19
3
EXECUTIVE SUMMARY
Nestle India is a subsidiary of Nestle Switzerland. Nestle India primarily operates in FMCG and
packaged foods industry to serve the Indian consumers with global products at a very high quality
and a very rich experience. It is also committed to long term shareholder satisfaction and
sustainable growth in India. The founding principles of Nestle are honesty, integrity and fairness
in its business.
Nestle India trades on NSE as ‘NESTLEIND’. It sells variety of milk products, beverages like
Nescafe etc., and other brands like Maggi, Kit Kat etc. Its major suppliers are farmers and it sells
products to almost all segments in the country. Lately it is exporting in the Indian subcontinent,
Middle east and Asia Pacific regions. It employs about 7500+ employees who are always coming
up with innovative strategies to boost profits. In terms of financial prowess of Nestle, it is the
undisputed market leader with INR 1037b market cap. It is also facing lot of competition in the
market by emerging players like Patanjali and other Herbal, Ayurvedic & Natural (HAN) players.
3. Rising pace of urbanisation and nuclear families: With the Indian government’s
initiative to build 100 smart cities, India is on the brink of stepping into an era of massive
urbanisation. In fact, nations such as Germany have agreed to partner with India in the
urbanisation wave and provide financial and technical assistance in the range of one billion
4
Euros till 2022. India is also slowly moving to nuclear households. As per a Boston
Consulting Group report, nuclearisation is likely to add about 10 million households by
2020. Put together, these factors will lead to huge demand for the FMCG sector.
4. Rising demand from Tier II and III cities: Consumers spend most of their income on
FMCG products and with an increase in income, consumers in the tier II and tier III cities
are expected to switch to branded products. Also, with higher disposable income, the
middle-class income group is expected to switch to ‘premium’ products which translates
to better revenues for the companies in FMCG sector.
FMCG is the fourth largest sector in India. As per the Boston Consulting Group (BCG), the Indian
FMCG market is estimated at about US$ 185 billion or about Rs. 12.6 trillion. By 2020, top lines
in the sector are expected to reach US$104 billion. Food and Beverages, which is the segment
where Nestle India is primarily active, accounts for 19% of market share in the sector. According
to a Boston Consulting Group report, on an overall basis, the share of the branded firms in the
FMCG sector stands at about a third. India's organized FMCG sector is estimated to grow at a pace
of 14-15% on a year on year basis per annum for the next decade. The most growth is expected in
the packaged foods, edible oils and home and personal care segments of the FMCG sector. There
has been a shift in consumer perspective in terms of lifestyle, so more of healthy snack alternatives
like oats, fibre-based biscuits, or wellness-based products like green tea, or Ayurveda based
products like Amla juice and other nutrition supplements. According to industry estimates, India’s
natural products segment contributed to 41% of the personal care products market in 2017,
generating US$2.5 billion in revenue. By 2022, India expects the market for Ayurvedic products
to reach US$8 billion.
5
Nestle has taken up several corporate strategies to improve its Return on Equity for its investors.
(ROE = Return on Assets (ROA) x Leverage, where: Leverage = Equity Multiplier) These are:
• To improve net margin: Nestle India follows a value-driven strategy to support the volume-
led growth platform which has the scope to expand beyond its focus of 100 top towns. It has
increased its utilization to give higher margins (lower fixed costs per unit). Nestle launches
several products in a year but also discontinues some products not meeting the profit
expectations. The company is focusing on launching of higher margin, special “health” focused
products for special dietary needs and protein supplements. Foraying into new categories and
expansion to become a multi-product and multi-category company (entered the pet care,
premium coffee and snacks segments recently) to leverage distribution and leveraging existing
brand image.
rural markets to lead to higher utilization of manufacturing plant (more sales) as well as
distribution (distributing in semi-rural/rural is an extension of current distribution channel
thereby increasing their efficiency in the common part of the distribution chain). Nestle is
improving Net Working Capital to use ‘net’ assets more efficiently.
• Equity Multiplier: Nestle India is a debt-free company by choice as its balance sheet has <1%
of its total assets as debt from 2014-18 (and in 8 out of past 10 years). Equity Multiplier is 1.
However, Nestle has identified this risk and is currently introducing new products like Maggi
Masala-iron fortified, Maggi nutrilicious, Kit Kat Dessert Delight etc. They are also trying to
create a perception that Nestle products are good for health to attract the new millennials who
are health conscious.
• Total Market Share of packaged food in India = 2,791.8 (in Billion) [12]
The concept of packaged food has just started gaining acceptance in India. With the changing trend
of lifestyle and people’s acceptance to packaged foods to include it in their daily life the industry
has huge potential for expansion in the coming years.
With this trend it can be safely assumed that the degree of competition within the industry is high,
but also the threat of new entrants is low because of the various factors involved like equipment,
high cost infrastructure etc. Also, unlike for small scale industries, fewer schemes have been
designed to promote scale by incentivizing large scale investors. [15] Due to intense competition
in the end-user market, the cost of equipment and the low running cost remain the primary factors
that influence the sale of the packaging equipment. [16]
RATIO ANALYSIS
Return on Equity
The return on Equity for Nestle India has exhibited a dip in 2016, attributed mainly to the trough
in Profits after Tax while the average shareholder’s equity has grown at a slower pace. The firm
had been efficient in utilizing the invested funds into greater gains but with a slight shift in 2016
because of the Maggi noodles lead issue.
9
ROE
40.00%
36.56%
35.00%
36.24%
30.00% 32.04%
25.00%
20.00%
15.00%
2015 2016 2017
ROE
Return on Sales
The profit margin for Nestle India has also exhibited a trend similar to ROE, owing to the slight
decrease in profits after tax, while sales have not matched the growth in profits after tax. In 2017,
Nestle was able to generate 12.02% of operating cash on its revenues while its competitor
Britannia stood at 10.02% in the same year.
ROS
13.00%
12.50% 12.54%
12.00% 12.02%
11.50%
11.00%
10.68%
10.50%
10.00%
9.50%
2015 2016 2017
ROS
10
Asset Turnover
146.87%
150.00% 142.43% 143.82%
140.00%
130.00%
120.00%
110.00%
100.00%
2015 2016 2017
Asset Turnover
Return on Assets
The Return on Assets has exhibited a trough in 2016, owing to a fall in the profits after tax for
Nestle India. In term of assets, the firm had been involved in increasing its current assets by
investments, another major contribution was through cash and cash equivalents.
ROA
20.00%
18.00%
17.29%
17.87%
16.00%
15.69%
14.00%
12.00%
10.00%
2015 2016 2017
ROA
Leverage
The use of leverage on equity side has been slowly growing in the period of 2015-2017. This
indicates that Nestle India has been issuing equity as a means to raise capital in the recent years.
11
Leverage
220.00%
215.00%
211.45%
210.00%
205.00%
202.80% 204.20%
200.00%
2015 2016 2017
Leverage
Financial Leverage
We can see from the graph and the values of financial leverage that Nestle has not been
sufficiently utilizing its strong position with respect to assets to generate more debt capital.
This ratio has been growing quickly for Nestle India from 2015 to 2017. This suggests that the
firm has been making greater use of debt to raise capital as compared to issuing stock to its
shareholders.
12
This is primarily because the company had been extremely conservative in raising capital
through debt financing and they needed to grow their businesses extremely fast after the Maggi
fiasco and therefore they leveraged their strong financial position to raise more capital.
Financial Leverage
1.20% 1.02%
1.00% 0.81%
0.80% 0.64%
0.60%
0.40%
0.20%
0.00%
2015 2016 2017
Financial Leverage
2.00 1.70
1.50
1.00
0.50 0.11
0.00
2015 2016 2017
Operating Spread
The spread has become largely negative for the firm; starting with 24.96% in 2015 to -131.66%
in 2017. The spread was at a negative peak of -191.55 in 2016 when Nestle India had witnessed a
dip in its profits after tax. This implies that the percentage growth on return on net assets has
been inadequate to cover-the net borrowing cost for Nestle India.
13
ROE = PAT/Equity
= 36.56 %
Thus, Advanced Dupont model holds good for this set of Calculations.
We can see from the above graph that although it may seem like the gross profit margins have
declined, they have remained approximately similar over the three years. This shows that the
production processes have been approximately maintained at an efficient level. We can also see
that the decrease in gross profit margins has been large because of the increasing cost of goods
sold over the three years.
The profit margins for Nestle are really great when compared with competitors like Britannia
(GPM – 13.87%) and GlaxoSmithKline (GPM – 16.38%).
20,000.00
0.00
2015 2016 2017
OPEX to sales
89.00% 88.71%
88.50%
88.00%
87.43% 87.41%
87.50%
87.00%
86.50%
2015 2016 2017
OPEX to sales
We can see from the graph that Operating expenses to sales have been relatively stagnant it
means that Nestle has been doing its business without any exorbitant additional expenses or
overheads in operations although the revenue and profits have increased significantly.
EPS
140.000 127.048
110.345 104.956
120.000
100.000
80.000
60.000
40.000
20.000
0.000
2015 2016 2017
EPS
We can see that earnings per share had declined for Nestle in 2016 with respect to 2015, this can
be attributed to the loss of revenue from the Maggi fiasco, but the company was able to bounce
back very well in 2017 and the earning per share have increased significantly over the last two
years.
Debtor Turnover
Nestle has been performing really well over the last three years in efficiently collecting the credit
sales from its customers. It has seen significant improvement in debtor turnover ratio compared
15
to its past performance and competitors. Currently, its sales form 109.06 times the average trade
receivables.
Liquidity Analysis
Current Ratio
The Current Ratio of the firm has been consistently growing (above 2) which usually implies that
the assets are highly liquid and thus the business has enough cash to be able to pay its debts.
Here the ratio is high because of high account receivables i.e. the firm has not been able to
collect the cash generated through sales which is not a positive sign.
It has an extremely high current ratio compared to its closest competitors like Britannia (CR –
1.59) and GlaxoSmithKline (CR – 1.42). Although Nestle has increased its borrowings, it is still
more conservative in terms of borrowing from financial institutions to expand and grow its
business than its competitors. It can more effectively use its strong financial position by
deploying assets more effectively to boost growth. We can also see from the following graph that
current ratio has increased gradually over the years.
16
Current ratio
3.00 2.64
2.40
2.50 1.97
2.00
1.50
1.00
0.50
0.00
2015 2016 2017
Current ratio
Quick Ratio
Quick ratio measures the firm's ability to pay off short-term obligations without relying on the
sale of inventory. Nestle has also been able to perform well in the quick ratio as well with the
ability to pay Rs. 2.033 for every 1 rupee of liability without relying on the inventory. Its major
competitor lacks the ability to pay Rs 1.16 for every 1 rupee of liability without relying on the
inventory.
Quick ratio for Nestle has also dramatically increased over the last 3 years.
Quick ratio
2.500
2.033
2.000 1.714
1.318
1.500
1.000
0.500
0.000
2015 2016 2017
Quick ratio
This means that the company has added to its assets more rapidly than it has borrowed in the
same period. It effectively means that Nestle can borrow still more in case it needs to raise more
capital to fund more projects.
Solvency
Debt to Equity Ratio
Debt to equity ratio for Nestle is 1% which is extremely low. It means it is not using enough
finances and bank instruments to increase its operating investments and thereby potentially earn
more revenues. We can also see from the previous year trends that Nestle has tried to increase its
debt to finance more operations, but it has been very cautious in doing that.
17
Debt to Equity Ratio of Nestle is 0.010 (1%) which makes it difficult for investors to purchase
the stock of the company. It implies that Nestle is financing very low amount through
borrowings for its increased operations.
Interest Coverage
Nestle has reached a strong financial position and it is able to finance its loans very effectively. It
used to be very conservative in taking loans earlier and it has increased this in the recent years
but its ability to pay its interests on those loans is unquestionably strong. We can also see from
the trend of interest coverage that Nestle’s position with respect to paying interest on its debt has
become stronger over the last year. We can also see that it had an extremely high-interest
coverage in 2015, it was a time when Nestle had very low debt which it has strategically
improved in the last two years.
Interest Coverage
300.00 248.30
250.00
200.00
150.00
100.00
50.00 18.00 21.01
0.00
2015 2016 2017
Interest Coverage
CONCLUSION
Nestle is a market leader in its category and is doing well against the competitors and industry
benchmarks as is evident from the analysis above. It has minimal borrowings and can leverage it
now to increase its borrowings. We recommend buying the stock.
18
APPENDIX
Parameters of interest 2017 2016 2015
Average Assets 70,865.25 64,508.55 59,553.75
Average Shareholder’s Equity 33,514.60 31,590.95 29,365.35
Net Operating Assets 34,557.30 33,154.80 30,535.90
Average Net Operating Assets 33,856.05 31,845.35 29,551.85
Average Borrowings 341.45 254.40 186.50
Net Financing Expense 578.97 572.733 20.727
Profit before EI & DO 12,251.90 10,121.40 10,641.10
Net Operating Profit 12,830.87 10,694.13 10,661.83
Net Sales 101,921.80 94,745.70 84,824.80
Cost of Goods Sold 52,317.73 46,995.93 42,327.67
Tax rate 37% 37% 37%
Profit before EI & DO 12,251.90 9,905.80 624.30
Change in
Inventory
(FG+WIP+SIT)
COGS
+ Purchase of
SIT + Cost of
Manufacturing
2017 2016 2015
Change in Inventory
-795.60 -76.60 119.70
(FG+WIP+SIT)
Purchase of SIT 1,747.60 1,153.80 980.70
Cost of Manufacturing
Cost of materials Consumed 42,316.60 37,750.90 33,588.70
Power and fuel 2,884.40 2,327.90 2,219.90 Other Expenses
Contract manufacturing charges 374.40 378.00 397.50 Other Expenses
(Assumption -
Maintenance and
repairs of Plant and
Machinery ~ 75% of
Maintenance and repairs (Plant
754.20 825.20 659.50 total - Based on
& Machinery)
previous year data
(year 2016- 78.90%;
Year 2015 -
73.60%)
Consumption of stores and
503.80 452.60 412.70
spare parts
Depreciation Cost (1/3 of total) 1,140.83 1,178.90 1,157.53
Employee benefit cost (1/3 of
3,391.50 3,005.23 2,791.43
total)
COGS 52,317.73 46,995.93 42,327.67
PURCHASES
REFERENCES
1. https://www.equitymaster.com/research-it/sector-info/consprds/Consumer-Products-
Sector-Analysis-Report.asp
2. https://economictimes.indiatimes.com/news/economy/indicators/indias-per-capita-
income-grows-by-8-6-to-rs-1-13-lakh-in-fy18/articleshow/64403632.cms
3. “Drivers to FMCG sector in Indian Emerging Market”, Natasha Saquib, International
Journal of Science Technology and Management
4. https://www.ibef.org/industry/fmcg-presentation
5. https://www.moneycontrol.com/news/business/real-estate/germany-intends-to-give-india-
1-billion-euros-for-urban-development-2804061.html
6. https://www.india-briefing.com/news/ayurveda-india-fmcg-market-consumer-
preferences-natural-organic-products-17395.html/
7. https://www.nestle.in/investors/stockandfinancials/documents/annual_report/nestle-india-
annual-report-2017.pdf
8. http://britannia.co.in/pdfs/annual_report/Annual-Report-Britannia-2018.pdf
9. https://india-pharma.gsk.com/media/835487/gsk-annual-report-2017-18.pdf
10. https://varunpepsi.com/wp-content/uploads/2018/03/VBL-AR-2017-Cover-to-Cover-
pdf_-260318.pdf
11. https://www.hap.in/pdf/annualreport/2018.pdf
12. http://www.fnbnews.com/Interview/india-to-be-worlds-3rdbiggest-packaged-food-
market-43250
13. https://www.big-consultants.com/images/Packaged Food Industry.pdf
14. http://www.fnbnews.com/Interview/india-among-top-five-markets-for-packaged-food-
40385
15. https://www.thehindubusinessline.com/economy/agri-business/Food-processing-Key-
challenges-and-deliverables-for-success/article20343935.ece
16. http://www.fnbnews.com/Interview/india-to-be-worlds-3rdbiggest-packaged-food-
market-43250