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Corporate Finance

Financial Analysis Britannia, Nestle and Kwality




Beta estimates
Company 1-yr daily 3-yr weekly
Nestle
0.230 0.109
Britannia
0.391 0.204
Kwality
0.367 0.469
Company Expected return(%)
Nestle 9.501
Britannia 10.794
Kwality 14.401
Expected returns
WACC
For calculating the cost of debt, the ratings of the companies according to
their interest coverage ratio and size of market capitalization are used for
estimating their synthetic rating and spreads. The costs of debt for our
companies are tabulated below--
Company Interest
coverage ratio
Synthetic
rating
Spread Cost of
debt(%)
Nestle >8.5 AAA 0.75 8.768
Britannia >8.5 AA 1.00 9.018
Kwality 2<x<2.5 B 6.50 14.518
The WACC data for the companies can be tabulated as follows
Company WACC Tax rate After-tax WACC
Nestle 9.231 31.2 8.227
Britannia 10.075 27.49 9.071
Kwality 14.491 10.15 13.354
0
50
100
150
2009 2010 2011 2012 2013
ROE
Nestle
Britannia
Kwality
Industry
0
100
200
2009 2010 2011 2012 2013
ROCE
Nestle
Britannia
Kwality
Industry
From the above plots we can see that both ROE and ROCE of Britannia and Kwality were sufficiently above industry averages. Nestles ROE and ROCE were
much above the industry averages but in the later years, their values are approaching those that of Britannia and Kwality.
0
50
100
150
200
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
2008 2009 2010 2011 2012
R
s
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C
r
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Gross block
Capital WIP
Reserves
Non-core inv
ROE
ROCE
For getting a clue about the investments of the companies, we have considered the gross block, capital work-in-progress, reserves and non-core investments
and compared these parameters with the ROE and ROCE of the companies.
Nestle
The plot shows that Nestle is increasing its gross block y-o-y. Until 2011, its capital WIP was also increasing. It
continues to maintain huge reserves, which may be the reason why ROE and ROCE are falling. Even the non-
core investments are increasing. Overall we can assume that the company is investing in fixed assets for long
term growth.
Britannia
The plot shows that both the gross block and the capital WIP of the company are increasing. The
companys past investments can be assumed to be paying off well by looking at the positive trend in
the ROE and ROCE. The company also uses its reserves judiciously and does not have too large
reserves. Investments in the non-core segments are also decreasing.
0
10
20
30
40
50
60
0
500
1000
1500
2009 2010 2011 2012 2013
R
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C
r
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Gross block
Capital WIP
Reserves
Non-core inv
ROE
ROCE
0
20
40
60
80
0
50
100
150
200
250
300
2009 2010 2011 2012 2013
R
s
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C
r
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Gross block
Capital WIP
Reserves
Non-core inv
ROE
ROCE
Kwality
The plot shows that the company is investing to increase its gross block. However, investments in capital WIP
and non-core segments are almost non-existent. The company has huge reserves and we can assume that
these reserves are not being fully utilized by the company for making any long term investments. The
presence of these huge reserves is the reason why the ROE and ROCE are falling recently.
For the last five years, the D/E trend
of the companies can be shown as
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2009 2010 2011 2012 2013
D
/
E

Nestle
Britannia
Kwality
Industry
For taking into account the debt servicing capacity of the
company, we will assume that the ratio of operating cash
flow of the company to the total debt of the company ie. the
debt service ratio is the parameter which is to be considered.
Debt service ratio = Operating cash flow / Total debt
0
0.5
1
1.5
2
0
200
400
600
800
2008 2009 2010 2011 2012
D
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Nestle
The plot shows that the company has robust cash flows as well as its debt
service ratio shows a positive trend. We can thus conclude that the company
has stable cash flows to service its debt obligations.
0
0.5
1
1.5
0
100
200
300
400
2009 2010 2011 2012 2013
D
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Britannia
The above plot shows that the debt service ratio is not showing a consistent
positive trend. In addition to this, the cash flows of the company are showing a
negative trend. Hence, the company may fall short of its debt obligations if it
does not increase its cash flows.
-0.5
-0.4
-0.3
-0.2
-0.1
0
0
5
10
15
20
25
2009 2010 2011 2012 2013
D
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Kwality
The debt service ratio of the company is negative due to negative operating
cash flows. However, both cash flows and debt service ratio are showing an
upward trend. The company will fulfill its debt obligations if both the
parameters continue their upward trend.
35
40
45
50
2008 2009 2010 2011 2012
DPS
DPS
0
50
2009 2010 2011 2012 2013
DPS
DPS
0
1
2
2009 2010 2011 2012 2013
DPS
DPS
0
10
20
30
40
50
60
70
80
FY09 FY10 FY11 FY12 FY13
D
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n
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p
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r
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Nestle
Britannia
Kwality
Nestle
The company has followed a consistent dividend policy for the last 5 years. It
has not engaged in any buyback of shares. From its financial data from various
sources, we can see that the company has returned cash to its shareholders
through dividends and continues to do so. Its DPS is constant at Rs. 48.50 for the
past 4 years whereas its dividend payout ratio is falling mainly due to the rise in
its earnings. It typically gives a final dividend and one or two interim dividends in
a year.
Britannia
The company has followed a consistent dividend policy for the last 5 years. It
has not engaged in any buyback of shares. From its financial data from various
sources, we can see that the company has returned cash to its shareholders
through dividends and continues to do so. The DPS data shows that after 2010,
the companys DPS has declined. This is only because the company went for a 5-
for-1 stock split in September 2010. Its dividend payout ratio is falling mainly
due to the rise in its earnings. The company typically issues a final yearly
dividend.
Kwality
The company has not paid high value dividends. It continues to pay a small DPS
of Rs. 0.1 for the last four years. This may be due to the fact that the company is
still small and is using up its excess cash for growth. It has not engaged in any
buyback of shares. Even here, the dividend payout ratio is falling due to
consistent growth in earnings.
We can see that Nestle and Britannia are following the trend of
giving high dividends. Kwality pays lower dividends when
compared to its peers. Earlier Nestle used to pay higher dividends
as compared to its peers but it has reduced its dividend payout
ratio in recent years.
-40 -20 0 20 40 60 80 100
2013
2012
2011
2010
2009
2008
2007
Kwality
Britannia
Nestle
WORKING CAPITAL ANALYSIS
CASH CONVERSION CYCLE DAYS
Nestles cash conversion cycle has
generally been negative but showing an
increasing trend
Britannias cash conversion cycle shows a
falling trend over years
Kwalitys cash conversion cycle has been
on an increasing trend
Nestle and Britannia consistently below
while Kwality has always been above the
industry average
-800 -600 -400 -200 0 200 400
2013
2012
2011
2010
2009
2008
2007
Kwality
Britannia
Nestle
Nestles working capital has generally
been negative but has been on
increasing trend in recent times
Britannias working capital has been
decreasing over the time
Kwalitys working capital shows an
increasing trend
WORKING CAPITAL