Financial Analysis

Nestle India ltd.

ACC Ltd.

SUBMITTED TO: SUBMITTED BY:

MRS.RANJANA NAVNEETSINGH

MBA 3RD B

90212233197

CT INSTITUTE OF MANAGEMENT STUDIES

 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
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
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
 Financial Analysis 2

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
16,950,135,00 14,077,619,00
TA 0 0 S / TA 2.551 2.489
43,242,450,00 35,043,532,00 Operating
Sales 0 0 Leverage 2.266 2.413
Financial
EBIT 7,744,698,000 6,294,683,000 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 0.17 0.69
Capital 5,110,484,000 4,499,926,000 D / E ratio % %
Variable 25,696,689,75 19,853,305,19
cost 0 2
Contributio 17,545,760,25 15,190,226,80
n 0 8
 Financial Analysis 3

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

10000
9000 BSE index

8000 Nestle

7000
6000
5000
4000
3000
2000
1000
0
1 4 7 1 0 1 3 16 19 2 2 2 5 2 8 31 34 3 7 4 0 43 4 6 4 9 52 55 5 8 6 1 64 67 7 0

20%
Nestle returns

10%

f(x) = 0.1 x + 0.02

R² = 0.02
0%
0% 10% 20% 30% 40%
 Financial Analysis 4

Volatility of returns: If St is the share price in period t then, log relative return is

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 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.
 Financial Analysis 5

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 & 3,220,084,00 2,924,722,00 2,577,176,00
Surplus 3,769,340,000 0 0 0 2,229,913,000
4,184,241,00 3,888,879,00 3,541,333,00
Equity 4,733,497,000 0 0 0 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.

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
 Financial Analysis 6

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

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.
 Financial Analysis 7

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
13,071,900,00 1,827,600,00
2009 Q3 0 2,488,300,000 0
12,143,600,00 1,620,200,00
2009 Q2 0 2,280,100,000 0
12,707,800,00 1,973,000,00
2009 Q1 0 2,838,800,000 0
10,931,000,00 1,210,900,00
2008 Q4 0 1,826,100,000 0
11,025,000,00 1,317,500,00
2008 Q3 0 2,042,900,000 0
10,423,400,00 1,210,900,00
2008 Q2 0 1,695,600,000 0
10,971,700,00 1,601,500,00
2008 Q1 0 2,180,000,000 0
2007 Q4 9,016,800,000 1,419,300,000 936,100,000
1,160,600,00
2007 Q3 8,993,100,000 1,859,900,000 0
2007 Q2 8,420,600,000 1,437,000,000 956,900,000
1,084,500,00
2007 Q1 8,700,300,000 1,578,400,000 0
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
 Financial Analysis 8

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- 1,112,968,42
Quarterly 8,935,700,000 1,628,542,105 1
SD –
Quarterly 2,349,604,234 532,015,084 393,858,998

Mean- 35,742,800,00 4,451,873,68

Annual 0 6,514,168,421 4
SD - Annual 4,699,208,469 1,064,030,167 787,717,995

7. OPERATING & FINANCIAL LEVERAGES

2008 2007 2006 2005 2004

96420000 96420000
Share Cap 964200000 964200000 964200000 0 0
376930000 278770000 249240000 21448000 17976000
Ret earning 0 0 0 00 00
473350000 418420000 388890000 35413000 31941000
NW 0 0 0 00 00

14300000
Debt 8200000 28700000 162700000 0 79100000

774470000 629460000 480960000 46927000 38727000

EBIT 0 0 0 00 00

Contributi 155473000 181066000 101930000 94027000 83905000

on 00 00 00 00 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
 Financial Analysis 9

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.

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
 Financial Analysis 10

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.

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 Analysis 11

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. 133390 25182407 13.42
1 lakh
Individual shareholders > Rs. 1 145 4241479 2.26
lakh
Pakistani Citizens 172 385965 0.21
Other Foreign Nationals 4 1105 0
Trusts 39 628072 0.33
Clearing Members/Clearing 212 134906 0.07
House
NRI/OCBs 2649 840561 0.45
138469 41389540 22.05
GRAND TOTAL 138969 187702997 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. = 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
 Financial Analysis 12

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
Debentu 5234881 3000500 45000000 65000000
res 000 0 000 00 00
Term 2500000 2500000 2500000 25000000 20000000
loan 000 000 000 00 00
Forex 1439100 21399000 21870000
loan 0 0 000 00 00
3200000 4038000 5020000 12130000 26666000
Others 00 00 00 00 00

Total L/ 8054881 2903800 7441600 10352900 13353600

T 000 000 000 000 000

Debt S/ 1603000 2700000 36130000 72370000

T 0 00 00 0 0

Calculation for EV:

Cash
O/s Share S /T balance EV in
Market Cap Total Debt
Shares price investment as on 31- Cr
dec
200 17424388 1407730000 279140000
4 3 338.7 59016403172 0 0 573200000 6972.91
200 18555613 1071420000 293750000 102790000 10587.2
5 8 534.2 99124088920 0 0 0 9
200 18832600 20443729906 503540000 620170000 20091.1
6 9 1085.55 9 7711600000 0 0 8
200 18867230 19329477647 844810000 743480000 18047.6
7 5 1024.5 3 3064100000 0 0 0
 Financial Analysis 13

200 18872970 679080000 984240000

8 6 477.9 90193926497 8054881000 0 0 8162

2. FINANCIAL RATIOS

Figures 2008 2007 Ratios 2008 2007

0.413 0.556
NW 4927.73 4152.71 RONW 2 5
0.376 0.518
LT debt 482.03 306.41 ROCE 3 2
54 0.167 0.208
CE 10 4459.12 PAT/Sales 6 5
1.336 1.546
TA 5409.76 4459.12 S / TA 4 0
Sales 7229.97 6894.79 EPS 64.62 76.67
0.245 0.346
EBIT 2036.12 2311.15 ROE 9 3
7.395 3.362
Interest 39.96 73.87 P/ E 5 4
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
 Financial Analysis 14

10,000.00
9,000.00 BSE
8,000.00 index

7,000.00
6,000.00
5,000.00
4,000.00
3,000.00
2,000.00
1,000.00
0.00
1 4 7 1 0 13 16 1 9 22 2 5 28 31 3 4 37 4 0 4 3 46 4 9 52 55 5 8 61 6 4 67 70

40%
ACC ret vs Market ret

30%
f(x) = 0.77 x + 0.01
R² = 0.4 20%

10%

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

10. COMPANY COST OF CAPITAL

Cost of Equity:
Re = Rf +  (Rm -Rf)
Rf = 6.9 %
Rm = 12.18 %
 Financial Analysis 15

 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 return After We x
t -We Re tax Re
10.97 0.09428
Equity
4927.73 0.85950628 % - 8
Total Debt 805.48 - - -  
Value 5733.21 - - -  
13.50
Debenture1
200.02 0.03488796 % 0.47% 0.31%
0.08721989
Debenture2
500.05 9 8.45% 0.74% 0.48%
0.04360558
Bank Loan
250 9 8.25% 0.36% 0.23%
0.00558151
Others
32 5 8.25% 0.05% 0.03%

10.48
Company Cost of Capital = %

3. EVA CALCULATION
2008 2007
5744.5
Invested Capital 5 4790.57
Company Cost of
Capital 10.48% 10.48%
Required Income 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.
 Financial Analysis 16

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 Date/Date Coupon Payment Maturity No. of
Instrument NSDL price Value of Allotment Rate mode Issues
Secured Non ACC LIMITED 1000000 1000000 10/12/2008 11.30% Annually on Dec 2013 2000
Convertible 11.30 NCD 10th Dec.
Debenture 10DC13
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
2009 2008 2007 2006 2005
2.90548 3.0472 2.4160 4.5090 4.2623
D/E ratio 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
 Financial Analysis 17

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
7719.6 1664.7 1099.6
2008
9 7 2 0.33% 0.00% 0.00%
2007 7693.9 1664.7 1099.6 31.49 -2.84% -
 Financial Analysis 18

4 8 2 % 11.35%
5851.2 1240.4 38.42 189.41 203.56
2006
4 1713.5 3 % % %
4227.2
2005
2 592.06 408.63

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.
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
 Financial Analysis 19

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
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!