Nestle India Limited 200

University Business School

Assignment
FINANCIAL MANAGEMENT

Capital Structure Analysis of Nestle

India Limited

Submitted BySubmitted ToGagan Gopal

Suveera Gill

Dr.

[2009-0328]
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ANSWER NO 1
Executive SummaryNestl India is a subsidiary of Nestl S.A. of Switzerland.
With seven factories and a large number of co-packers,
Nestl India is a vibrant Company that provides
consumers in India with products of global standards
and is committed to long-term sustainable growth and
shareholder satisfaction.

The Company insists on honesty, integrity and fairness

in all aspects of its business and expects the same in its
relationships. This has earned it the trust and respect of
every strata of society that it comes in contact with and
is acknowledged amongst India's 'Most Respected
Companies' and amongst the 'Top Wealth Creators of
India'.

Nestls relationship with India dates back to 1912,

when it began trading as The Nestl Anglo-Swiss
Condensed Milk Company (Export) Limited, importing
and selling finished products in the Indian market.

After Indias independence in 1947, the economic

policies of the Indian Government emphasized the need
for local production. Nestl responded to Indias
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aspirations by forming a company in India and set up
its first factory in 1961 at Moga, Punjab, where the
Government wanted Nestl to develop the milk
economy. Progress in Moga required the introduction of
Nestls Agricultural Services to educate, advise and
help the farmer in a variety of aspects. From increasing
the milk yield of their cows through improved dairy
farming methods, to irrigation, scientific crop
management practices and helping with the
procurement of bank loans. Nestl set up milk
collection centres that would not only ensure prompt
collection and pay fair prices, but also instil amongst
the community, a confidence in the dairy business.
Progress involved the creation of prosperity on an ongoing and sustainable basis that has resulted in not just
the transformation of Moga into a prosperous and
vibrant milk district today, but a thriving hub of
industrial activity, as well.

The Company continuously focuses its efforts to better

understand the changing lifestyles of India and
anticipate consumer needs in order to provide Taste,
Nutrition, Health and Wellness through its product
offerings. The culture of innovation and renovation
within the Company and access to the Nestl Group's
proprietary technology/Brands expertise and the
extensive centralized Research and Development
facilities gives it a distinct advantage in these efforts. It
helps the Company to create value that can be
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sustained over the long term by offering consumers a
wide variety of high quality, safe food products at
affordable prices.

Nestl India manufactures products of truly

international quality under internationally famous brand
names such as NESCAF, MAGGI, Cerelac, Lactogen,
Eclairs, MILKYBAR, MILO, KIT KAT, BAR-ONE, MILKMAID
and NESTEA and in recent years the Company has also
introduced products of daily consumption and use such
as NESTL Milk, NESTL SLIM Milk, NESTL Fresh 'n'
Natural Dahi and NESTL Jeera Raita.

Nestl India is a responsible organization and facilitates

initiatives that help to improve the quality of life in the
communities where it operates.

Beginning with its first investment in Moga in 1961,

Nestls regular and substantial investments
established that it was here to stay. In 1967, Nestl set
up its next factory at Choladi (Tamil Nadu) as a pilot
plant to process the tea grown in the area into soluble
tea. The Nanjangud factory (Karnataka), became
operational in 1989, the Samalkha factory (Haryana), in
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1993 and in 1995 and 1997, Nestl commissioned two
factories in Goa at Ponda and Bicholim respectively.
Nestl India has commissioned in 2006 its 7th factory
at Pant Nagar in Uttarakhand.

Key Figures
Rupees in Millions
2003

2004

2005

2006

2007

Gross Sales

22,798.3

23,728.2

26,438.9

29,441.9

36,471.8

Domestic Sales #

20,226.9

21,292.8

23,847.1

26,646.1

33,174.1

Export Sales

2,571.4

2,435.4

2,591.8

2,795.8

3,297.7

EBITDA *

4,446.8

4,509.9

5,220.5

5,415.2

6,962.7

Additional Employee Cost

753.7

278.3

144.5

237.4

206.1

254.4

Impairment of fixed assets

22.2

23.3

(26.4)

3.9

11.8

Provision for contingencies

229.6

266.9

223.2

144.9

(590.4)

Profit before taxation

3,991.5

3,864.9

4,690.6

4,805.3

6,286.1

Net Profit

2,630.8

2,519.2

3,095.7

3,151.0

4,138.1

Earnings per Share (Rs.)

27.29

26.13

32.11

32.68

42.92

Dividends per Share (Rs.)

20.00

24.50

25.00

25.50

33.00

Other Income

# Domestic Sales include excise duty also

* EBITDA - Earnings before Interest, Tax, Depreciation and Amortisation.

Final Balance Sheet of 2008 financial year is not public

yet. Next investors meet is on May 05,2009 and
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audited Balance Sheet is expected to be out soon,
before March31. Company follows a calendar financial
year starting from January.

The Unaudited results for the Quarter ended

December 31, 2008
The Company has posted a net profit of Rs 1210.90
million for the quarter ended December 31, 2008 as
compared to Rs 936.10 million for the quarter ended
December 31, 2007. Total Income has increased from
Rs 9053.00 million for the quarter ended December 31,
2007 to Rs 11030.10 million for the quarter ended
December 31, 2008.

The Audited results for the Year ended December

31, 2008
The Company has posted a net profit of Rs 5340.80
million for the Year ended December 31, 2008 as
compared to Rs 4138.10 million for the Year ended
December 31, 2007. Total Income has increased from
Rs 35297.90 million for the Year ended December 31,
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2007 to Rs 43581.30 million for the Year ended
December 31, 2008.

Despite recession and global meltdown, Nestle India is

doing very well and posting huge profits. Its share price
has also remained stable when whole market crashed.
Companys dividend per share has grown at a 21%
CAGR in the last 10 years. Its earnings per share
clocked in a growth of 19% CAGR during the same
period. This points out that the company had become
more generous while rewarding its shareholders in this
decade. Given this long history, there is very little
chance that the company might stop paying dividends
to its shareholders in the future.

During 2008 Nestle India paid interim dividend of 220%

and has announced a final dividend of 120% on
March09, 2009. So dividend for financial year 2008 is
340%, continuing the company history of high dividend
payout and profitability for investors.
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ANSWER NO 2

(a)CAPITAL EXPENDITURE FOR THE FIVE YEARS:

Year
2003 2004 2005
2006
2007
Amt. Of 7,21,4 6,14,1 13,89,9 14,09,0 13,94,8
capital
99
97
66
07
86
expendit
ure
(Rs. 000)
(b)Capital Expenditure is increasing and it nearly
doubled in five years.
(c)No, Capital Spending is not consistent but
there is overall increase.
Note: Capital expenditure is taken from Balance
Sheet, Fixed Assets.
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So, we can interpret from this that the company

is executing good investments on capital
expenditure each year and has a long term
prospect. Company set a new manufacturing
facility in Pantnagar in 2006 thats the reason for
high Capital Expenditure recently.

ANSWER NO 3
(a)ACCOUNT BALANCES FOR PROPERTIES, PLANT
AND EQUIPMENT FOR THE FIVE YEARS:
Year
2003
2004
2005
2006
2007
ACCOUN 39,13,69 39,72,1 42,79,8 50,60,4 57,67,8
T
4
58
02
62
30
BALANC
ES
(Rs.000)
(b)PERCENT OF PROPERTIES, PLANT AND
EQUIPMENT
REPLACED EVERY
YEAR:
Year
PERCENT

2003 2004 2005 2006 2007

5.38
6.17
13.27 11.46 11.48
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OF
%
REPLACEM
ENT

FORMULA: PURCHASE-SALE
INITIAL INVESTMENT
It shows that the company is growing
constantly and new assets are added with
upgradation of technology as well. Higher values
in recent years are due to new facility.

ANSWER NO 4
Years
2003
2004
2005
2006
2007

Nestle

Dabur

ITC

Emami

Marico

0.01

0.14

0.01

1.02

0.05

0.02

0.14

0.03

0.43

0.23

0.04

0.04

0.01

0.32

0.80

0.04

0.04

0.01

0.10

0.91

0.01

0.03

0.01

0.12

1.09

Debt/Equity ratio of company is very good and the company

has improved it consistently over the past. A look at FMCG
sector companies shows that Nestle is leading the sector with
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ITC. But, they are not using the means of financing as
effectively as they could.

ANSWER NO 5
BETA MEASURE OF Nestle (March 2009) is 0.58
(Source: reuters.com)
Dabur
ITC

- 0.4

-0.5

Emami-0.4
Merico-0.4
Beta of all FMCG companies comes less than 1 because the
market has fallen considerably during the period but FMCG has
not fallen that steeply and have been the reason behind the
strength of economy during recession. Beta for these
companies was more than 1 in the past.

ANSWER NO 6
WACC of company-

The weighted average cost of capital is defined

by:

Where

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And the following table defines each

symbol:
Symbol

Meaning

Units

weighted average cost of capital

required or expected rate of return on equity, or cost of equity"

required or expected rate of return on borrowings, or cost of

debt

corporate tax rate

total debt and leases (including current portion of long-term

debt and notes payable)

currency

total market value of equity and equity equivalents

currency

total capital invested in the going concern

currency

Or
WACC = wd (1-T) rd + we re
wd = debt portion of value of corporation
T = tax rate
rd = cost of debt (rate)
we = equity portion of value of corporation
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re = cost of internal equity (rate)
WACC calculation for Nestle India Limited
Year
Tax rate
Interest
Rate
Dividend/pri
ce
Weight of
debt
Weight of
Equity
WACC

2007
0.34
10.97
21.29
0.01
0.99
21.15

WACC comes too high for Nestle India Limited

because the company is running very high in
profits. They are distributing very high dividends
thrice a year i.e. 330% annually.

ANSWER NO 7
(i)

Five Year High Debt Equity Ratio was .

04
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(ii)

Five Year low Debt Equity Ratio was .01

(iii)

Comparison of Debt Equity Ratio of the

selected company with that of other
companies in the same industry
SECTOR- 0.61

Years
2003
2004
2005
2006
2007

Nestle

Dabur

ITC

Emami

Marico

0.01
0.02
0.04
0.04
0.01

0.14
0.14
0.04
0.04
0.03

0.01
0.03
0.01
0.01
0.01

1.02
0.43
0.32
0.10
0.12

0.05
0.23
0.80
0.91
1.09

These companies are doing better than industry

(except Marico) and are very rich and efficient.
They have very low D/E Ratio suggesting that
their funds are much greater than what was
required because of high profitability. Dividend
payout ratio is also more than 1.

ANSWER NO 8
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DuPont identity for the company

ROE = 4138122000/964157160 = 4.292

ROE is pretty good for the company as each

Rupee invested in Equity gives a return of 4.3
Rs. Its an ideal company to invest.

Answer 9 - Comment on the following:(A) Working capital position

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Year

2003

2004

2005

2006

2007

Nestle
w.cap.

-12,83,293

26,00,59
7

22,26,33
0

23,34,987

-31,99,152

(in 000)

Working capital= current assets current

liabilities
Here we see that working capital of Nestle is
negative. It shows that company is working on
others money. The company operations are
very efficient and it is still earning huge profits.
So we can comment that the company is using
its position and brand name to a good extent in
operations and is running quiet well.

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(B) Cash position
Year

2003

2004

2005

2006

2007

Nestls
cash
position

7,99,32
3

16,43,11 14,10,71 15,41,29 13,21,6

2
9
2
18

(in 000)

Cash position= Cash and cash equivalents at

the end of the period (taken from the cash flow
statement)

Cash position of the company is very sound. It

has increased substantially during last five
years. Last year company had Rs. 132 crore in
cash and cash equivalents available on closing
i.e. December 31st.

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(C) Short term financing (Rs. 000)

Year

2003

Nestle
49,23,2
short
85
term
financing

2004

2005

2006

2007

61,82,34 68,53,29 76,88,72 95,77,6

9
5
5
93

Note: It includes Sundry Creditors, Accruals and

Advances from the customers

957 crores of short term financing available again

shows the companys ability to use its brand and
very efficient operations. Also it has doubled in
last five years showing the efficiency.

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(e) Inventory management policy

Year

2003 2004 2005 2006 2007

Nestle
Inventory
Turnover

11.76 12.42 12.02 12.01 10.02

Avg. Age of
Inventory

31.03 29.39 30.37 30.39 36.43

Note: calculated by dividing sales with inventory.

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