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Course name: Financial Management II

Nestle Financial Statement Analysis

FAS Group No: E2

Ashish Rakheja
Pankaj Deshpande
Sarthak Chandra
Shruti Shukla
Sreeda P

15F113
15F134
15F144
15F148
15F153

TERM 3 2016
T A PAI MANAGEMENT INSTITUTE, MANIPAL

Table of Contents
1. Introduction to FMCG Industry....................................................................3
2. Nestle An Overview.................................................................................... 3
3. Common Size and Trend Analysis...............................................................4
3.1 Common Size Analysis of Income Statement......................................................4
3.2 Trend Analysis Income statement.....................................................................5
3.3 Common Size of Balance Sheet..........................................................................5
3.4 Trend Analysis of Balance Sheet.........................................................................6
4. Financial Forecasting.................................................................................... 7
4.1 Pre-forecasting Ratios......................................................................................... 8
4.2 Post Forecasting Ratios..................................................................................... 10
5. Dividend Policy............................................................................................. 11
6. Working Capital Financing Policy..............................................................12
References........................................................................................................ 13

1. Introduction to FMCG Industry

In 2015, globally FMCG industry faced with two main challenges.

Continued negative growth in peoples disposable incomes

Changing consumer attitudes toward products and brands

To respond to this challenge companies must take alternate routes to reach to

customers. It is anticipated that global FMCG ecommerce will have an increase of
$17 billion in sales by the end of 2016. It is also expected that Asia will be the next
major growth market.[1]
As per the report by AC Nielsen, the market size of FMCG sector in India is estimated
to grow by 12% in 2016 with food products accounting for 43% of the overall market.
[2]
Nestle being one of the prominent player in the food and beverage segment in
India it is necessary to analyse their financial performance over the years and
correlate it with their strategies.

2. Nestle An Overview
Nestl India has a presence in milk & nutrition, beverages, ready-to-cook food &
cooking aids and chocolate & confectionery segments of the Indian FMCG market.
About 20% of Nestle Indias revenue comes from the sales of Maggi their flagship
product in the ready-to-cook food segment.
With the FSSAI issuing a ban on Maggi on June 5 th, 2015 Nestle reported a net loss of
INR 64.40 crores in the second quarter ended June 30, 2015. [3] This further led to a
decrease in net sales by 17.2% by the year end of 2015 compared to 2014.

Figure 1: Quarterly record of Nestle for past 5 years

The financial position of Nestle prior to Maggi ban, and the impact of Maggi ban will
be studied in detail through common size and trend analysis of Nestls financial
statements.

3. Common Size and Trend Analysis

In this section common size analysis of Nestle Income Statement and Balance Sheet
is performed for the past 6 years (From 2010 to 2015). Also, in this section trend
analysis of Nestle Income Statement and Balance Sheet is performed for the past 6
years (From 2010 to 2015) taking 2013 as the base year.

3.1 Common Size Analysis of Income Statement

Operating Profit

Interest Expense

From 2010 to 2011, Nestles COGS as

percentage of sales decreased as a result of
improved product/channel mix and Nesltes
continuous
initiative
to
improve
its
operations. This resulted in sudden increase
in operating profits from 18.16% in 2010 to
20.37% in 2010. Late in 2014 although sales
increased by 8.2%yoy, Nestle saw a decrease
in operating profits as percentage of sales,
this is mainly due to higher cost of milk and
its derivatives in India that was higher than
their costs in international market which lead
Although the COGS decreased by 23% in 2015 compared to 2014, the sudden drop in
net sales by 17.2% as a result of Maggi ban issue caused their operating profits to
further drop to 16.09%.
Nestles
interest
expense
increased
drastically from 0.02% of sales in 2010 to
0.4% in 2013. From analysing the balance
sheets for this period we see that their Longterm borrowings increased up to Rs.118948
lakhs. This is mainly due to the restatement
of External Commercial Borrowings at the
closing exchange rate in 2013. Also US
$192mn remained outstanding since 2012
and the annualised cost over the loan period,
Further in 2014 the sales increased by 8.2% from 2013 and the repayment of ECB
loans lead to a sudden decrease in Nestles interest expense.

Pre-Tax Income
Pre-tax income as %sales remained almost
constant around 18% from 2010 to 2014.
However, in 2015 the value decreased
drastically to 10.02%. The decline in sales in
2015 as a result of Maggi ban lead nestle to
move to operating losses of Rs.48975 lakhs
from an operating profit of Rs.753lakhs in
2014.

Net Income Available to Common Shareholders

Similar to pre-tax income, net income was almost stable at 12-13% from the
period 2010 to 2014. In 2015, it reduced to 6.93% as a result of the Maggi ban
issue.
Net sales worth Rs. 30340 lakhs had to be
reversed during the full year ended
December 2015 as the Maggi noodle packets
had to be withdrawn from traders and market
due to the ban. This further increased
Nesltes operating expenses which further
added to the decline net income.

3.2 Trend Analysis Income statement

From the above graph, it is evident that net profit, net sales was the highest in 2014
compared to last 6years, whereas Operating profits was the highest in 2013 and pretax income was the highest in 2014. 2015 had the lowest value for all these
parameters as a result of Maggi ban issue and loss of faith in the brand from
customers. Although Nestle suffered loss due to this incident only in Q2 of FY2015,
they were not able to pull up their sales drastically in the remaining 6 months since
the ban and as a result faced 11.24% decrease in sales compared to 2013. This
sudden decrease in sales attributed to the decline in their net income during the
period, although their operating income increase by 87% compared to 2013.
To further understand the operating and financing measures taken by Nestle during
the period 2010 to 2015 we carry out common size and trend analysis of their
balance sheets during this period.

3.3 Common Size of Balance Sheet

Total Assets

The total current assets of Nestle as a percentage of total assets reduced from
46.78% in 2010 to 29.31% in 2011. At the same time the total long-term assets
increased from 53.22% in 2010 to 70.69% in 2011. There was 101.5% increase in
Nestles cash in 2011 compared to 2010, while their short term investments
reduced by 65%. They also invested heavily in fixed assets in 2011. In 2013,
Nestle acquired non-controlling stake in Sahyadri Agro and Dairy Ltd. and also
invested in long term tax free bonds. However, the investment in fixed assets was
comparatively less. In 2013, their cash balance and current investments also
increased by 227% and 72% respectively due to better cash flows from
operations. In 2014, the extra cash balance was used to repay the ECB loans as a
results their cash reduced by 41% compared to 2013. In 2015, the inventories
increased as a result of recall of Maggi from market. In the same year, their
investments in fixed decresed by 3%. This increased the current assets
component in the total assets compared to non-current assets in 2015 over 2014.

Total Liabilities
Total liabilities as % of total assets was the
highest in 2011 and the lowest in 2014. In
2011, Nestle invested heavily in fixed assets
due to the capacity expansion projects for
which they borrowed US $ 136 million from
Nestle SA for 5yrs under ECB approval from RBI,
India. Whereas in 2014, Nestl paid of their ECB
loans as a result their long term liabilities

Total Equity

There was a steady increase in total equity of Nestle from 2010 to 2014. However,
the value of equity as percentage of asset is 33% in 2010 and is 29% in 2011
because the value of assets owned by Nestle in 2011 is higher than 2010. The equity
in 2015 reduced by Rs. 1937 lakhs causing the value of equity as a percentage of
assets to reduce to 46%.

3.4 Trend Analysis of Balance Sheet

Total Assets
While the total assets and total long term
assets of Nestle in 2015 was less than
that in 2013 by 3.7% and 10.26%
respectively, the total current liability
increased by 7.73%. The main cause for
this was the increase in inventories by
11.53% compared to 2013 due to the
recall of Maggi from the market and also
short term investment also increased by

Total Liabilities
Total current liabilities in 2010, 2011
and 2015 was higher than the value in
2013 by 23.93%, 8.93% and 9.54%.
However, the effect of long term
liabilities caused the total liabilities in
all the years from 2010 to 2015 be a
value less than 2013. Nestle was
expanding their capacity in India during
this period and had borrowed US $
136million from Nestle SA for the same

4. Financial Forecasting
Nestle India saw a 20% decline in 2015 Q2 sales,
after Maggi was pulled off from the shelves due to
safety concerns. The cost of removing Maggi from
the market led to a one-time exceptional loss of
Rs.4.52bn which is 1.5 times the average profit in
2014. However, Maggi is only a small part of their
business and the negative effect of recall on sales
growth was temporary to Q2. By the end of 2015, the
sales of Nestle rose by 4.5% from June which was
higher than the average forecast of 4.3% by the
analysts.[4] However, the company could not meet the
long-term target of 5-6% yearly growth, due to
foreign exchange rate fluctuations and the noodle
recall and thus ended with a sales less by 17%
compared to 2014 yoy.
According to the market report by Reuters India, the
sales of Nestle is expected to grow at a rate of 3 -5%
in 2016 signalling a difficult year ahead for Nestle.
The forecasted Balance sheet and Income statement for year ending Dec 31, 2016 is
given below,

4.1 Pre-forecasting Ratios

Nestle India has its presence in almost all segments of the FMCG Industry. They
mainly operate in Food processing and dairy products segments. In these segments,
Hatsun Agro Products and Vadilal are their main competitors. In this section, we
analyse the post forecast ratios of Nestle India with the ratios of Hatsun Agro
Products and Vadilal for the past years from 2011 2015. The comparison table is
given below.

Nestles capital structure is mainly equity driven. Thus in comparison with the 2
competitors, Nestle India has the least Debt/Equity ratio over the past 5 years,
indicating more financial stability compared to its peers. Thus we can interpret that
Nestle has a better solvency.
Performing liquidity analysis, we see that in 2011 Nestle has the highest Current ratio
(0.88) but the however, quick ratio is the least (0.38) compared to its peers.
Although current ratio is the measure of companies ability to repay short-term
liabilities using its current assets, this measure can often be misleading as current
assets also includes inventories. Thus we can see that Nestles liquidity position in
2011 was poor compared to peers. However from 2013 to 2015, Nestl had higher
current ratio and quick ratio which implies that over the years Nestl has improved
on their inventory management. Another interesting observation is that although in
2015, Nestle witnessed the Maggi ban issue, they were able to maintain their
liquidity position compared to the peers.
Coming to profitability ratios, we see that Nestle India has maintained an almost
constant gross profit margin of above 50%, which is ideal. It is also much above the
profit margin of its peers. However, its operating profit margin has decreased over
the years showing decrease in operating efficiency even though sales have been
increasing. However, still it is comfortably above its competitors. Net profit margin is
almost constant at about 12%, except in 2015 where it came down to 6.93% due to
the Maggi ban.
The management efficiency ratio show a concern. Return on equity has fallen down
considerably in the last 5 years from 75% in 2011 to 41% in 2014. The equity of
Nestle has increased much more than its income resulting in the fall of ROE. This
indicates that they are losing their competitive edge. The increase in equity is due to
increase in retained earnings. This is consistent with their capital structure where
they dont depend on liabilities.
The average payable days have increased from 23 to 33 days yet it is much better
than its peers. Since, the food processing industry is mainly cash based, the average
collection period is less than 4 days, comparable to the peers.

4.2 Post Forecasting Ratios

In this section, Nesltes financial position is analysed by calculating the ratios for the
forecasted financial statements of 2016 and is compared with the ratios in 2015 to
predict its future performance.

From the above table. It is clear that the solvency position of Nestl will almost
remain unchanged in 2016 compared to 2015. Expanding the capacity would not be
of preference in 2016, rather they would prefer to concentrate on attaining the
stability in market by restoring the brand perception of their customers which would
help them boost their sales in 2016 compared 2015. However, the liquidity position
of Nestle seems to be worrying. The Maggi ban in 2015 had led to a decline in net
sales by 17.2% and domestic sales by 18.3% due to which Nestl net income
reduced by almost 100% in 2015 from 2014. Thus in 2016 to regain its position,
Nestl will have to make full use of its assets to generate more sales and hence will
not be in a position to repay its short-term liabilities using these current assets.
The profitability and growth ratios also is forecasted to remain unchanged in 2016, if
Nestl achieves a growth rate of 5% as predicted. Assuming that Nestle will continue
its current operational efficiency, the inventory days, accounts payable days,
receivable days is forecasted to remain almost the same.
Asset turnover ratio compared to 2015 is predicted to improve by 0.24 in 2016. This
indicates that Nestle will be concentrating on making full use of its assets to
generate sales revenue. This higher asset turnover ratio compensates for the low
liquidity forecasted.
Return of equity, return on assets and return on capital employed is forecasted to
improve drastically (approx. 4%, 6%, 13% respectively) in 2016 which is an
indication that the temporary sales loss caused by Maggi ban can be overcome in the
coming year if Nestl continues its current operations and achieves the predicted
growth rate of 5%.
Overall Nestls financial position in 2016 seems to be promising for its attempt to
attain stability in market. Adopting aggressive methods to push sales and expand

capacity is not suggested in 2016 given that the customers trust has hit hard due to
the Maggi ban. Aggressive methods could give a wrong message to customers about
Nestls products and thus might hit hard on sales. Thus continuing the current
modest approach would help Nestl achieve the forecasted financial position 2016.

5. Dividend Policy
Nestle had A F Ferguson & Co. as its auditors. As on 31-Dec-2015, the company has a
total of 96,415,716 shares outstanding.

For the year ending December 2014, Nestle India has declared an equity dividend of
630.00% amounting to Rs 63 per share. The company has a good dividend track
report and has consistently declared dividends for the last 6 years.
Nestle follows almost fixed dividend policy. For the financial year ending Dec2014,
the nestle dividend increased to 63 rupees per share from 48.50 rupees per share. In
financial year ending Dec2015 the price fell to rupees 30 per share owing to Legal
proceedings faced by Maggi. This boils down to lower dividends.
Nestle typically pays out half of it profits as dividends to its shareholders. In all
likelihood, the pay-out would be lesser this year. Every time the company announces
its quarterly results, the stock could take a knock. This would unsettle plans of
opportunistic investors who are tempted to buy the blue chip now. The stock has
dropped 22% in the past three months and has come off its peak valuation of 62
times of earnings hit in January this year.
Currently the market price of Nestle Indias share is the highest of past 6years with a
value of Rs. 5490/- whereas the EPS is the lowest which is around Rs.58.42/-. Thus
the P/E Ratio of Nestle increased to 93.97 from 43.07 in D ec 2014 (i.e., an increase
of more than 200%). High P/E Ratio implies that Nestle India has opportunity to grow,
however the FMCG Industry as a whole has a P/E Ratio of only 33.17. This indicates
that the market is regaining its faith in Nestle after the Maggi ban incident and thus
Nestl has to live up to this high expectations by substantially increasing its
earnings, or the stock price will need to drop.
Financial Year
Industry P/E
Ratio
Nestle P/E Ratio
Industry
Dividend Yield
Dividend Yield

2010
30.09

2011
26.50
84
38.49

2012
32.459
6
37.41

2013
32.850
2
43.16

2014
34.01
94
43.05

Current
33.1721
9
93.97

2.18%

1.92%

1.65%

1.45%

1.47%

1.56%

1.90%

1.26%

1.17%

0.97%

1.19%

0.55%

30.366

Nestle has always had a low dividend yield compared to the industry average. This
can mean two things: (1) the share price is high because the market reckons that
Nestle has impressive prospects and is not worried about the company's dividend
payments, or (2) the company is in trouble and cannot afford to pay reasonable
dividends.
However, combining the effect of both dividend yield value and the P/E ratio of
Nestle, it is evident that that option (1) is more appropriate. [5]
The last bonus that Nestle India had announced was in 1996 in the ratio of 1:2. The
share has been quoting ex-bonus from July 15, 1996.
Nestle India has not split the face value of the share so far.

6. Working Capital Financing Policy

Working capital of Nestle India is depicted in the graph below.

Working Capital
12000.00
10000.00
8000.00
6000.00
4000.00
Working Capital
2000.00
0.00
2010 2011 2012 2013 2014 2015
-2000.00
-4000.00
-6000.00

Financial Year

Ratios

Dec 2014 Dec 2013 Dec 2012 Dec 2011 Dec 2010

Current Ratio

0.53

0.65

0.54

0.55

0.62

Quick Ratio

0.25

0.39

0.22

0.27

0.27

29.60

34.80

31.60

29.51

31.28

4.34

4.44

3.45

3.40

57.93

57.52

50.89

39.40

0.0

Number of Days In 22.64

Working Capital

38.45

15.90

-8.63

-27.60

Dividend Payout Ratio 57.11

48.63

43.78

41.85

51.27

Inventory
days

Turnover

Debtors
days

Turnover 3.72

Days Payable

The company had negative working capital during 2010-2011. Also, it averaged
negative working capital for most of the last decade. A negative working capital is a
sign of managerial efficiency as FMCG industry is characterized by low inventory and

accounts receivables as it operates on an almost cash basis. It indicates that it may

be collecting money from sale before it pays for goods which mean it has good cash
flow. Conventionally, the FMCG Companies are famous for negative working capital
due to efficient supply chain management. This industry has lower level of debtors,
which are usually financed by creditors or suppliers. Also, Nestles turnover does not
depend upon their production but upon the capability to sales. Similarly,
development of SCM, ERP and JIT, etc. made effective management of inventory and
resources, which significantly minimise the need of current assets.

References
[1] Accelerating the Growth of Ecommerce in
http://www.kantarworldpanel.com/ (February 25, 2016)

FMCG

Global

News

[2] Whats in Store for Indias FMCG Market? Insights Reports 2014 Nielsen India
(February 25, 2016)
[3] Indian Express article Nestle posts first loss in 17 years after Maggi ban an
article
on
Maggi
ban
issue
dated
July
30,
2015
http://indianexpress.com/article/business/business-others/the-maggi-effect-nestleposts-first-loss-in-17-years/ (February 25, 2016)
[4] Reuters news article Nestle tempers sales growth expectations in tough
markets dated
Feb 18, 2016 http://in.reuters.com/article/nestle-resultsidINKCN0VR0KF (February 25, 2016)
[5] Long term stock return study of Nestle India by Kunal Pawaskar on Capitol Orbit
portal
http://www.caporbit.com/nestle-india-a-long-term-stock-return-study/
(February 25, 2016)
[6] Financial results Stock and Financial Investors - Nestle India webpage
(February 24, 2016)
[7] Annual Reports Stock and Financial Investors - Nestle India webpage (February
24, 2016)
[8] Moneycontrol.com for financial ratios of peers and Nestles current stock
performance (February 27, 2016)
[9] Bloomberg data for financial statements for years from 2010 to 2015 for Nestle
India (NSE Listed) (February 23, 2016)