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2. FINANCIAL RATIOS
Net Worth = Total assets – Long term Liabilities
= Share Capital + Retained earnings + General Reserve
Capital Employed = Net Worth + Long term Loans
Retained earnings = Opening Balance + Net income - Dividends
Invested capital = Net worth + Deferred tax liability + Total Debt
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
Financial Analysis 4
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%
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.
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
3,220,084,00 2,577,176,00
Reserve & Surplus 3,769,340,000 0 2,924,722,000 0 2,229,913,000
4,184,241,00 3,541,333,00
Equity 4,733,497,000 0 3,888,879,000 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
Financial Analysis 6
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
Opening balance 4,555,845,000 3,666,483,000
AV 4,786,511,500 4,111,164,000
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
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.
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.
469270000 387270000
EBIT 7744700000 6294600000 4809600000 0 0
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.
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 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.
Financial Analysis 10
ACC ltd.
1. ENTERPRISE VALUE
Financial Analysis 11
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
Similarly calculating for other years:- Both Long term and Short term debt are
Debt L /T 2008 2007 2006 2005 2004
Debentur 52348810 30005000 450000000 650000000
es 00 0 00 0 0
25000000 25000000 25000000 250000000 200000000
Term loan 00 00 00 0 0
Forex 14391000 213990000 218700000
loan 0 0 00 0 0
32000000 40380000 50200000 121300000 266660000
Others 0 0 0 0 0
S /T Cash balance
O/s Shares Share price Market Cap Total Debt EV in Cr
investment as on 31-dec
200 17424388 1407730000
4 3 338.7 59016403172 0 2791400000 573200000 6972.91
200 18555613 1071420000
5 8 534.2 99124088920 0 2937500000 1027900000 10587.29
200 18832600 20443729906
6 9 1085.55 9 7711600000 5035400000 6201700000 20091.18
200 18867230 19329477647
7 5 1024.5 3 3064100000 8448100000 7434800000 18047.60
Financial Analysis 12
200 18872970
8 6 477.9 90193926497 8054881000 6790800000 9842400000 8162
2. FINANCIAL RATIOS
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
Financial Analysis 13
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%
3. EVA CALCULATION
2008 2007
Invested Capital 5744.55 4790.57
Company Cost of Capital 10.48% 10.48%
Required Income 601.90 501.94
Earned income 1212.79 1438.59
EVA 610.89 936.65
… figures are in crore except % figures
The Company is really creating value.
9. CAPITAL STRUCTURE
Debt Structure
3. D/E ratio
2008 2007 2006 2005 2004
2.905482 3.0472 2.4160 4.5090 4.2623
D/E ratio 4 1 2 5 4
Company is in a high capital intensive business. Therefore it is imperative to take debt to avail tax
shield.
Financial Analysis 15
2
1240.4 189.41
2006
5851.24 1713.5 3 38.42% % 203.56%
2005 4227.22 592.06 408.63
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.
4. COMPETITIVE ADVANTAGE
Competitive advantages are:
Financial Analysis 17
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!
1205.6 1628.3
Debt 805.488 314.7 940.97 1 6
1664.7
EBIT 1664.77 8 1713.5 592.06 698.65