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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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 s .
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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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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 S R
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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 S R
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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 S R
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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 i v i d e n d
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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
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