Corporate results: Higher margin products propel Nestle Pakistan’s earnings by 20%

FMCG giant announces profit of Rs3.5b in first half of 2013.

KARACHI:

Nestle Pakistan’s profits increased by a fifth on the back of higher margins that helped the company absorb higher distribution and selling expenses and disregard sluggish growth in its revenues during the six-month period of 2013.

On Tuesday, the Pakistani subsidiary of the world’s largest food and consumer goods company reported a net profit of Rs3.5 billion for the first half of 2013, up 20% compared with Rs2.9 billion it earned during the corresponding period of the previous year.

However, the company’s revenues, for the period under review, increased only 3% to Rs42.4 billion in comparison with Rs41.1 billion it grossed in the corresponding period of last year. Even a small growth in revenues of a company as large as Nestle Pakistan is a positive sign, but it certainly indicates sluggish growth for a company that saw its revenues shoot up 22% in 2012.

There is a slowdown across the FMCG sector while the law and order situation, especially in Karachi, is also hurting the sector’s growth, said Ayub Ansari who is the deputy head of research at AKD Securities. Inflation may have been another factor, he said – the average inflation rate for the first six months of 2013 was 6.4%.

“It is mainly improved margins which drove the company’s profits because its revenues remained almost flat.”

Nestle’s gross margins increased from 27.4% in the first six months of 2012 to 31% in the first half of 2013 – an indication that the company is selling more of its higher-margin products.

The prices of raw material remained more or less depressed in the first half of the current year, Ansari said. Given the company imports most of its raw material, he said, it may have benefited from the better pricing of the raw material.

The rupee depreciation during the first half of the current year could also be a factor that improved the company’s core margins, said Arif Habib Corporation Head of Research Khurram Shahzad.

The rupee depreciated over 2% against the dollar in the period, Shahzad said, which helped them get good prices for their exports to Afghanistan and Central Asia.

Nestle, however, saw its distribution and selling expenses for the period increase 27%, which eroded profitability.

The company’s marketing and advertising cost increased significantly as it could not grow its sales during the period. The company has been aggressively advertising in the last quarter, they said.

Rising competition could also be a reason behind dampened growth in the company’s top-line. Engro foods is doing aggressive marketing in the dairy and juices segment and may be giving competition to Nestle, he said.

Published in The Express Tribune, August 28^th, 2013.

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