Updated on June
The market closed 4.5% higher at 1768 relative to
last weeks' closing at 1691. Average daily volume rose to 143 million
shares, relative to 120 million shares, as speculators saw better
prospects ahead and took positions in the market. On the other hand,
the latter part of the week featured investors deciding to wait it out
before the budget, with the last day's sentiments ruled by another
bomb blast in Karachi.
With the week beginning with the good news of India
declaring its intentions to reduce tensions and formulate a strategy
to take active measures to promote peace with Pakistan, the
exhilarated market rose 100 points on Monday to 1792 levels. This
spontaneous rise in the market reflects the yearnings of the bulls to
make their entry into the market. Investors took positions in PTCL,
Hubco, National Bank, SNGPL and FFC Jordan during the day, where 59%
of the total trading volume of 222 million shares was attributed to
trading in volume leaders PTCL and Hubco.
On Tuesday, absence of substantial good news on the
political front (lifting of ban on over flights by India counted for
naught) subdued the bulls somewhat, and the market ended up about 3
points down at 1789. Hubco's price declined by 60 paisa during the day
to PkR24, possibly on the back of the (baseless) rumor that potential
dividends for shareholders would decline following a decline in cash
flows due to the expenditure of having to replace transformers. PTCL's
price was hiked up during the day by 20 paisa to PkR17.75. MCB's price
also reacted favorably to the news that it had offered the highest bid
for the 51% share in UBL and the value of the scrip increased by 35
paisa to PkR27.25.
Wednesday, the market declined another 4 points to
close at 1785 level, however, the decline was contained by ready
demand at dips. News that the GoP had persuaded international finance
institutions to maintain gas price subsidy on the fertilizer sector
proved to be positive for the scrips in the sector and Engro
Chemical's stock price ended up rising 5 paisa. Hubco continued to see
heavy selling, and ended up losing 20 paisa during the day. However,
institutional buying at dips limited PTCL's decline to PTCL ended up
15 paisa by the end of the day.
The market indicated the wait-and see attitude of
investors to Musharraf's talks with Rumsfeld, where it closed
marginally lower at 1784 levels on Thursday. Trading volumes during
that day shrank as rumors concerning the discussion floated in the
market. On the other hand, positive news with regards to Rumsfeld
views on easing of tensions lifted spirits in the afternoon session.
On the whole however, volumes remained subdued at below 100 million
A bomb blast in front of the US consulate in
Karachi on Friday, which left 8 dead and several more injured,
substantially dampened investors confidence and hence the bear
dominated market declined by 16 points to close at 1768 for the week.
Heavy weights Hubco and PTCL declined by 45 paisa and 30 paisa each,
to close at PKR23.15 and PkR17.30 respectively.
GROWTH FOCUS YIELDS STELLAR
Milkpak was established in 1981. It collects milk
from the rural areas, processes it by ultra heating technology (UHT)
method, and sells it in tetra pak containers. Since 1988, Milkpak has
been in collaboration with Nestle of Switzerland, the world's largest
Nestle's focus has been on strengthening market
share for existing products as well as introducing new products and
variations of existing lines. It has established a foothold in the
market with more than 20 different products. Its product lines
•Dairy (UHT milk, cream, butter, powdered milk, tea
whitener, plain and fruit yogurt.
•Culinary (sauces and Noodles).
•Infant Dietetics (under brand name of Lactogen, Cerelac,
Neslac and NAN1),
•Beverages (Coffee, milk chocolate, fruit juices),
•Water (Pure Life, AVA & Fontalia),
In order to strengthen its market position in the
water business the company has recently acquired the majority controls
in Universal Aqua (80%) with Fontalia brand, in Pak Water Bottlers
(90%) and Northern Bottlers (98%), both with the AVA brand. These
acquisitions complement the water business of Nestle Pure Life in the
Home & Office delivery segment. Following the acquisitions, Nestle
is the dominant player in the mineral water segment.
Nestle has not only increased local sales
substantially, but has also been very successful as far as exports are
concerned. Export sales have increased by a compound annual growth
rate (CAGR%) of 68% from just Rs 4.38 million in 1993 to Rs 273
million in 2001. Nestle exports to the United States, the UAE, the
Central Asian countries, Malaysia and Bangladesh. In 2001 Nestle
Milkpak became the first Pakistani producer of milk products to export
milk powder to African markets.
Over the past three years, the company's sales
revenue has increased phenomenally from Rs5.8 bn in 1999 to Rs8 bn in
2001, demonstrating a CAGR of 18% over the period. In the year 2001
alone, sales increased by 22%. Higher volumes sold primarily drove the
increase in revenue.
During the three years period under review the
sales volume increased by a CAGR of 26%. The increase may be
attributed to increased awareness and health consciousness of the
general public that is using more of Nestle's products. The other
reasons being change in preferences and lifestyles of people who are
using more of branded foods stuff.
In the year 2001 gross profit showed a growth of
24.83% to post a gross profit margin of 31.67% versus 30.88% in 2000.
This improvement in profitability may be attributed to a decreasing
unit cost. We believe that lower COGS per unit flows from the
•Duty drawback facility on the export of milk
products. The repayment of customs duty has been admissible in respect
of the goods exported.
•Lower raw material cost as a result of improved technology and
processes and advantages from scale economies.
The company also managed to reduce its
administration & selling expenses from 17.38% as a per cent of
sales to 16.29% in 2001. This may be attributed to a declining cost of
sales, promotion and advertisement; a decrease from 8.2% to 7.1% as a
per cent of sales. Hence, growth in core profitability reflected in
the operating margin of 11.41%.
In the year 2001, financial charges also decreased
from 2.06% to 1.62% as a per cent of sales, thus improving the
interest coverage from 5.21x to 7.04x. The lower financial charges
contributed to an increase in net income by 62% posting a net margin
of 5.51% up from 4.87% in 1999. The lower financial charges flow from
a declining long-term interest bearing debt over the period.
NESTLE AMONGST ITS PEERS
Sales for the consumer sector grew by 5.1% during
2001, however, for Nestle the growth was 22%. This high revenue growth
for the company, in spite of slow GDP growth of 3.6% during the year
appears to indicate a shift in consumer perception of Nestle's product
offering towards daily necessities, reflected by the fact that income
elasticity of demand seems to have declined.
Nestle's gross margin remained superior to the
industry over the period under review. Though the operating margin in
2000 and 2001 was lower relative to the sector, both the company and
the sector recorded an increase in core operating profitability over
Overall profitability of Nestle versus the industry
as reflected by net margin demonstrated a reversal over the period,
where Nestle's profitability outperformed the sector in 2001, contrary
to 1999 and 2000 trends. This indicates the decline in financial
expense over the period.
The consumer sector has historically maintained
very high ROE. In an attempt to understand what drives Nestle's high
ROE we have analyzed the ratio by decomposing into three elements.
The first component being net margin, reflective of
the profitability, saw drastic improvement in 2001 for Nestle but not
for the sector. In fact net margin declined from 5.3% to 5.1% for the
The second component of the ROE is the asset
turnover. The asset turnover for the sector has declined. This is
attributed to slower sales growth and deterioration in the asset
utilization during the year, which contributed to a decline in ROE%.
As for Nestle the asset turnover improved showing better asset
The third factor influencing the ROE is leverage.
It may be noted that the leverage for the sector is declining. This
indicates the reduction in the reliance on external financing.
However, lower reliance on debt has reduced the potential growth in
the ROE. As for Nestle leverage has increased slightly thus
contributing to the increase in ROE.
In 2001, the sector showed improvement on PER, PBV
and EV/EBITDA valuation multiples. Nestle has been trading at a
premium on PER, PBV and EV/EBITDA valuation multiples to the sector.
This indicates that the market prices the company at a premium on
account of its blue chip status. We expect Nestle to continue to
command a premium over the sector, going forward.
Mkt. Cap (US $ bn)
Total Turnover (mn shares)
Value Traded (US$ mn.)
No. of Trading Sessions
Avg. Dly T/O (mn. Shares)
Avg. Dly T/O (US$ mn)
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