Business Recorder - Food: NESTLE PAKISTAN LIMITED - Analysis of Financial Statements Financial Year

Food: NESTLE PAKISTAN LIMITED - Analysis of Financial Statements Financial Year 2003 -
Financial Year 2009

OVERVIEW  (August 11, 2010) : Nestle Pakistan Limited (NPL), formerly known as Nestle
Milkpak Limited, is a subsidiary of Nestle SA. - a company of Swiss origin headquartered in
Vevey, Switzerland. It is listed on the Karachi and Lahore stock exchanges. For 9 years in a
row, the company has won a place among the top 25 companies of the KSE.

Its principal activities include manufacturing, processing and selling food products and ancillary
equipment. The food products include dairy, confectionery, infant nutrition and culinary
products, coffee, beverage and drinking water. The major brands include Milkpak UHT,
Everyday, Lactogen, Neslac, Cerelac, Nestle Pure Life, Nescafe, Maggi and Kitkat.

Nestle has been serving Pakistani consumers since 1988, when its parent company, the
Switzerland-based Nestle SA, first acquired a share in Milkpak Ltd. Nestle Pakistan is
headquartered in Lahore. The company operates four production facilities. Two of its factories in
Sheikhupura and Kabirwala are multi-product factories.

To preserve the quality of raw milk in hot weather conditions in Punjab, the company has made
substantial investment in setting up an extensive cold chain by installing over 2200 chilling units
all over the milk shed area. Nestle Pakistan now operates the biggest milk collection system,
the basic unit of which is the village milk collection center (VMC) where farmers from over 3000
villages deliver milk, morning and evening. In line with its parent company's global philosophy, it
is committed to excellence in product safety, quality, and value. From spreading awareness
about nutrition and wellness to digging wells in Thar, and succoring earthquake victims, it is
committed to serving our country and its people.

Its vast sales and distribution network across the country ensures the availability of its products
to the customers nationwide.

Nestle also exports its products like Maggi Noodles, Cerelac, Lactogen 1 and 2, UHT cream,
Frost, Nido, Polo, Nestle Pure Life drinking water and fruit pulps to countries such as
Afghanistan, Turkmenistan and other Central Asian Republics.

INDUSTRY OVERVIEW OF FY09

Nestle Pakistan is a member of the growing Fast Moving Consumer Goods Market in Pakistan
and it has several competitors. Nestle Pakistan faces the biggest competition from Unilever
Pakistan, which is involved in marketing various same products, which Nestle Pakistan is
producing and marketing.

The industry's overall performed fairly well during FY09. Profit margin for the industry was
7.65%, while gross profit margin was even higher, standing at 31.96%.

1/7
Business Recorder - Food: NESTLE PAKISTAN LIMITED - Analysis of Financial Statements Financial Year

Liquidity of the industry is on average quite similar and has the same trend of worsening with
quick ratio standing at 0.27 and current ratio at 0.84.

Asset management ratios show increase in the operating cycle of the industry, which has risen
from 46 days in FY08 to 53 days in FY09. This indicates tightening liquidity in the market with
the companies being unable to convert the sales into cash quickly.

Debt management is again quite similar because all the multinationals operating in Pakistan
and controlling the major chunks of the market are fairly established and have the same capital
structure with very few differences.

Market ratios indicate that investor confidence in the companies is high with continuously rising
share prices. Furthermore, companies on average in the industry have shown consistent growth
in EPS, dividend payout and book value.

FINANCIAL PERFORMANCE FY03-FY09

Net sales for Nestle Pakistan continued rising trend since 2003 by increasing 20% (YoY) in
FY09 from Rs 34.183 billion to Rs 41.155 billion. This was contributed by increasing sales of
milk and nutrition products (20.23% YoY increase) from Rs 29.575 billion to Rs 35.559 billion
and beverages (24.59% YoY increase) from Rs 4.194 billion to Rs 5.225 billion. However, other
operations showed a significant decline in revenue contribution by falling 10.48% (YoY) in FY09
from Rs 0.414 billion to Rs 0.370 billion.

Increase in sales can be partly attributed to diversification of the portfolio, with introduction of
several new brands such as NESQUIK MILK ENHANCER, LACTOGEN GOLD & CERELAC
FRUIT CEREALS and partly to pricing movements with respect to food inflation in the country.
Furthermore, exports of these products increased by 48% (YoY) to Rs 3.269 billion as a result
of expansion into new markets.

CGS witnessed an increase of 15.95% (YoY) in FY09 from Rs 25.231 billion to Rs 29.256
billion, which was largely caused by supply constraints and inflation in key commodities in the
country. The main contributors to this rise were costs of raw materials, salaries and repairs
costs.

PROFITABILITY

Gross profit for Nestle Pakistan rose 32.91% (YoY) in FY09 from Rs 8.952 billion to Rs 11.898
billion owing to the significant increase in net sales. Net operating expenses came to Rs 7.270
billion, increasing from Rs 6.167 billion in 2008 (17.89% increase YoY) reducing EBIT to Rs
4.628 billion, which was Rs 2.784 billion in FY08 (an increase of 66.19% YoY). This significant
rise can be contributed to strict-controlled operations of the company and a rise in other
operating income generated by Nestle Pakistan.

Nestle Pakistan's PAT in FY09 was Rs 3.005 billion, rising from Rs 1.552 billion in FY08, an
increase of 92.5% (YoY) as a result of the higher EBIT and a significant decrease in financing

2/7
Business Recorder - Food: NESTLE PAKISTAN LIMITED - Analysis of Financial Statements Financial Year

costs incurred from Rs 0.557 billion in FY08 to Rs 0.442 billion in FY09 (20.68% YoY). Finance
costs reduced owing to lowering of the policy rate by SBP, which allowed easier access to bank
loans than in the previous year.

An assessment of Nestle Pakistan's profitability, as demonstrated by the diagram below, shows

an upward trend in all profitability ratios.

The profit margin rose from 4.54% in FY08 to 7.30% in FY09. However, this was below the
industry average of 7.65%. The gross profit margin rose from 26.19% in FY08 to 28.91% in
FY09 but again this was less than the industry's GPM, which stood at 31.96%. Operating profit
margin also increased from 12.01% in FY08 to a 13.55% in FY09. An overview of the return on
assets (ROA) and return on equity (ROE) forged a similar upward trend thereby sustaining the
profitability of Nestle Pakistan. ROA almost doubled from 9.3% in FY08 to 16.17% in FY09
attributed to a 92.5% increase in PAT accompanied by an 11.4% rise in total assets between
FY08 and FY09. The industry average ROA stood at 21.46%. ROE statistics indicate a huge
increase from 35.38% in FY08 to 67.88% in FY09 as the total equity fell from Rs 4.888 billion in
FY08 to Rs 4.426 billion in FY09. ROE for the industry was 80.18%. Overall, Nestle Pakistan's
profitability ratios remained well below the industry average showing high competition from the
competitors.

LIQUIDITY

Quick ratio fell drastically from 0.45 in FY08 to 0.26 in FY09. This is because although current
assets of the company showed a significant increase in FY09 (20.43% YoY), the increase was
mostly attributed to stores and spares and stock in trade, which reduced liquidity of the current
assets. Furthermore, current liabilities rose from Rs 5.306 billion to Rs 8.083 billion in FY09
(YoY increase of 52.32%). The current ratio fell from 1.07 in FY08 to 0.85 in FY09 as the
increase in current assets was more than offset by the increase in current liabilities. This growth
in liabilities is registered on the back of a sharp increase in liabilities against assets (FY08: Rs
0.054 billion to Rs 2.105 billion in FY09) and a rise in trade and other payables.

ASSET MANAGEMENT

The inventory turnover rose from 35 days in FY08 to 42 days in FY09, however, this was well
below the industry average of 53 days. Day Sales Outstanding approximately halved from 4.81
days in FY08 to 2.11 days in FY09, indicating a tighter collection policy from the debtors.

Moving further, the Total Asset Turnover for Nestle Pakistan rose from 2.05 in FY08 to 2.21 in
FY09 indicating slightly higher profitability of the asset base employed by Nestle Pakistan. Total
Asset Turnover for the industry was 2.61, which is slightly better. Sales to equity ratio rose from
7.79 in FY08 to 9.30 in FY09.

DEBT MANAGEMENT

The debt to asset ratio stood at 0.76 in FY09 showing little change since FY07. The debt to
equity ratio rose from 2.80 in FY08 to 3.20 in FY09 implying a slight shift towards debt financing

3/7
Business Recorder - Food: NESTLE PAKISTAN LIMITED - Analysis of Financial Statements Financial Year

for assets of the company supported by decreased interest rates in the economy and instability
of the equity market. On the other hand, the long term debt to equity ratio fell from 1.59 in FY08
to 1.37 in FY09, indicating company's preference for equity over long-term borrowing. The
Times Interest Earned (TIE) ratio doubled from 5.00 to 10.47 owing to the high EBIT in FY09.

MARKET RATIOS

Market ratios for Nestle Pakistan indicate a whopping 93.5% increase in Earnings per Share
from Rs 34.24 in FY08 to Rs 66.27 in FY09. The industry's EPS was much higher, standing at
an average of Rs 148.

Dividend per Share however, dipped by 20% falling from Rs 25 in FY08 to Rs 20 in FY09. The
reason for this (despite the company having high profits) is that in the future, the company plans
to take on some projects for which retention of earnings is required. The Book Value per Share
for Nestle Pakistan registered an increase from its value of Rs 96.78 in FY08 to Rs 97.62 in
FY09.

Share price of Nestle Pakistan's on 31st December 2009 rose from Rs 1200 to Rs 1246 at
closing with the announcement of a lower-than-expected dividend.

FUTURE OUTLOOK

Nestle Pakistan has maintained a firm position in the Pakistani foods market with the leading
position in several categories and is expected to continue its strong operations on the basis of
its current and past performance.

Nestle Pakistan's future operations seem promising with several projects and investments
already in line. The company plans to spend Rs 2.6 billion in FY10 on milk collection field
development projects and upgradation of the existing facilities as part of its long-term
infrastructure plan.

========================================================================
========================================================= FINANCIAL
SUMMARY
========================================================================
========================================================= NESTLE
PAKISTAN LIMITED (NPL) - FINANCIALS
========================================================================
========================================================= Balance Sheet
(PKR '000) 2003 2004 2005 2006 2007 2008 2009
-------------------------------------------------------------------------------------------------------------------------------
-- Property, plant and equipment 2,149,781 2,351,281 3,298,880 6,941,332
9,074,428 9,464,373 10,700,874 Capital work-in-progress 294,480 824,595
1,788,475 1,107,052 971,183 1,382,401 914,956 Long term loans and advances
11,013 20,287 47,691 66,008 80,670 98,544 113,490 Long term
security deposits 4,314 5,036 5,338 6,088 6,088 5,036

4/7
Business Recorder - Food: NESTLE PAKISTAN LIMITED - Analysis of Financial Statements Financial Year

5,026 Total non-current assets 61,238 71,234 230,687 207,116

179,140 153,324 125,622 Stores and spares 205,443 261,852
249,921 329,346 436,573 804,647 868,984 Stock in trade
863,136 1,693,783 1,492,983 1,907,300 2,393,306 2,488,573 3,895,038 Trade
debts 28,906 30,806 47,298 238,291 344,053 456,813
241,715 Advances, deposits, prepayments, other receivables 146,491 281,297
916,331 2,109,314 2,022,387 1,488,103 1,503,009 Cash and bank balances
62,675 93,338 858,995 34,663 406,225 419,327 315,770 Total
current assets 1,334,744 2,364,112 3,569,152 4,627,685 5,623,823
5,684,078 6,845,528 Total Assets 3,840,243 5,611,222 8,887,214
12,927,902 15,848,574 16,684,176 18,586,980 Total non-current liabilities 1,139,382
1,748,141 2,610,132 5,172,334 5,758,347 6,988,758 6,076,895 Total current
liabilities 1,496,740 2,302,851 4,413,700 5,224,488 5,978,522 5,306,571
8,083,130 Total liabilities 2,636,122 4,050,992 7,023,832 10,396,822
11,736,869 12,295,329 14,160,025 Total Equity 1,204,121 1,560,230
1,863,382 2,531,080 4,111,705 4,388,847 4,426,955
-------------------------------------------------------------------------------------------------------------------------------
-- Income Statement (PKR '000) 2003 2004 2005 2006 2007
2008 2009
-------------------------------------------------------------------------------------------------------------------------------
-- Sales - net 10,461,254 12,801,355 17,142,363 22,030,958 28,235,393
34,183,847 41,155,822 Cost of goods sold (7,446,497) (9,242,534)
(12,354,618) (15,778,330) (20,291,270) (25,231,532) (29,256,902) Gross profit
3,014,757 3,558,821 4,787,745 6,252,628 7,944,123 8,952,315 11,898,920
Profit from operations / EBIT 1,211,942 1,474,348 1,817,184 2,453,229 3,134,190
2,784,809 4,628,307 Finance cost (61,480) (59,024) (180,108)
(447,774) (584,434) (557,325) (442,050) Profit before taxation 1,150,462
1,415,324 1,637,076 2,005,455 2,549,756 2,227,484 4,186,257 Taxation
(391,625) (425,392) (484,145) (642,165) (744,544) (674,590) (1,181,124)
Profit after taxation 758,837 989,932 1,152,931 1,363,290 1,805,212
1,552,894 3,005,133
-------------------------------------------------------------------------------------------------------------------------------
-- PROFITABILITY RATIOS 2003 2004 2005 2006 2007
2008 2009
-------------------------------------------------------------------------------------------------------------------------------
-- Profit Margin 7.25% 7.73% 6.73% 6.19% 6.39%
4.54% 7.30% Gross profit margin 28.82% 27.80% 27.93%
28.38% 28.14% 26.19% 28.91% Return on Assets 19.76%
17.64% 12.97% 10.55% 11.39% 9.31% 16.17% Return on Equity
63.02% 63.45% 61.87% 53.86% 43.90% 35.38% 67.88%
-------------------------------------------------------------------------------------------------------------------------------
-- LIQUIDITY RATIOS 2003 2004 2005 2006 2007
2008 2009
-------------------------------------------------------------------------------------------------------------------------------
-- Quick Ratio 0.18 0.18 0.41 0.46 0.47 0.45
0.26 Current Ratio 0.89 1.03 0.81 0.89 0.94 1.07

5/7
Business Recorder - Food: NESTLE PAKISTAN LIMITED - Analysis of Financial Statements Financial Year

0.85
-------------------------------------------------------------------------------------------------------------------------------
-- ASSET MANAGEMENT RATIOS 2003 2004 2005 2006
2007 2008 2009
-------------------------------------------------------------------------------------------------------------------------------
-- Inventory Turnover(Days) 36.77 55.00 36.60 36.55 36.08
34.68 41.67 Day Sales Outstanding (Days) 0.99 0.87 0.99 3.89
4.39 4.81 2.11 Operating cycle (Days) 37.77 55.86 37.60
40.44 40.47 39.49 43.79 Total Asset Turnover 2.72 2.28
1.93 1.70 1.78 2.05 2.21 Sales/Equity 8.69
8.20 9.20 8.70 6.87 7.79 9.30
-------------------------------------------------------------------------------------------------------------------------------
-- DEBT MANAGEMENT RATIOS 2003 2004 2005 2006
2007 2008 2009
-------------------------------------------------------------------------------------------------------------------------------
-- Debt to Asset 0.69 0.72 0.79 0.80 0.74 0.74
0.76 Debt to Equity Ratio 2.19 2.60 3.77 4.11 2.85
2.80 3.20 Long Term Debt to Equity 0.95 1.12 1.40 2.04
1.40 1.59 1.37 Times Interest Earned 19.71 24.98 10.09
5.48 5.36 5.00 10.47
-------------------------------------------------------------------------------------------------------------------------------
-- MARKET RATIOS 2003 2004 2005 2006 2007
2008 2009
-------------------------------------------------------------------------------------------------------------------------------
-- Earning per share 16.76 21.87 25.42 30.06 39.81
34.24 66.27 Price/Earnings Ratio 22.43 23.78 30.29 34.76
45.22 38.96 18.80 Dividend per share 4.00 5.00 15.00
5.00 10.00 25.00 20.00 Book value per share 26.60 34.46
41.09 55.81 90.67 96.78 97.62 No of Shares issued (in thousands)
45273.00 45273.00 45349.60 45349.60 45349.60 45349.60 45349.60
Market prices(Year End) 376.00 520.00 770.00 1045.00 1800.00
1334.00 1246.00
========================================================================
=========================================================
COURTESY: Economics and Finance Department, Institute of Business Administration,
Karachi, prepared this analytical report for Business Recorder.

DISCLAIMER: No reliance should be placed on the [above information] by any one for making
any financial, investment and business decision. The [above information] is general in nature
and has not been prepared for any specific decision making process. [The newspaper] has not
independently verified all of the [above information] and has relied on sources that have been
deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of
information do not bear any liability or responsibility of any consequences for decisions or
actions based on the [above information].

Copyright Business Recorder, 2010

6/7
Business Recorder - Food: NESTLE PAKISTAN LIMITED - Analysis of Financial Statements Financial Year

7/7