Dividend Policy, Capital Structure & Capital Budgeting

Techniques of Nestle Pakistan

Dividend Policy:
On the back of strong volumetric growth, Nestle Pakistan boosted its earnings by more than
a third to almost Rs8 billion in calendar year 2014, according to a notice posted to the
Karachi Stock Exchange on Thursday. The Pakistani subsidiary of the world’s largest food
and consumer goods company reported an after tax profit of Rs7.9 billion or Rs175 per
share in 2014, up 35% when compared to Rs5.8 billion or Rs137 per share it earned during
2013. The Swiss foods giant saw its revenues, for the period under review, increase by 12%
to Rs96.4 billion compared to Rs86.2 billion it grossed in the previous year. The company
also announced an interim cash dividend of Rs90 per share for the year, which is in addition
to the interim cash dividend already paid at Rs30 per share, the notification said.

Capital Budgeting & Capital Structure Techniques:

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%.

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 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 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.