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FINANCIAL ANALYSIS OF NESTLE MILK PAK

30

AN ASSINGMENT OF
Financial Analysis of Nestle Milk Pak Limited
SUBMITTED TO

MADAM, AMINA NOOR


SUBMITTED BY
FARHANA SARWAR M.B.A. (B.B.A) 1ST (SEMESTER)

DEPARTMENT OF MANAGEMENT SCIENCES The Islamia University of Bahawalpur

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FINANCIAL ANALYSIS OF NESTLE MILK PAK

TABEL OF CONTENTS
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Sr. # 1 2 3 4 5 6 7 8 9 10

CONTENT
OVERVIEW OF F.M.C.G. SECTOR INDUSTRIAL OVERVIEW VISION STATEMENT OF NESTLE

PAG E NO.

04 13 20 23 26 30 32 35 60 63

HISTORY OF NESTLE DIRECTORS REPORT INCOME STATEMENT OF NESTLE BALANCE SHEET PERFORMANCE OVERVIEW SWOT ANALYSIS SUGGESTION

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FAST MOVING (FMCGS)

CONSUMER

GOODS

The Consumer & Allied sector is made up of number companies that operate in a number of different markets, but which are linked by the products they produce. While the consumer goods companies typically produce fast moving consumer goods, the allied companies provide the packaging material used by these companies. With the Pakistani economy growing strongly, we expect to see strong growths continuing in this sector, especially given that the companies are aware of the increased capacity requirements. The Pakistani consumer and allied sector has been growing both in terms of size and in profitability since the country became independent 57 years ago. There are a number of different sectors that make up the consumer and allied sector that is the subject of this report. Consumer Goods companies produce and market goods ranging from soaps and detergents to beverages and cigarettes. While these companies are strictly speaking Pakistani, most of them are majority owned by their foreign partners as is evident from the table below.
CONSUMER GOODS

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DEGREE OF FOREIGN OWNERSHIP


Foreign Partner Holding
Colgate Palmolive Pakistan (Colgate Palmolive Company USA) Deutsche Bank International Limited (Germany) Nestle Milkpak Limited (Nestle SA Switzerland) Pakistan Tobacco Limited (British American Ltd UK) Reckitt & Benckiser Limited (Reckitt Benckiser plc UK) Unilever Pakistan Limited( UK ) 30% 20% 59% 94% 78% 67%

Source: Company Reports

. ROLE MULTINATIONAL ORGANIZATIONS IN DIFFERENT SECTORS OF THE ECONOMY


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The American Business Council of Pakistan (ABC) a Formal Association of American conglomerates operating in Pakistan, conducts in-formal business survey annually to assess how their members view investment climate in Pakistan. Most recent survey was completed a few days ago and the feed back is promis. 93% respondents reported improvement in Domestic Economy. 90% reported increase in their gross revenues in Dollar terms while 84% in rupees.

88% were optimistic about Pakistan's overall prospects. 86% indicated increase in their pre-tax profits. 78% indicated improvement in external political situation. 77% reported planning investment in Pakistan.

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TOP 25 MULTINATIONAL COMPANIES OF PAKISTAN

(2004-05)
# Company Name Income (In millions) Net profit (In millions) Net worth (In millions)

29086.3 Shell Pakistan Ltd 65725.0 Hub Power Company Ltd Indus Motors Company Ltd ICI Pakistan Ltd Engro Chemical Ltd Pak Suzuki Motors Ltd Nestle Milk Pak Ltd Honda Atlas Cars Ltd Siemens Pakistan Engineering Company Ltd Glaxo Welcome Pakistan Ltd 9054.7 12815.4 8393.9 7976.1 6575.2 4485.4 4460.5 3221.8 Lever Brothers Pakistan Ltd 20508.0

10858.7 1056.0 203.4 1339.0 566.6 1126.3 87.0 272.4 204.5 253.9 501.9

27685.4 5389.6 1635.9 1258.6 2355.5 5218.6 1807.8 840.7 1260.3 1469.9 2233.6

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Rafhan Maize Products Ltd Dawood Hercules Chemical Ltd Abbott Laboratories Pakistan Ltd Packages Ltd Indus Dyeing & Manufacturing Co Ltd Reckitt Benckiser Pakistan Ltd General Tyres & Rubber Company Ltd Aventis Pharma Pakistan Ltd Colgate Palmolive Pakistan Ltd Rafhan food Ltd Orix Leasing Pakistan Ltd Shehzan International Ltd 3126.4 2886.0 2542.5 2236.0 2184.7 2081.0 1967.0 1800.6 1519.7 1484.6 1346.5 695.2 347.4 764.0 179.5 193.0 134.6 12.2 189.2 57.8 58.5 140.0 154.2 31.4 67.6 1200.7 3420.0 999.3 2285.6 281.2 514.7 667.3 345.6 282.2 568.2 1030.2 159.6 1264.4

Japan Power Generation Ltd 374.5

SUB SECTORS OF FMCGS


The sub sectors being studied in this report include:

Foods
The Foods sub sector includes Unilevers Blue Band margarine operations. With the sale of Dalda, we have excluded it from this category.

Ice Cream
A wall is the biggest player in the Pakistani ice cream market and earns strong margins for Unilever.

Milk
At its core, Nestle Pakistan is a packaged milk company that easily dominates the local packed milk industry.

Water
Bottled water is a growing industry in Pakistan, a premise identified by Nestle as it diversifies its operations.

Home & Personal Care (HPC)


Arguably the most competitive segment in the consumer goods industry, dominated by Unilever, but encompassing all the FMCG companies in Pakistan.

Beverages

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FINANCIAL ANALYSIS OF NESTLE MILK PAK Includes juices and teas, which are dominated by Unilever that fields a very strong tea range. Pepsi and Coca-Cola in soft drink, shezan and Maza juices.

Tobacco
Pakistan, with its young population represents breeding ground for smokers. Pakistan Tobacco is one of the two main players in this sector.

ALLIED SECTOR
The Allied sector being covered includes firms whose revenues and profits are immediately and directly affected by the performance of the consumer goods companies. These companies are typically locally owned. The companies being covered primarily produce packing materials for use in the consumer goods industry.

board.

Cartons and board


Packages is Pakistans largest producer of offset and corrugated cartons and

Biaxally Oriented Polypropylene (BOPP) Film

Tri-pack is the countrys largest producer of BOPP film, but Macpacs recent capacity expansion threatens to reduce Tri-packs domination.

FETURES OF THE FMCGS SECTOR IN PAKSITAN


Ownership
Interestingly, foreign firms are the dominant firms in the Pakistani consumer and allied sectors, with significant interests in the consumer companies. At the same time however, a number of local Pakistani groups also command significant influence in these sectors. Two main local groups that come to mind are the Packages Group and the Lakson Group. The Packages Group influence is derived through its flagship company, Packages Limited, and through its holdings in Tripack Films, Unilever, Nestle and Coca Cola to name a few. The Lakson Group on the other hand has substantial holdings in Colgate-Palmolive Pakistan in addition to the Lakson Tobacco Company.

Ability to Deliver
With increased demand coming through, whether the consumer and allied companies earn additional revenues and profits will depend on their ability to meet this enhanced level of demand.

PAST TRENDS

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FINANCIAL ANALYSIS OF NESTLE MILK PAK Historically, the consumer and allied industry has played a large role in the development of local expertise and production capacity.

Capacity Expansion
Over the past few years, we have seen manufacturing output grow rapidly aided by capacity expansions made by the consumer and allied sector.

Transfer of Knowledge
With the introduction of new products and production techniques, we have seen a transfer of expertise taking place to Pakistan from overseas.

Advanced Distribution Channels


As the consumer and allied companies strive to get their products to their customers as efficiently and quickly as possible, we have seen local distribution channels improve in terms of efficiency and sophistication.

FUTURE PERSPECTIVE Investment in Distribution and Capacity


As has been stated by the State Bank, the manufacturing industry is approaching full capacity on the back of the growth that has been witnessed recently. As may be noted however, the consumer and allied companies are in the process of expanding capacity to avoid losing sales.

New Product Development


The consumer and allied companies consistently introduce new products in the local markets to boost their sales. Such new products may play an important role in the future growth of these companies. For example, Pure life water that was introduced by Nestle a few years ago has been a great success.

Product Consolidation
With increased competition in the market, we are also seeing the consumer and allied companies, in addition to introducing new products, also divest other product lines as in the case of Unilever and Dalda, in order to boost profits.

INDUSTRY THREATS
The consumer and allied industry face significant threats from a number of areas, including (I) Illegal Trade Practices (II) Government Taxes and Regulations (III) A Depreciating Rupee. As a result of these threats, the consumer and allied companies find that they have to compete with products that are cheaper than their own and which as a result are able to capture market share from them. Furthermore, these cheaper goods place an effective price cap on the products produced by the registered companies. In fact, it is estimated that these non-registered companies have a market share of 20-50%. The net result is that the registered companies sales and margins suffer. While the government and the CBR have begun to actively deal with these problems, they remain significant

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FINANCIAL ANALYSIS OF NESTLE MILK PAK threats to the companies revenues and profits in the medium term .The consumer goods and allied industry face significant threats from a number of factors, with illegal competitor practices remaining the most significant. Government regulations and taxes and the value of the rupee also play an important role in determining the sectors growth and profitability.

(i) Illegal Trade Practices


The most significant threat to the consumer and allied sectors comes from illegal trade practices, which include Smuggling Under-Invoicing Counterfeiting Tax Evasion. Smuggled goods have a significant effect on both the top and bottom lines of the consumer companies, since the same product produced overseas may be made available locally at a lower price than that charged for the locally produced version. It has been historically noticed that the quantity of goods smuggled into Pakistan has a close relationship to the level of taxes applied to the product locally. As taxes are increased therefore, smuggling increases. The Home and Personal Care segment is especially vulnerable to smuggled products, especially in an environment of rising prices since the company is unable to pass on cost increases to the end consumer for fear of losing further market share. While it was expected that the government would reduce Central Excise Duty (CED) on certain products to combat smuggling, this expectation did not materialize, thus smuggling remains high. Under invoicing has had an especially significant effect on the allied industry, especially in the case of BOPP film. While the current supply shortage ensures that the local firms dont suffer very significantly, we are likely to see an impact on the firms as their capacity expansions come online. The impact of this particular practice is likely to multiply with the rupees expected depreciation. As is evident from the case of car imports, the Central Bureau of Revenue (CBR) has become a lot more aggressive in dealing with this issue. Counterfeiting also impacts the local manufacturers through its impact on the companies sales, especially since the counterfeited products are typically available at lower both foreign governments and from local firms to deal with this issue and has begun to take steps to deal with it. Tax evasion ensures the availability of relatively cheap products for end users, while ensuring the non competitiveness of products produced by the companies being covered in this report. While the government through the CBR is working towards documenting the economy, tax evasion is likely to remain prevalent in the system at least in the medium term.

(ii) Taxes & Government Regulations

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FINANCIAL ANALYSIS OF NESTLE MILK PAK The government plays an important role in determining the level of sales and margins for the consumer and allied companies through tax and duty rates and other regulations. A large portion of the raw materials used by the consumer and allied sector is imported and is thus affected by the prevailing duty rates .Furthermore, the total cost of the product to the end user includes indirect taxes levied by the government in the form of Central Excise Duty (CED) and General Sales Tax (GST). Given that the demand for the products produced by these companies tends to be price sensitive, the effect of the change in the level of taxes has an immediate and direct impact. It may be noted here that the government abolished the CED on fruit juices and halved the customs duties on tea imports in Budget 05. Government regulations also carry significant consequences for the industry as is evident from the implementation of General Zias constitutional package on the tobacco industry. Furthermore, the advent of the Afghan Transit Route and the South Asian Free Trade Agreement will play a significant role in terms of increasing competition and providing new markets for the consumer and allied products.

(iii) Depreciating Rupee


Another interesting factor that is common to all the companies in the consumer and allied sector is their exposure to foreign currency risk. Just about all the companies import all or a major part of their raw materials from outside Pakistan. Thus any change in the value of the rupee has an immediate and direct impact on the margins of these companies and ultimately their profits. With Pakistans burgeoning trade deficit and the slow growth in foreign exchange inflows, the companies are likely to find their margins threatened, thereby forcing them to either allow their margins to decline or risk losing revenues by raising prices.

The Future
The consumer and allied industry faces significant threats from the unregulated sector, which controls 20-50% of their market. Given that these competing products tend to be cheaper, an effective price ceiling comes into play, which prevents the regulated companies from being able to pass on cost increases to end consumers. The result is that the consumer and allied companies have seen their margins being stressed. However, these factors have existed for a while and thus are already built into the share prices of the companies being reviewed. In our opinion, the governments concentration on promoting economic growth whilst implementing measures to improve the operating environment in Pakistan is likely to positively affect these companies in the medium to long term.

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INDUSTRIAL REVIEW OF DIFFERENT MULTINATIONAL COMPANIES IN PAKISTAN Colgate Colgate-Palmolive Pakistan Limited
Colgate-Palmolive Pakistan Limited is a consumer goods company, whose strong brand portfolio has allowed it to grow rapidly over the last few years. With Pakistans strong economic situation and the companys soon to be completed capacity expansion, we expect revenues to grow by a 5 year CAGR of 23%. However, net margins are expected to decline by 150bps over the next 5 years as a result of (I) the depreciating rupee, (II) increasing international raw material costs, (III) a likely increase in operating expenses on the back of aggressive marketing activities in the near future, and (IV) a price ceiling due to the high levels of competition in the sector. These factors are expected to result in the company reporting a 17% 5-year CAGR in profits. With the stock trading at a PER of 9x and at a 22% discount to our DCF based fair value of PkR302.4/ share, we issue a BUY on the stock.

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FINANCIAL ANALYSIS OF NESTLE MILK PAK Strong Growth 23% 5-year CAGR in revenues Increased Competition Price cap Increased Raw Material Costs 177bps decline in Gross Margins over 5 years Aggressive Marketing Strategy 24% CAGR in operating costs over the next 5 years Valuation Trading at an 22% discount to our DCF fair value of PkR302.43. BUY STOCK MARKET PERFORMENCE INDEX

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Packages Limited
Packages are expected to gain directly from Pakistans accelerating GDP growth through the growth in exports and indirectly through the growth in demand for its products from the consumer goods companies. While the company is seeing accelerating growth in demand for its paper products, it also recently began expanding its flexible packing business. While the company is expected to continue earning a substantial portion of its profits in the form of dividends from its other holdings, it is likely to see some margin pressure in the future on the back of the depreciating rupee. We expect the company to report a CAGR of 15% in profits on the back of 19% growth in revenues over the next 5 years. With the stock trading at a 17% discount to our DCF based fair value of PkR239.8/share, we issue a BUY on the stock. Growth in Consumer Goods Products 5 year CAGR of 19% in revenues Growth in Paper Demand 45% jump in FY03 revenues Flexible Packing Expansion Improved revenues and margins Growth in Exports 10% per annum Increased Dividend Income 44% of FY03 pre-tax profits Decreasing Margins 5% decline in gross margins in next 5 years Valuation Currently trades at a 17% discount to our fair value. BUY Page 15

FINANCIAL ANALYSIS OF NESTLE MILK PAK Current Price PkR195.0 12-month. PkR2 STOCK MARKET PERFORMENCE INDEX

39.8

39.8

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Reckitt Benckiser Ltd.


Reckitt Benckiser allows investors to take advantage of growth both in the household and in the pharmaceutical sectors. While the company had a bad year last year as it restructured its operations and sold off its Korangi plant, it is poised to report strong profit growth on the back of strong revenue growth and improved margins this year. Furthermore, the company bought back 2.7mn of its own shares in FY04. As per reports however, the company been pushing excessive levels of stock onto its distribution network, which may result in reduced profits next year. It must be noted here that the stock has attracted a lot of interest in recent times on the back of de-listing rumors as a result of the companys recent share buyback scheme, which have since been proved to be true. While the company is expected to report a 5 year CAGR of 38% in profits on the back of 20% rise in revenues, the recent rise in the stocks price has resulted in it trading at a PER of 12x and at an 8% premium to our DCF based fair value of PkR100/share, leading us to issue a HOLD on the stock. Household Segment & Korangi Plant 23% CAGR in revenues over next 5 years Pharmaceutical Cost Cutting 15% CAGR in revenues over the next 5 years

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FINANCIAL ANALYSIS OF NESTLE MILK PAK Share Buyback Scheme Possibility of the company being de-listed Inventory Pushing Large writeoffs expected Valuation Currently trading at an 8% premium to our DCF based fair value of PkR100/share. HOLD

STOCK MARKET PERFORMENCE INDEX

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Unilever Pakistan Limited


While Unilever Pakistan has a very strong product portfolio, it operates in a highly competitive environment. The recent sale of the Dalda business coupled with continued strong ice cream margins and the resolution of the companys distribution problems is expected to boost margins. At the same time however, increased tea/HPC raw material costs and competition is likely to largely offset the expected rise in the companys overall margins. Given that we expect the company to maintain its traditional payout policy, we expect it to pay out substantial dividends this year on the back of the gain on the sale of the Dalda business. For the next 5 years, we expect Unilever Pakistan to report a slow 1% CAGR in profits as a result of the sale of the Dalda business, which represented 16% of the companys overall sales. With the stock trading at a PER of 10x and at a 7% discount to our DCF based fair value of PkR1624/share, we issue a HOLD on the stock. Dalda Sale 16% of revenues & 3% of operating profits Strong Ice Cream Margins 5 year CAGR of 13% in profits Distributor Problems resolved Improved Margins Strong Dividends FY04 dividend yield of 9%

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FINANCIAL ANALYSIS OF NESTLE MILK PAK Tea/HPC Competitive Pressures CAGR of 5%/2% in revenues respectively over the next 5 years Valuation Currently trades at an 7% discount to our fair value. HOLD STOCK MARKET PERFORMENCE INDEX

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Vision Statement of Nestle Milkpak


The strategic priorities of Nestle Milkpak are focused on delivering shareholder value through the achievement of sustainable, capital efficient and profitable long term growth. Improvements in profitability will be achieved while respecting quality and safety standards at all times. In line with this objective, Nestle Milkpak envisions to grow in the shortest possible time into the number one food company in Pakistan with the unique ability to meet the needs of consumers of every age group - from infancy to old age, for nutrition and pleasure, through development of a large variety of food categories of the highest quality. Nestle Milkpak envisions the company to develop an extremely motivated and professionally trained work force, which would drive growth through
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innovation and renovation. It aspires, as a respected corporate citizen, to continue playing a significant role in the social and environmental sectors of the country.

Summary of Operations

Production:
The joint venture between Milkpak Ltd. And Nestle S.A. came about in 1988 and the company was renamed as Nestle Milkpak Ltd. Prior to that, Milkpak Ltd., produced UHT milk, butter, cream, desi ghee and fruit drinks at Sheikhupura factory. 21 branded product lines were added during 1990 to 1998. Nestle Milkpak operates the largest and an extremely efficient milk collection system in the country, which enables it to collect the highest quality milk for production of UHT and powder milks as well as other milk based products. The company voluntarily provides extension services of farmers in the area of animal husbandry and livestock breed improvement.
Exports:

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Nestle Milkpak entered the export market in 1993 with exports of Rs.3.2 million to Afghanistan. Growing steadily over the years, its exports stood at Rs.321 million by June, 1998. Currently, it's overseas markets include the UAE, UK, USA, Sri Lanka, Malaysia, Bangladesh, Afghanistan and Central Asian States. Contribution to other Sectors: In the social sector, the company provides over 1,700 job opportunities for skilled, unskilled and professional manpower. It plays a remarkable role in vitalizing the rural economy by disbursing over Rs.1.37 billion annually against milk purchases, benefiting over five million household members of the dairy farmers.
The Environment: In line with its universal commitment, Nestle Milkpak fully complies with its responsibilities forwards the protection of the environment. By making available the processed and packaged dairy products to urban consumers, it helps in arresting urban environmental degradation caused by the influx of cattle into towns. Within it's own production facilities, the company takes pains to operate an elaborate water treatment system to cleanse its industrial wastewater before releasing it for irrigation.

HISTORY
The joint venture between Milkpak Ltd. And Nestle S.A. came about in 1988 and the company was renamed as Nestle Milkpak Ltd. Prior to that, Milkpak Ltd., produced UHT milk, butter, cream, desi ghee and fruit drinks at Sheikhupura factory. 21 branded product lines were added during 1990 to 1998. Nestle Milkpak operates the largest and an extremely efficient milk collection system in the country, which enables it to collect the highest quality milk for production of UHT and powder milks as well as other milk based products. The company voluntarily provides extension services of farmers in the area of animal husbandry and livestock breed improvement.
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Nestle Milkpak entered the export market in 1993 with exports of Rs.3.2 million to Afghanistan. Growing steadily over the years, its exports stood at Rs.321 million by June, 1998. Currently, it's overseas markets include the UAE, UK, USA, Sri Lanka, Malaysia, Bangladesh, Afghanistan and Central Asian States. In the social sector, the company provides over 1,100 job opportunities for skilled, unskilled and professional manpower. It plays a remarkable role in vitalizing the rural economy by disbursing over Rs.1.37 billion annually against milk purchases, benefiting over five million household members of the dairy farmers. In line with its universal commitment, Nestle Milkpak fully complies with its responsibilities forwards the protection of the environment. By making available the processed and packaged dairy products to urban consumers, it helps in arresting urban environmental degradation caused by the influx of cattle into towns. Within its own production facilities, the company takes pains to operate an elaborate water treatment system to cleanse its industrial wastewater before releasing it for irrigation.

Nestle Milkpak Limited


Nestle is one of the largest packaged milk producers and sellers in Pakistan, with an exceptionally strong supply chain. In addition, the firm dominates the Pakistani bottled water market as well. With Pakistans continued population growth coupled with increased levels of urbanization and increased health awareness, we expect packaged milk sales to continue growing strongly. Furthermore, given the likely exit of some competitors from the packaged milk sector, strong growth in water based revenues, lower costs from lower milk prices and operational efficiencies from the companys new computer system; we project a CAGR of 17% in Nestls profits over the next 5 years on the back of an 18% CAGR in the firms revenues. With the stock trading at a PER of 27x and near our DCF fair value of PkR477.7, we issue a HOLD on the stock. Growth in Packed Milk Consumption 5 year CAGR of 18% in revenues Strong Supply Chain Positive Exit of Weak Competitors Increased gross margin
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Water Business New plant reaching completion Diversification Additional revenue and profit support Business Restructuring Increased operating margin Afghanistan Future revenue growth Valuation Currently trades at a 1% premium to our fair value. HOLD Current Price PkR450.05 12-month Price Obj. PkR770

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DIRECTOR REPORT TO THE SHARE HOLDER


2005 was another year for continuing improvement in the economic situation and of stable political environment in Pakistan. This combined with dynamic management across all function enable the company to accelerate growth and further improvement its operation performance during the year under review as reflected in the following key financial result:

PKR MILLION Sales Operating profit %of Sales Net profit

2005 17142 2114 132.3% 1149

2004 12857 1514 12.0% 984

CHANGE% 33.3% 37.2%

16.7%

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%of Sales Earning per share

6.7% 25.33

7.7% 21.70 16.7%

In 2005 the company achived double digit growth for the eight consecutive years however this time growth surged to an impressive +33% as sales reached 17.1 billion. The strong sales performance was buoyed by real internal growth of +27% and was well balanced across all product categories. This was complemented by the successful launches of outstanding new products like NIDO 1+, NESTLE RED GRAPES NECTORES, KIT KAT CHUNKY NESTLE NESVITA MILK 500ml, NESTLE CORN FLAKES and NESTLE KOKO KRUNCH. These new product were aggressively supported to ensure consumer convince and choices. Other key enables of growth were the continued aggressive investment behind distribution infrastructure expansion, dynamics sales & marketing initiatives and category development inside. In addition better consumer communication based on consumer understanding and distribution expansion helped to continue to improve product penetration and consumer acceptance. Exports exceed to RKR 1 billion marks as sales to Afghanistan alone increased alone increased by +44% to PKR 995 million signaling a progressive climate for the business in their recovering economy. The companys milk collection activities also accelerated to support our growth. Fresh milk volume increased by 20% while quality was improved. This achievement was supported by the successful incentive scheme implemented during the period, and the company agri-services activities that assist diary farmers in improving milk production. However fresh milk prices were higher during the year under reviewed compared to last year. Growth translated into improved profits as operating profit increased by + 37%to PKR 2,114 million and improved by 30 basis point. Net profit increased by +17% but showed a decline in margin compared to previous mainly due to three elements:

a) Higher financing cost as government monetary policy pushed interest rates in 2005. b) The company made its first annual donation (Rs. 50 million) of its five year commitment to the Lums School of sciences & technology. c) Provisions were made for the impairment of several production assets that have become uneconomical or obsolete.

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FINANCIAL ANALYSIS OF NESTLE MILK PAK Given the strong cash flow and operating profit results generated, the boards of directors have recommended to pay a final dividend of 150% (Rs.15 per share of Rs.10 each) out of profit available for distribution. When coupled with our interim dividend already paid, this brings the total profit distribution for 2005 to Rs. 25.00 per share or 250%

INVESTMANT PROJECT
Total capital expenditure for the year reached to PKR 2.6 billion, which is the highest record in the company history. These investments are part of our long term infrastructure plan needed to support our continued accelerated growth. The most significant projects are listed below.

PROJECT DESCRIPTION
Kabirwala- new factory extension Shiekhupura new dual fuel generator Shiekhupura UHT capacity increased Milk collection- Field development Information Technology-upgrade of equipment

PKR MILLION
1,636 258 148 83 30

Planned investments in 2006 are equally as aggressive. We expect our investment to gain top PKR 2.5+billion. This includes plant capacity increases, milk collection field development and upgrading of existing production facilities.

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FINANCIAL ANALYSIS
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INCOME STATEMENT OF NESTLE MILK PACK LIMITED


PROFIT AND LOSS ACCOUNT
For the year ended December 31, 2005 2005 2004
(000) Sales-net Cost of good sold 17,142,363 (12,357,079) -------------(000) 12,857,001 (9,261,216) -------------

Gross profit
Distribution and selling expenses Administrative expanses

4,785,284
(2,093,383) (577,816) ------------

3,595,785
(1,638,624) (416,067) -------------

Operating profit

2,114,085

1,541,094

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Finance cost Other operating expanses Other operating income

(180,108) (356,528) 53,151

(65,986) (105,100) 39,980

Profit before taxation


Taxation

----------1,630,600
(481,878)

---------1,409,988
(425,709)

Profit After taxation Earning per share

1,148,722 ========= 25.33 =====

984,279 ====== 21.70 ====

BALANCE SHEET AS AT DECEMBER 31, 2005


2005 (000) 2004 (000)

ASSETS
Tangible and fixed assets
Property plant and equipments Assets subject to finance lease Capital work in progress 3,298,880 20 1,788,475 _________ 5,087,375 177,658
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2,393,776 142 824,595 _________ 3,218,513 ----

Intangible assets

FINANCIAL ANALYSIS OF NESTLE MILK PAK

Long term loan and advances Long term security deposits Current assets

47,691 5,338

20,287 5,997

Stores and spears 249,921 Stock in trade 1,492,983 Trade debts 47,298 Current portion of long term loans and deposits 3,624 Advances, deposits and other receivable 865,897 Cash and bank balance 858,995 ________ 3,518,718 ____________ 8,836,780 ===========

262,148 1,696,299 26,401 3,036 273, 45 95,176 __________ 2,356,518 ___________ 5,601,315 =========

BALANCE SHEET AS AT DECEMBER 31, 2005 2005 (000) 2004 (000)

EQUITY AND LIABILITES


Share capital and reserves
Authorized capital (75,000,000) Ordinary share of 10 each Issued subscribed and paid up capital Share premium 750,000 ________ _________ 453,496 249,527
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750,000 _______ ________ 452,730 249,527

FINANCIAL ANALYSIS OF NESTLE MILK PAK

General reserve Amalgamation reserve Accumulated profit

280,000 ------974,024 _______ 1,957,047

280,000 (41,511) 547,440 ________ 1,488,186

Non current liabilities


Long term finances Deferred taxation Retirement and other benefits Liabilities against to finance lease Customer security deposit- interest free 1,946,850 444,414, 74,769 -----80,472 _______ 1,450,000 175,271 70,287 31 64,822 _______

BALANCE SHEET AS AT DECEMBER 31, 2005 2005 (000)


Current liabilities
Current portion of: Long term finances Liabilities against to finance lease Short term borrowing Running finance under mark arrangements Trade and other payable Interest and markup accrued Dividend payable 400,000 200,000 31 115 125,000 -----1,121,041 1,107,035 2,188,402 1,032,638 45,258 12,870 453,496 ----_________ ________ 4,333,228 2,352,658
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2004 (000)

FINANCIAL ANALYSIS OF NESTLE MILK PAK

_________ _________ 8,836,780 5,601,315 ========= =========

Cash flow statement for the year ended on December 31st, 2005 Items Cash in Cash Net cash flow (000) out out flow/ flow (inflow) (000) (000) Cash flow from operating activity
Cash generated from operations Decreased in long term securities Increased in customer security deposit interest free Increased Long term loan &advances Retirement & other benefit Finance cost paid Taxes paid 3739860 659 15590 27992 81911 147720 582411

Net cash generated from operations

2916075
2766273 4622

Cash flow from Investment activity


Fixed capital expenditure Sale proceeds of property, plant and equipment

Net cash used in investing activity


Page 35

(2761651)

FINANCIAL ANALYSIS OF NESTLE MILK PAK

Cash flow from Financing activity


Receipt of long term finances Repayment of long term finances Receipt of short term financing Payment of finance lease liability Dividend paid Net cash generated from finance activity 896850 200000 12500 115 226346

595389

Net increased in cash

749813

PERFORMANCE OVERVIEW

Page 36

FINANCIAL ANALYSIS OF NESTLE MILK PAK

SALES

Page 37

FINANCIAL ANALYSIS OF NESTLE MILK PAK

18000 16000 14000 12000 10000 8000 6000 4000 2000 0

17142 12857 8054 9222 10510 years sales

IN Million of Rs.

6575

1 1

2 2

3 3

4 4

5 5

6 6

SALES

YEARS

GROSS PROFIT IN MILLION OF RS.

Page 38

FINANCIAL ANALYSIS OF NESTLE MILK PAK


Gross profit 6000 4785

5000

In million of Rs.

4000 2768 2288 2000 1792 3050

3596 Gross profit

3000

1000

0 1 2 3 years 4 5 6

Operating profit in million of Rs.


Page 39

FINANCIAL ANALYSIS OF NESTLE MILK PAK

2500 2114 2000 1541 1500 1154 1000 650 500 0 1 1 2 2 3 3 4 4 5 5 6 6 906 1269 years operating profit

OPERATING PROFIT % OF SALES


Page 40

FINANCIAL ANALYSIS OF NESTLE MILK PAK

profit %of sales 14 12 10 % of sales 8 profit %of sales 6 4 2 0 1 2 3 years 4 5 6

PROFIT BEFORE TAX


Page 41

FINANCIAL ANALYSIS OF NESTLE MILK PAK

profit before tax


1800 1600 1410 1400 In million of Rs. 1200 1006 1000 800 600 400 200 0 1 1 2 2 3 3 years 4 4 5 5 6 6 493 720 years profit before tax 1151

1631

PROFIT BEFORE TAX %OF SALES

Page 42

FINANCIAL ANALYSIS OF NESTLE MILK PAK


profit before tax %of sales 12

10.9

11

11 9.5

10

8.9 7.5

8 % of sales

profit before tax %of sales

0 1 2 3 years 4 5 6

PROFIT AFTER TAX

Page 43

FINANCIAL ANALYSIS OF NESTLE MILK PAK

Profit after tax


1400 1200 1000 In million of Rs. 800 656 600 419 400 200 0 1 1 2 2 3 3 years 4 4 5 5 6 6 272 759 years profit aftertax 984 1149

Profit after tax % of sales


Page 44

FINANCIAL ANALYSIS OF NESTLE MILK PAK

profit after tax %of sales 9 8 7.1 7 6 % of Sales 5 4.1 4 3 2 1 0 1 2 3 years 4 5 6 profit after tax %of sales 5.2 7.7 7.2 6.7

EARNING PER SHARE


Page 45

FINANCIAL ANALYSIS OF NESTLE MILK PAK

Earning per share 30 25.33 25 21.7 20 16.75 15 9.23 6.01 5 14.48 Earning per share

10

0 1 2 3 years 4 5 6

INVENTORY TURN OVER RATIO


Page 46

FINANCIAL ANALYSIS OF NESTLE MILK PAK

inventory turn over ratio 9 8 7 6 Inventory 5 inventory turn over ratio 4 3 2 1 0 1 2 3 years 4 5 6 5.3 6.9 7 8 7.2 7.7

TOTAL ASSETS TURN OVER RATIO


Page 47

FINANCIAL ANALYSIS OF NESTLE MILK PAK

Total assets turnover ratio 3.5 3 2.6 2.5 2 Total assets turnover ratio 1.5 1 0.5 0 1 2 3 years 4 5 6 2.2 2.9 2.7 2.7 2.4

PRICE EARNING RATIO


Page 48

FINANCIAL ANALYSIS OF NESTLE MILK PAK

Price earning ratio 35 30.4 30 25 20 ratio 16.3 15 10 5 0 1 2 3 years 4 5 6 15.1 Price earning ratio 25 22.5 24

RETURN ON CAPITAL EMPLOYED


Page 49

FINANCIAL ANALYSIS OF NESTLE MILK PAK

Return on capital Employed 60 50 43 36 32 30 Return on capital Employed

50 44 40 % of capital

47

20

10

0 1 2 3 years 4 5 6

Debt Equity Ratio


Page 50

FINANCIAL ANALYSIS OF NESTLE MILK PAK

Debt Equity Ratio


70 60 50 Debt & Equity 40 30 20 10 0 1 2 3 Years 4 5 6 57 51 45 49 49 51 43 35 35 Debt Equity 65 55 65

CURRENT RATIO
Page 51

FINANCIAL ANALYSIS OF NESTLE MILK PAK


Current Ratio 1.4 1.2 1 0.8 Ratio Current Ratio 0.6 0.4 0.2 0 1 2 3 years 4 5 6 1 0.9 0.9

1.3 1.1 1.1

INTEREST COVERAGE RATIO


Page 52

FINANCIAL ANALYSIS OF NESTLE MILK PAK

Interest Cover Ratio 25 22.4 20 19.3

15 Ratio 11.2 10 6.5 5 4.6 Interest Cover Ratio 10.1

0 1 2 3 years 4 5 6

APPLICATION OF REVENUE FOR 2005


Page 53

FINANCIAL ANALYSIS OF NESTLE MILK PAK


Application of revenue

Others, 19%

Material Retained earning., 3% Dividends, 5% Material, 53% Government, 6% Financial charges, 1% staff cost, 7% staff cost Financial charges Government Dividends Retained earning. Others

FIXED CAPITAL EXPANDITURE VS DEPRICATION OF TANGIBAL ASSESTS

Page 54

FINANCIAL ANALYSIS OF NESTLE MILK PAK

fixed capital expanditure vs deprication of tangibal assets


3500 3299 3000 2766 2500 In million of Rs. 2196 2000 1500 1000 766 500 0 1 2 3 years 4 5 6 397 281 312 301 526 327 364 413 552 1156 1879 1909 1998 fixed assets capital expenditure deprecation 2394

SHARE HOLDER FUND

Page 55

FINANCIAL ANALYSIS OF NESTLE MILK PAK


SHARE HOLDER FUND 2500

2000 IN MILLION OF Rs.

1957

1500 1044 1000 1103 1138

1488 SHARE HOLDER FUND

990

500

0 1 2 3 YEARS 4 5 6

RETURN ON EQUITY

Page 56

FINANCIAL ANALYSIS OF NESTLE MILK PAK


Return on equity 80.00% 70.00% 60.00% 50.00% 42.30% 40.00% 30.00% 20.00% 10.00% 0.00% 1 2 3 years 4 5 6 26.10% Return on equity 59.50% 66.70% 66.10% 58.70%

MARKET PRICE PER SHARE VS. NET ASSETS PER SHARE


Page 57

% of equity

FINANCIAL ANALYSIS OF NESTLE MILK PAK

Market price per share vs net assets per share


900 800 700 600 in Rs. 500 400 300 200 24 23 22 150 2 219 376 25 520 33 Net assets per share 770 Market price 43

100 150 0 1

3 years

MARKET CAPITALIZATION

Page 58

FINANCIAL ANALYSIS OF NESTLE MILK PAK


Market capitalization 40000 35000 30000 In million of Rs. 25000 20000 15000 10000 5000 0 1 2 3 years 4 5 6 9915 6790 6790 17023 23542 Market capitalization 34919

DIVIDEND PAID

Page 59

FINANCIAL ANALYSIS OF NESTLE MILK PAK


Dividend paid 1200 1134

1000

In million of Rs.

800 634 600 453 400 294 543 679 Dividend paid

200

0 1 2 3 years 4 5 6

DIVIDEND PAY OUT RATIO

Page 60

FINANCIAL ANALYSIS OF NESTLE MILK PAK

(% of share capital)

Dividend pay out ratio 300 250

250

% of share capital

200 140 120 100 65 50 100 150

150

Dividend pay out ratio

0 1 2 3 years 4 5 6

Page 61

FINANCIAL ANALYSIS OF NESTLE MILK PAK

SWOT ANALYSIS

STRANGTH
Page 62

FINANCIAL ANALYSIS OF NESTLE MILK PAK

Sales is increasing in 2005 up to 33 % as compared to 2004 Operating profit is also increased up to 37 % as compared to 2004 Net profit increased up to 16.7% as compared to 2004 Earning per share is also increased up to 16.7% as compared to 2004

Capital expenditure for the year is Rs a. 2.6 Billion which is a good for accompany.

WEAKNESS
Operating profit increased 37.2% while net profit increased by 16.7% which show higher finance cost and other operating expanses

Long term liabilities are increased while interest rate are also increased which is a negative sign

Total assets turn over ratio is also decreased

Interest cover ratio is decreased by 12.4 which shows a big weakness in financial policy of company

Debt equity ratio and current ratio is not up to standard

OPPORTUNITIES
Page 63

FINANCIAL ANALYSIS OF NESTLE MILK PAK

Making more investment on milk Collection Company can get fresh and cheaper milk Market price per share is very high as compared to net assets value. Company can float share in market for new projects.

Afghanistan is a big market for company as record show sales on this territory is increased

THRATES

Interest rate is increased day by day which also increased the finance cost.

Page 64

FINANCIAL ANALYSIS OF NESTLE MILK PAK

SUGGESATIONS FOR NESTLE MILK PAK LIMITED


Company should launched new projects but it must be for its internal sources instead of debt Amount of debt must be decreased because last year again interest rate become high and this increased the cost and decreased profit Focused on the Afghanistan territory as well. For new project float the new shares instead of external borrowing

Page 65