financial analysis of nestle milk pak limited

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 SCIENCESThe Islamia University of Bahawalpur


TABEL OF CONTENTS


Sr. #

CONTENT PAGE NO.

1 OVERVIEW OF F.M.C.G. SECTOR 042 INDUSTRIAL OVERVIEW 13

3 VISION STATEMENT OF NESTLE 20

4 HISTORY OF NESTLE 23

5 DIRECTORS REPORT 266 INCOME STATEMENT OF NESTLE 307 BALANCE SHEET 328 PERFORMANCE OVERVIEW 359 SWOT ANALYSIS 6010 SUGGESTION 63


FAST MOVING CONSUMER GOODS (FMCGS)

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

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.


DEGREE OF FOREIGN OWNERSHIP

Foreign Partner Holding

Colgate Palmolive Pakistan (Colgate Palmolive Company USA) 30%

Deutsche Bank International Limited (Germany) 20%

Nestle Milkpak Limited (Nestle SA Switzerland) 59%

Pakistan Tobacco Limited (British American Ltd UK) 94%

Reckitt & Benckiser Limited (Reckitt Benckiser plc UK) 78%

Unilever Pakistan Limited( UK ) 67%

Source: Company Reports

.ROLE MULTINATIONAL ORGANIZATIONS IN DIFFERENT SECTORS OF THE ECONOMY


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.


TOP 25 MULTINATIONAL COMPANIES OF PAKISTAN (2004-05)

# Company Name Income (In millions)

Net profit (In millions)

Net worth (In millions)

Hub Power Company Ltd

29086.3 10858.7 27685.4

Indus Motors Company Ltd 9054.7 203.4 1635.9

Lever Brothers Pakistan Ltd 20508.0 1339.0 1258.6

ICI Pakistan Ltd 12815.4 566.6 2355.5

Engro Chemical Ltd 8393.9 1126.3 5218.6

Pak Suzuki Motors Ltd 7976.1 87.0 1807.8

Nestle Milk Pak Ltd 6575.2 272.4 840.7

Honda Atlas Cars Ltd 4485.4 204.5 1260.3

Siemens Pakistan Engineering Company Ltd

4460.5 253.9 1469.9

Glaxo Welcome Pakistan Ltd

3221.8 501.9 2233.6

Shell Pakistan Ltd 65725.0 1056.0 5389.6


Rafhan Maize Products Ltd 3126.4 347.4 1200.7

Dawood Hercules Chemical Ltd

2886.0 764.0 3420.0

Abbott Laboratories Pakistan Ltd

2542.5 179.5 999.3

Packages Ltd 2236.0 193.0 2285.6

Indus Dyeing & Manufacturing Co Ltd

2184.7 134.6 281.2

Reckitt Benckiser Pakistan Ltd

2081.0 12.2 514.7

General Tyres & Rubber Company Ltd

1967.0 189.2 667.3

Aventis Pharma Pakistan Ltd

1800.6 57.8 345.6

Colgate Palmolive Pakistan Ltd

1519.7 58.5 282.2

Rafhan food Ltd 1484.6 140.0 568.2

Orix Leasing Pakistan Ltd 1346.5 154.2 1030.2

Shehzan International Ltd 695.2 31.4 159.6

Japan Power Generation Ltd 374.5 67.6 1264.4

SUB SECTORS OF FMCGS

The sub sectors being studied in this report include:• FoodsThe Foods sub sector includes Unilever’s 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


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.

• TobaccoPakistan, 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.• Cartons and board Packages is Pakistan’s largest producer of offset and corrugated cartons and

board.• Biaxally Oriented Polypropylene (BOPP) Film Tri-pack is the country’s largest producer of BOPP film, but Macpac’s recent

capacity expansion threatens to reduce Tri-pack’s domination.

FETURES OF THE FMCGS SECTOR IN PAKSITAN

OwnershipInterestingly, 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 DeliverWith 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


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. Forexample, 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


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 sector’s growth and profitability.

(i) Illegal Trade PracticesThe 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 don’t 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 rupee’s 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 inthe medium term.

(ii) Taxes & Government Regulations


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 thegovernment 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 Zia’s 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 Pakistan’s 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 factorshave existed for a while and thus are already built into the share prices of the companies being reviewed. In our opinion, the government’s 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.


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 Pakistan’s strong economic situation and the company’s 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.


• 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


Packages Limited

Packages are expected to gain directly from Pakistan’s 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


Current Price PkR195.012-month. PkR2STOCK MARKET PERFORMENCE INDEX

39.8

39.8


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 company’s 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 stock’s price has resulted in it trading at a PER of 12x and at an 8% premium to ourDCF 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


• 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



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 company’s 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 company’s 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 company’s 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%


• 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



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


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:


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.

HISTORYThe 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.


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 Pakistan’s 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 company’s new computer system; we project a CAGR of 17% in Nestlé’s profits over the next 5 years on the back of an 18% CAGR in the firm’s 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


• 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 PkR450.0512-month Price Obj. PkR770


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 2005 2004 CHANGE%

Sales 17142 12857 33.3%

Operating profit 2114 1514 37.2%

%of Sales 132.3% 12.0%

Net profit 1149 984 16.7%


%of Sales 6.7% 7.7%

Earning per share 25.33 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 CHUNKYNESTLE 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 company’s 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.


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 PKR MILLION

Kabirwala- new factory extension 1,636

Shiekhupura – new dual fuel generator 258

Shiekhupura – UHT capacity increased 148

Milk collection- Field development 83

Information Technology-upgrade of equipment 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.


FINANCIAL ANALYSIS


…………………………………………………………………


INCOME STATEMENT OF NESTLE MILK

PACK LIMITED

PROFIT AND LOSS ACCOUNTFor the year ended December 31, 2005

2005 2004 (000) (000)

Sales-net 17,142,363 12,857,001

Cost of good sold (12,357,079) (9,261,216) -------------- -------------

Gross profit 4,785,284 3,595,785

Distribution and selling expenses (2,093,383) (1,638,624)

Administrative expanses (577,816) (416,067) ------------ -------------

Operating profit 2,114,085 1,541,094


Finance cost (180,108) (65,986) Other operating expanses (356,528) (105,100)

Other operating income 53,151 39,980 ----------- ----------Profit before taxation 1,630,600 1,409,988

Taxation (481,878) (425,709)

Profit After taxation 1,148,722 984,279 ========= ======Earning per share 25.33 21.70 ===== ====

BALANCE SHEET AS AT DECEMBER 31, 2005

2005 2004(000) (000)

ASSETS

Tangible and fixed assets

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

Intangible assets 177,658 ----


Long term loan and advances 47,691 20,287Long term security deposits 5,338 5,997

Current assets

Stores and spears 249,921 262,148Stock in trade 1,492,983 1,696,299Trade debts 47,298 26,401Current portion of long term loans and deposits 3,624 3,036Advances, deposits and other receivable 865,897 273, 45 Cash and bank balance 858,995 95,176 ________ __________ 3,518,718 2,356,518

____________ ___________ 8,836,780 5,601,315 =========== =========


2005 2004

(000) (000)

EQUITY AND LIABILITES

Share capital and reserves

Authorized capital 750,000 750,000(75,000,000) ________ _______Ordinary share of 10 each _________ ________

Issued subscribed and paid up capital 453,496 452,730Share premium 249,527 249,527


General reserve 280,000 280,000Amalgamation reserve ------- (41,511)Accumulated profit 974,024 547,440 _______ ________ 1,957,047 1,488,186Non current liabilities

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


2005 2004

(000) (000)

Current liabilities

Current portion of: Long term finances 400,000 200,000Liabilities against to finance lease 31 115

Short term borrowing 125,000 ------Running finance under mark arrangements 1,121,041 1,107,035Trade and other payable 2,188,402 1,032,638Interest and markup accrued 45,258 12,870Dividend payable 453,496 ----- _________ ________ 4,333,228 2,352,658


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

Cash flow statement for the year ended on December 31st, 2005Items Cash in

flow (000)Cash out flow (000)

Net cash out flow/ (inflow)(000)

Cash flow from operating activityCash generated from operations 3739860

Decreased in long term securities 659

Increased in customer security deposit –interest free

15590

Increased Long term loan &advances 27992

Retirement & other benefit 81911

Finance cost paid 147720

Taxes paid 582411

Net cash generated from operations 2916075

Cash flow from Investment activityFixed capital expenditure 2766273Sale proceeds of property, plant and equipment 4622

Net cash used in investing activity (2761651)


Cash flow from Financing activity Receipt of long term finances 896850

Repayment of long term finances 200000Receipt of short term financing 12500Payment of finance lease liability 115Dividend paid 226346Net cash generated from finance activity 595389Net increased in cash 749813

PERFORMANCE OVERVIEW


SALES


SALES

1 2 3 4 5 6

65758054

922210510

12857

17142

02000400060008000

1000012000140001600018000

1 2 3 4 5 6

YEARS

IN M

illi

on

of

Rs.

years

sales

GROSS PROFIT IN MILLION OF RS.


Gross profit

1792

2288

27683050

3596

4785

0

1000

2000

3000

4000

5000

6000

1 2 3 4 5 6

years

In m

illi

on

of

Rs.

Gross profit

Operating profit in million of Rs.


1 2 3 4 5 6

650

906

11541269

1541

2114

0

500

1000

1500

2000

2500

1 2 3 4 5 6

years

operating profit

OPERATING PROFIT % OF SALES


profit %of sales

0

2

4

6

8

10

12

14

1 2 3 4 5 6

years

% o

f sa

les

profit %of sales

PROFIT BEFORE TAX


profit before tax

1 2 3 4 5 6

493

720

1006

1151

1410

1631

0

200

400

600

800

1000

1200

1400

1600

1800

1 2 3 4 5 6

years

In m

illi

on

of

Rs.

years

profit before tax

PROFIT BEFORE TAX %OF SALES


profit before tax %of sales

7.5

8.9

10.9 11 11

9.5

0

2

4

6

8

10

12

1 2 3 4 5 6

years

% o

f sa

les

profit before tax %of sales

PROFIT AFTER TAX


Profit after tax

1 2 3 4 5 6

272

419

656

759

984

1149

0

200

400

600

800

1000

1200

1400

1 2 3 4 5 6

years

In m

illi

on

of

Rs.

years

profit aftertax

Profit after tax% of sales


profit after tax %of sales

4.1

5.2

7.1 7.27.7

6.7

0

1

2

3

4

5

6

7

8

9

1 2 3 4 5 6

years

% o

f S

ale

s

profit after tax %of sales

EARNING PER SHARE


Earning per share

6.01

9.23

14.48

16.75

21.7

25.33

0

5

10

15

20

25

30

1 2 3 4 5 6

years

Earning per share

INVENTORY TURN OVER RATIO


inventory turn over ratio

5.3

6.9 7

8

7.27.7

0

1

2

3

4

5

6

7

8

9

1 2 3 4 5 6

years

Inve

nto

ry

inventory turn over ratio

TOTAL ASSETS TURN OVER RATIO


Total assets turnover ratio

2.2

2.62.7

2.92.7

2.4

0

0.5

1

1.5

2

2.5

3

3.5

1 2 3 4 5 6

years

Total assets turnover ratio

PRICE EARNING RATIO


Price earning ratio

25

16.315.1

22.524

30.4

0

5

10

15

20

25

30

35

1 2 3 4 5 6

years

rati

o

Price earning ratio

RETURN ON CAPITAL EMPLOYED


Return on capital Employed

32

4447

50

43

36

0

10

20

30

40

50

60

1 2 3 4 5 6

years

% o

f ca

pit

al

Return on capital Employed

Debt Equity Ratio


Debt Equity Ratio

5551

49

57

65 65

4549

51

43

35 35

0

10

20

30

40

50

60

70

1 2 3 4 5 6

Years

Deb

t &

Eq

uit

y

Debt

Equity

CURRENT RATIO


Current Ratio

1.3

0.9

1

1.1 1.1

0.9

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1 2 3 4 5 6

years

Rat

io Current Ratio

INTEREST COVERAGE RATIO


Interest Cover Ratio

4.6

6.5

11.2

19.3

22.4

10.1

0

5

10

15

20

25

1 2 3 4 5 6

years

Rat

io Interest Cover Ratio

APPLICATION OF REVENUE FOR 2005


Application of revenue

Material, 53%

staff cost, 7%

Financial charges, 1%

Government, 6%

Dividends, 5%

Retained earning., 3%

Others, 19%

Material

staff cost

Financial charges

Government

Dividends

Retained earning.

Others

FIXED CAPITAL EXPANDITURE VS DEPRICATION OF TANGIBAL ASSESTS


fixed capital expanditure vs deprication of tangibal assets

1879 19091998

21962394

3299

397301

526

766

1156

2766

281 312 327 364 413552

0

500

1000

1500

2000

2500

3000

3500

1 2 3 4 5 6

years

In m

illi

on

of

Rs.

fixed assets

capital expenditure

deprecation

SHARE HOLDER FUND


SHARE HOLDER FUND

1044 9901103 1138

1488

1957

0

500

1000

1500

2000

2500

1 2 3 4 5 6

YEARS

IN M

ILL

ION

OF

Rs.

SHARE HOLDER FUND

RETURN ON EQUITY


Return on equity

26.10%

42.30%

59.50%

66.70% 66.10%

58.70%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

1 2 3 4 5 6

years

% o

f eq

uit

y

Return on equity

MARKET PRICE PER SHARE VS. NET ASSETS PER SHARE


Market price per share vs net assets per share

150 150219

376

520

770

23 22

24

25

33

43

0

100

200

300

400

500

600

700

800

900

1 2 3 4 5 6

years

in R

s. Net assets per share

Market price

MARKET CAPITALIZATION


Market capitalization

6790 6790

9915

17023

23542

34919

0

5000

10000

15000

20000

25000

30000

35000

40000

1 2 3 4 5 6

years

In m

illi

on

of

Rs.

Market capitalization

DIVIDEND PAID


Dividend paid

294

453

543

634679

1134

0

200

400

600

800

1000

1200

1 2 3 4 5 6

years

In m

illi

on

of

Rs.

Dividend paid

DIVIDEND PAY OUT RATIO


(% of share capital)

Dividend pay out ratio

65

100

120

140150

250

0

50

100

150

200

250

300

1 2 3 4 5 6

years

% o

f sh

are

cap

ital

Dividend pay out ratio


SWOT ANALYSIS

STRANGTH


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


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.


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

financial analysis of nestle milk pak limited

Documents

nestle milk

central asian

illegal trade

fixed capital

nestle milkpak

nestle milkpak

livestock

dcf based