Although sales growth at 18.33 per cent was the lowest since 1993, profits on the operational levels have shown a smart jump. With a 39.38 per cent jump in operating profit, margins at the operational level has gone up from 10.23 per cent to 12.05 per cent.

Higher exports coupled with control over raw material cost and better realisations have helped the profit margins. Exports have recorded a smart jump of 31 per cent to Rs 330.2 crore. Raw material cost was up by 13.8 per cent as compared to a 18.33 per cent growth in revenues. Raw material accounts for around 55 per cent of the total sales. Lower coffee prices have been the major contributor. The cost for per metric tonne coffeehas fallen from Rs 76,592 during 1996 to Rs 67,695 in 1997. As a result, despite a 30 per cent jump in quantity, the cost for raw coffee has gone up by only 15 per cent. Had the prices of tea and milk not gone up, the benefits would have been much more. While the per unit cost of milk has gone up by 10.6 per cent, the same has gone up by 20 per cent for tea. Advertising and sales promotion expenditure have gone up substantially by 41.68 per cent to 79.89 crore. Profit after tax was up by 36.9 per cent to Rs 74.33 crore, netting an EPS of Rs 7.70.

However, if one were to compare the second half's performance with the first half, there has been a smart improvement in the later half's results.

While sales in the second half stood at Rs 801 crore, up by 28 per cent from first half's figure of Rs 624.60 crore, profit on the operational levels have gone up from Rs 61.40 crore in the first half to Rs 110.42 crore, a net jump of 79.83 per cent. As a result, margins on the operational levels have moved up from9.83 per cent in the first half to 13.78 per cent in the second half.

Incidently, the stock price had started its upward rally in the second week of November last year. And within a short-period of four months, the stock was up by 100 per cent.

For the future, the budget recommendations are likely to put some pressure on margins. The finance minister announced in the budget to restrict the availability of Modvat credit by 5 per cent of the duty paid in case of inputs used in the manufacture of excisable goods. The restriction in the availability of Modvat credit will result in higher excise outgo. However, the impact of last year's launches will be fully felt in the current year. During last year, the company had launched more than 30 new products in the domestic market and emphasis was more on thrust areas of culinary and chocolate and confectionery. The commissioning of its sixth factory at Goa will also provide an advantage to the company. With exports accounting for around 23 per cent of the sales, asharp decline in rupee value also augurs well for Nestle. Lower prices of tea should also help.

While the company is expected to record a 20 per cent growth in sales as well as profits, the stock market should also maintain its discounting for the stock. In the past 15-months, the price multiple for the Nestle stock has been moving in the range of 43 to 53. Since the future outlook appears encouraging, the discounting for this multinational is unlikely to go below 40 and the stock will continue to attract buyers at lower levels. Besides, if one were to go by past trend, a bonus issue somewhere in the next year is also not ruled out. Last bonus issue was during 1996.