Nestle investors may get fixed price

MUMBAI/NEWDELHI: Nestle India plans to distribute part of its general reserves and share premium account to shareholders. “Nestle pays out substantial dividends and has very little distributable profits left.

So, this scheme could be for paying a special dividend too, to be paid out of reserves,” said an FMCG analyst with a leading brokerage. As of December 2005, Nestle had undistributed profits of Rs 7.2 crore, but will go up after this year’s profits are added to it. It had paid out Rs 240 crore as dividend in 2005, from available profits of Rs 313 crore.

The other option is that the company buys back shares. The outcome of a buyback is uncertain as it is optional and success depends on the premium to market price. There is another option to return cash under the Sec 391-394 route, meaning the exercise is carried out as a share capital reduction program, with all shareholders participating in it, after it gets approval from shareholders, creditors and the courts. This becomes a compulsory buyback as it is done across the board.

All shareholders will get a fixed price and their shareholding will come down correspondingly. The shareholding pattern does not alter in this case. Recently, Infomedia India had got approval for a scheme, under which it purchased and cancelled (essentially a buyback) 14% of its equity shares. This may not be a buyback in the technical sense, but assumes the same form. In bonus debentures, a portion of the networth is converted to debentures and issued to shareholders free of cost, who get cash on redemption.

Nestle is a cash rich company, which generated net cash from operating activities of Rs 403 crore in 2005. On its balance sheet, it had liquid investments of Rs 100 crore, Rs 36 crore in cash, and Rs 100 crore in advances and inter-corporate deposits. In the January-September 2006 period, its net sales grew by 12% to Rs 2,080 crore while its net profit grew by 7.6% to Rs 252 crore. Higher raw material costs affected its performance during 2006. The company has an efficient working capital management and rotated its working capital 31 times in the January-September 2006 period, compared to 28 times in 2005, and 22 in 2002.