Research and Analysis Project

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Research and Analysis Project
Oxford Brookes University
An Analysis and Evaluation of Business and

Financial Performance of Nestle Pakistan
Limited between 1 January 2014 and 31
December 2016
WORD COUNT: 7,466
ACCA REGISTRATION: 2272065

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Contents
1. PROJECT OBJECTIVES and Overall Research Approach ............................................................................. 3
1.1 Introduction ........................................................................................................................................ 3
1.2 Reasons for Choosing the Topic .......................................................................................................... 3
1.3 Reasons for Choosing Industry ........................................................................................................... 3
1.4 Reasons for Choosing Company.......................................................................................................... 3
1.5 Reasons for Choosing the Competitor ................................................................................................ 4
1.6 Project Objectives ............................................................................................................................... 4
1.7 Research Questions ...................................................................................................................... 4
1.8 Overall Research Approach ................................................................................................................. 4
2. Information Gathering and Accounting / Business Techniques Used ...................................................... 5
2.1 Sources of Information ....................................................................................................................... 5
2.2 Information Gathering: ....................................................................................................................... 5
2.3 Limitations of Information Gathering ................................................................................................. 5
2.4 Ethical Issues Involved in Information gathering Process................................................................... 5
2.5 Accounting and Business Techniques Used: ....................................................................................... 6
2.5.1 Ratio Analysis: .............................................................................................................................. 6
2.5.2 Limitations of Ratio Analysis: ....................................................................................................... 6
2.5.3 SWOT Analysis:............................................................................................................................. 6
2.5.4. Limitations of SWOT Analysis: .................................................................................................... 6
2.5.5. Porter’s Five Forces ..................................................................................................................... 7
2.5.6. Limitations of Porter’s Five Forces: ............................................................................................. 7
3. Results, Analysis, Conclusions and Recommendations............................................................................. 8
Industry Profile:......................................................................................................................................... 8
NESTLE PAKISTAN.................................................................................................................................. 8
UNILEVER PAKISTAN ............................................................................................................................. 8
3.1. Ratio Analysis: .................................................................................................................................... 9
3.1.1. Sales Revenue: ............................................................................................................................ 9
3.1.2. Gross Profit Margin: .................................................................................................................. 11
Net Profit Margin: ............................................................................................................................... 13
3.1.4. Return on Capital Employed: .................................................................................................... 14
3.1.5. Current Ratio: ............................................................................................................................ 15
3.1.6 Receivable Days: ........................................................................................................................ 17

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3.1.7. Payable Days: ............................................................................................................................ 18

3.1.8. Inventory days:.......................................................................................................................... 19
3.1.9. Debt to Equity Ratio: ................................................................................................................. 20
3.1.10. Interest Cover Ratio: ............................................................................................................... 21
3.1.11. Earnings per Share: ................................................................................................................. 22
3.2. Business Analysis:............................................................................................................................. 23
3.2.1. Porter’s Five Forces: .................................................................................................................. 23
3.2.2. SWOT Analysis:.......................................................................................................................... 24
3.3. Conclusion: ....................................................................................................................................... 27
3.4. Recommendations: .......................................................................................................................... 28

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1. PROJECT OBJECTIVES and Overall Research Approach

1.1 Introduction
This project is an assessment and evaluation of performance of a Nestle’s business and its
financial performance for three years. This is a complete description of a company in which
different kinds of accounting techniques and business models are used for detailed analysis of
the company.
1.2 Reasons for Choosing the Topic

In B.Sc. project, initial step is to choose a topic out of twenty topics that is proposed by Oxford
Brookes University. The selection of topic was really a difficult step for me. After thorough
analysis of all the topics, I chose a topic, which could meet my knowledge and interest. The
main reason behind the selection of the topic is my background knowledge about the topic and
ACCA studies. The interesting factor was that I have read this topic during my ACCA studies
and it is according to my interest. I have a complete understanding of the project. It will not only
help me to boost up my knowledge but also will help me to meet my career goals. It is good for
my educational, professional as well as my practical life. I found all the information this topic of
my internet easily.
1.3 Reasons for Choosing Industry

Having selected the topic, I had to choose the industry and after a lot of careful consideration, I
chose the food industry more relevant to my interest. Food industry plays an important role in
economy of a country. In a developing country like Pakistan where people spend half of their
incomes on food, it was a good choice. I had to select one out of three recommended topics by
Oxford Brookes which includes food industry, aerospace and hotel management. In Pakistan,
no such aerospace and hotel management industries are found but a number of small and large
food industries are present here in Pakistan. There is a high rate of growth in food industry of
Pakistan in past years due to a number of reasons which includes increase in population,
urbanization. There can be seen a growth up to 9.5% in 2013 which was 5.9% in 2012. So, I
decided to go with the food industry as it is a basic need of humans.
1.4 Reasons for Choosing Company

After the selection of topic and industry, the third step was to choose the company and I gave
preference to NESTLE Pakistan Limited over all other companies because it is one of the
largest industries of the country and stands prominently among top 25 companies of the
country. This company enjoys the healthy and pleasant atmosphere. It is a well-known and
legalized Company of the country. Nestle became the second largest company of the country as
it market reached to $4 billion in 2013 and it invested Rs 14 billion on various new projects.
(Mehdi, 2014)
It crossed 100 billion in 2015 which means that it earned 10.5% more in 2015 than past year.
(Mir-Khan, 2016)

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Nestle earned more than RS 112 billion and after excluding all taxes the profit was 35.2% more
than 2015. The overall profits were 9.13% than 2015. Due to input expenses, management and
value chain, the company gained profits of 226bps in 2016. (nestle, 2017)
1.5 Reasons for Choosing the Competitor

I chose UNILEVER Pakistan because it has the similar products and chain as NESTLE has. In
Pakistan, these two companies compete each other. The vision of this company incudes the
sustainability, long term business ways ads the strategies for the growth of business. (Young,
2107)
Sales of Unilever increased by 3.5% which is a positive growth and their aims involve the
improvement in health, increment in the incomes of the farmers help Unilever to make its
position strong in the country and this is the reason of selection of this competitor of Nestle.
(Unilever Annual Report 2017)
Information of UNILEVER is easily available on internet and it share the same ending as
NESTLE do.
1.6 Project Objectives

The main objective is to analyze the business and financial performances of the company. I will
use different methods like SWOT, Porter Five Forces etc. to get a detailed analysis of the
company as these are the most suitable models to find out the strengths, weaknesses, threats
and opportunities of the company.
I will use the analytical ratios including profitability, liquidity and efficiency etc. to analyze the
financial performance. I will use the SWOT analysis to find out the strategic position of the
company by getting aware about all its strengths, weaknesses, threats a company should face
and the available opportunities for company. Then, I will use the Porter five forces to find out the
competitive position of the company. This report will present the complete internal and external
analysis of the company. I will use the best knowledge available on authentic sources on
internet.
1.7 Research Questions
1. Is there any increase or decline in the ratios over relevant period

2. Variation of profit ratio of NESTLE over the relevant period?
3. Whether the gearing position is good or bad?
4. What is the strategic position of NESTLE?
5. Did NESTLE enjoy good position than its competitor UNILEVER.
1.8 Overall Research Approach

The aim is to research completely on the project and give a complete analysis in a form of BSC
pack information. I will try to use may all knowledge of ACCA. I will try to use a complete
mechanism and way of doing RAP. For all this, I spent a lot of time in careful selection of a right
topic, industry and suitable accounting and business models. In the end, I selected the ratio
analysis for quantitative and business analysis. I used SWOT analysis and porters five forces
for a thorough analysis. Lastly, I reviewed the project thoroughly and concluded it.

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2. Information Gathering and Accounting / Business Techniques

Used
2.1 Sources of Information
Primary Sources
Primary sources provide the direct data and the information these sources provide is in original
form. It is a direct information which cannot be interpreted. Primary sources of information
include Newspaper, photographs, results of experiments and interviews etc (Kaueper &
Beaumont, n.d.).
Secondary Sources
Secondary source of information includes the indirect data which can be interpreted from the
primary sources of information. They may provide the description of primary sources to support
their point of view. This type of information may include Encyclopedias, Journals, biography etc.
(Kaueper & Beaumont, n.d.)
2.2 Information Gathering:

Information gathering is an important and basic step to complete RAP. I used official sites of
NESTLE and UNILEVER to gather the information about these companies from their annual
reports. I downloaded the annual reports of the companies. I used financial information from the
annual reports of the companies for the authentic data. There was a sea of sources on the
internet and the main thing was to scan the authentic data which took a lot of time. Electronic
and print media have been used in search of the information such as Dawn news, Tribune,
Express news, the Nation, Business Recorder etc.
To analyze the performance of the company, I thoroughly studied the reports of the Director and
the Chairman. It provided me better insight of the company and I got an idea how to continue
my work. I also used ACCA books for the better understanding of different financial and
business techniques.
2.3 Limitations of Information Gathering

It was hard for me to collect the newspapers of past three years. I used internet to resolve this
issue but this was not an easy job as I considered it. While using internet an issue raised and
that was to collect the authentic information. There is an ocean of information regarding every
topic. Just type some keywords and you will get millions of links. The difficult thing was to scan
the authentic links from all these provided links. After that, to I had to skim the data to collect the
relevant points out of it. It was time consuming and most of my time spent in this struggle. I
gathered only authentic information with proper care for my project.
2.4 Ethical Issues Involved in Information gathering Process

The major issue with I had to deal was the plagiarism while completing the project. Plagiarism
means to copy the work of others. This work needs confidentiality which means not to use

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information without the permission of the owner. It was too a time consuming task but I tried my
best to maintain confidentiality and produce the work without plagiarism.
2.5 Accounting and Business Techniques Used:

2.5.1 Ratio Analysis:
Ratio analysis is a process of financial analysis of an organization. By this method, financial and
operational analysis is done by using various financial statements. this can be applied to various
areas for calculation. Ratio analysis gives a detailed overview of weaknesses and strengths of a
company. It helps a company to pay heed to its weak points and work for prosperity of
company. It is a kind of indication about various important factors of a company. It involves
ratios related to debt, profit, Asset management etc. (zenwealth, n.d.)
2.5.2 Limitations of Ratio Analysis:

 Ratio analysis just provides the mathematical analysis and is nothing to do with absolute
meaning of its own unless any change is found.
 Ratios help a company to compare its previous records with that of current records and it
helps to come over weaknesses (BBC, n.d.)
 Financial ratio analysis is an important tool especially for small industries which aware
the company about the trends of the industry
(Peaveler, 2018).
2.5.3 SWOT Analysis:

SWOT analysis is a tool which helps the owner of company to find out the weaknesses and
strengths of his company. It also helps the owner to over view the opportunities and threats and
to tackle such issues. SWOT helps a company to set its goals and overcome its flaws (Anon.,
n.d.)
SWOT analysis consists of two parts which includes internals and externals of a company.
Strengths and weaknesses comes in internals of a company which threats and opportunities are
the externals of a company. Strengths may include the way in which a company manages its
brand. Weakness arises when a company shows delay in payments and the distribution of its
products. To overcome these issues may enhance the progress of the company. For this
concern often the experts from outside are invited to analyze the strengths and weaknesses of
company as they can give a better analysis. Threats and opportunities comes in external factors
and these are the things which a company cannot control. These includes the economic, social,
environmental, legal national and international threats (Anon., n.d.).
2.5.4. Limitations of SWOT Analysis:

Firstly, SWOT Analysis lacks the detailed analysis which is a drawback. Secondly, though the
SWOT Analysis provides the strengths, weaknesses, threats and opportunities of a company
but does not help the country to rank these four things. It does not help to prioritize things to
start work on them. Companies should work on the prioritizing the things and to turn
weaknesses into the strengths and for this a detailed overview is required (Hall, 2017).

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SWOT analysis is only one step in the process of planning of business. Some other analysis
and researches are needed for detailed research. Limitations of SWOT analysis include the
priority issues, lack of solutions for the existing problems, does not help to select one of the
selected ideas, issues in providing the authentic information (Business Queensland, n.d.).
2.5.5. Porter’s Five Forces

Porter Five Forces analysis is a tool to analyze the company’s position in the industry. Professor
Michael e porter designed the model for Porter Five Forces. This model is divided into the five
parts. The model basically evaluates the position of the company in the industry. (Porter)
Porter’s Five Forces is a kind of easy but an important way to get the awareness position of
competition in the industry. It is effective because it helps to understand the things that can
affect the performance of the company. The founder of this model Porter realized that in market
everyone keeps an eye on its competitor and this effects the environment of the industry every
now and then. He introduced five forces which involves competitive rivalry, supplier power,
buyer power, threat of substitution, threat of new entry (tools, n.d.).
2.5.6. Limitations of Porter’s Five Forces:

Basically there are two main weaknesses in the model of Porter’s five forces. The first
weakness is in the composition of this model. This model is useful for short term strategy
making. External forces affect this model badly. When this model was designed, there was not a
clear progress in technology and globalization. The other issue is the way it is being used by the
people. It was to enlighten the strategic use of the mode (Beattie, 2018).
This model is based on microeconomics. This theory needs a perfect market both industries of
the world are not economically perfect for the market. This model is for simple markets and for
big and complex markets it would not be easier to use this model. The focus of the model was
to compete. It was to achieve the competition between the competition but it is not beneficial the
larger markets (Recklies, 2015) made to be used on an industry rather than a specific company.
It is not for the analysis of an individual company.

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3. Results, Analysis, Conclusions and Recommendations

Industry Profile:
Though there is decline in economy of Pakistan but there is no decrease seen in the food
industry and has become the second largest country in this concern. People of Pakistan are
fond of eating and they spend a lot on food. This has been proved by the recent researches that
the half of income of Pakistan is spent on food. Food industry is sharing 17% of GDP (Afzal,
2014) Researchers have shown that developed countries spend less on food than the
developing countries.
NESTLE PAKISTAN
Nestle Pakistan is the largest food processing company of Pakistan. It manufactures and sells
various products within the country. It produces and sells Milk and Nutrition products which are
comprised of milk based products. It produces beverages which includes juices and water and
various products like breakfast and dairy products etc (Reuters, n.d.)
Nestle Pakistan is company of Swiss origin and was firstly had shares with Milkpak Ltd in 1988.
It gained great reputation in KSE as well as LSE. It manufactured, processed many products
including dairy, coffee, Nestle pure water etc. (Business Recorder, 2015)
Nestle Pakistan is a Pakistani company which produces products of nutrition, health and
wellness. The main objective of the country is to produce and sell food products which includes
two segments namely milk and beverages products. These segments are further divides into
various things like juices, milk based products, baby foods etc (myft, n.d.).
UNILEVER PAKISTAN
Unilever Pakistan’s previous name was Rafhan Best Foods Limited and it changed its name to
Unilever Pakistan in 2007. This company was founded in 1948 and its headquarter is based in
Karachi. The company manufactures and sells various food products in Pakistan. The company
offers a range of products which includes margarine, soups, shampoos, corn, flour, corn oil, ice
cream, hair conditioners, hair care, toothpaste etc. It sells its products under the names of
Rafhan. Knorr, Energile, Lipton, Cornetto, Surf Excel, Dove, Fair & lovely etc (Bloomberg, n.d.).
Unilever Pakistan was known as Lever Brothers Pakistan Limited earlier and was formed in
1948 in Pakistan. It is(FMCG) company of Pakistan. It is one of the largest multinational
companies within the country. In start, it selected Rahim Yar Khan as its basic and initial site for
its oil factory and in 1960s it shifted its head office to Karachi (Anon., n.d.).It produces more
than 400 products for the benefits of people of the country which involves foods as well as
house hold products. It is considered as the most trusted brand. It is working with different
companies. NGOs to bring change which is needed in this time in the world. Their mission is to
produce the products for social benefits of people. Their basic strategy is to deal with
sustainable issues of the world. Their model is to make fast decisions. They are working with
best intellectuals and using modern technology. Research and Development is the key to their
business.

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3.1. Ratio Analysis:

3.1.1. Sales Revenue:
Sales Revenue
120,000,000 112,392,654
102,985,916
96,457,743
100,000,000
Rupees (000)
80,000,000
60,000,000
40,000,000
20,000,000 9,466,836 8,571,097 7,787,059

0
2016 2015 2014
Nestle Pakistan Ltd Uniliver Food Pakistan Ltd

(SOURCE: NESTLE, 2014:2016; UNILIVER, 2014:2016)
In FY 2014 to 2015, there seem boost in sales revenue by 6.77% and it further showed an
increase of 9.13% from FY 2015 to FY 2016. Collective increase from FY 2014 to 2016 is
16.52% (Appendices)
In FY 2015, sales of Nestle were around 102.9 billion which shows an increase of 6.77%.
(Appendices)
The increase in sales of Nestle was due to the low input costs of company, higher sales volume
and most importantly the stability of currency (Jamal, 2015).
Though the country was facing energy crisis but Nestle maintained its position by increase in
revenue by Rs 2.9 billion (Tribune, 2015).
This rise in sales was due to increase in demand of UHT due to actions of PFA
While comparing Nestle with Unilever, Unilever enjoyed sales grow by 10.07% (Unilever, 2015)
which is more than the sales of Nestle which were 6.77% in total. (Nestle, 2015)
As compared to 2015, sales revenue of Nestle in 2016 was RS 112 billion which increased the
yearly earnings and in total it was 35.2% after the payment of tax etc. Total sales revenue was
9.13 % in 2016 which was greater than 2015. In 2015, the cost per share was 193.18 while it
increased to 261.23 per share in 2016. There was an increase in exports of the products of
almost RS 4.9 billion (khan, 2017).
In 2016, sales revenue was 9.27 % more than 2015. This increase was due to increase in
exports of the product. The total revenue was almost RS 7.2 billion (Ahmed, 2016).

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In year 2016, sales revenue of Nestle Pakistan increased by 2.10% and this increase is due to
the rise in prices of milk. Nestle increased the price of milk by Rs 5 per half liter and Rs 10 per
liter. Nestle also launched some new products which includes new flavors of juices that is White
grapes and Lychee and Nestle everyday double creamy (Business Recorder, 2017).
In 2016, here was an increase of RS 112 billion in sales revenue of Nestle which was more than
2015. The total earnings increased by 35.2pc more than 2015 (Pakistan Today, 2017).
In year 2016, Unilever again enjoyed increase in sales by 10.45 % than year 2015 which shows
that Unilever performed much better than Nestle.
Increase in the sales of Unilever in 2016 is due to collaboration of Magnum with Uber to spread
out all around the Lahore. Due to this reason within 4 hours they got 30000 requests. Magnum
also launched two new flavors in last year. Also last year, Pakistan became one of the largest
tea (Masood, 2016) consumption country due to the increase in demand of tea.
Overall analysis of both companies shows that they enjoyed increase in profits and individual
analysis of both companies shows a significant increase in sales of Unilever than Nestle.

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3.1.2. Gross Profit Margin:
Gross Profit Margin (%)

50.00 44.39 44.71 43.15
40.00 35.40
33.14
28.33
30.00
20.00
10.00
-
2016 2015 2014

SOURCE: NESTLE, 2014:2016; UNILIVER, 2014:2016
Gross profit margin of Nestle increased with time. There was an increase of 28.33% to 33.14%
from 2014 to 2015. This shows a significant increase of 4.81% due to increase in sales revenue.
In year 2016, profits increased from 33.14% to 35.40% which is a clear increase of 2.26 %.
Though, this increase is less than the previous years. (Annual report 2015 Appendences)
The reason in decline of sales was due to decline in prices of fuel in 2015. The decrease in
prices of fuel was 25% world widely while there was 10% decrease in Pakistan in FY 2015
(dunya news, 2015)
The decrease in prices of fuel also decreased the cost of Nestle and this helped in growth of
profits in FY 2015.
In 2015, due to decrease in the prices of fuel, gross profit margin of Nestle increased by 481
bps (business recorder , 2016).
In 2015 and 2016, salaries and wages of workers increased. The wages increased due to the
increase in costs of products and also the Federal government raised the wages of workers.
In 2016, the gross profit margin raised to 250 bps more than 2015 as the exports in 2016 were
RS 3.6 billion (Ahmed, 2016).
IN year 2015, the rate of share of Nestle was RS55.8 in last quarter of the year while the cost of
share was RS 81 per share which shows the decrease in prices. The company witnessed a
decrease in gross margins of 5% in first and last quarters of year as in first quarter it was 37%
while in last quarter it was 32% (express tribune , 2015)
In 2016, Nestle enjoyed an increase of 226 bps which was more than 2015. (nestle , 2017) If
Unilever and Nestle are compared, gross profit margin of Nestle is less than the previous years.

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The gross margin profit of Unilever is 43.15% while Nestle earned just 28.33% in FT 2014.
There was a little change in margins of both companies if compared with previous years.

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Net Profit Margin:
Net Profit Margin (%)

16.00 15.05
14.38
13.48
14.00
12.00 10.54
10.00 8.51 8.22
8.00
6.00
4.00
2.00
-
2016 2015 2014

ASOURCE: NESTLE, 2014:2016; UNILIVER, 2014:2016
The net profit margin of FY 2014 was 8.22% and in year 2015 it increased to 8.51% in total.
There was an increase in sales, distribution and marketing of 39.2% in year 2015. (Appendices)
Nestle also changed its strategy and spent more on the advertisement of products in 2015
(Express Tribune, 2015)
In 2015, there was no profit on foreign currency and due to the other incomes decreased in
2105. There was a decrease of 31.46% on finance cost in 2015 and it affected the net profit
margin and there was a decrease in interest rates (Iqbal, 2015).
There was increase in net profit of the Nestle food of RS 8.76 billion which is RS 193.18 per
share which is higher than 2014 as in 2014 it was RS 7.92 billion which makes RS 174.85 per
share (Business Recorder, 2016).
In FY 2016, net profit margin increased by 10.54% as compared to 8.51% in FY 2015. Despite
the challenges, company maintained its position and it became possible due to cool weather
and the stability in prices of fresh milk (Anon., 2015). In FY 2016, interest rates decreased by
25points and also the financial rates of the company fell by 35.09% sales of Unilever raised but
the net profit decreased to 13.48% (Rahman, 2016). This fall of values was due to the increase
in costs and decrease in other incomes.
In comparison with Nestle, Unilever earned profit margin of 15.05% in FY 2014 which showed a
decline of around 10.42% while in 2015, Unilever earned profit margin of 0.67. Similarly, in
2016, there was a decline in margin and it was around 0.90%. (Appendices)

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3.1.4. Return on Capital Employed:
ROCE (%)
250.00
194.24
200.00
150.00
101.26
89.19 89.60
100.00
58.02 54.96
50.00
-
2016 2015 2014

During the past few years, ROCE of the company increased. Nestle earned a good profit and it
helped ROCE to increase. ROCE grow in FY 2015 from 54.96% to 58.02%. The reason in
increase in sales was the reduction of non-current assets which were sold in FY 2015 and
helped profit margin to increase. (Nestle 2015 pp5, 28)
ROCE increased by 101.26% from 58.02% and this massive increase in profit was due to the
high growth and increase in financial and non-financial assets. This also increased the current
liabilities of a company which is not positive for any company. Increase in sales increase the
profits and this became possible due to the new products in market in FY 2016. (Express tribue
, 2015)
The ROCE of competitors in FY 2014 was 194.24% which was too high but in FY 2014 ROCE
of the competitive companies fell down by 89.60%. This increase was due to increase in total
assets of a company. (Unilever 2016 pp 28)

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3.1.5. Current Ratio:
Current Ratio
1.00 0.94
0.90
0.90
0.80 0.72
0.66
0.70 0.59 0.61
0.60
0.50
0.40
0.30
0.20
0.10
-
2016 2015 2014

The current ratio in FY 2014 was 0.66:1 and it increased to 0.72:1 in FY 2015 which shows an
increase of 0.05%. There was a decline of 2% in FY 2015 in the current assets and 9% in the
current liabilities. The liquidity of company improved in FY 2015 but it was still less than one.
The increase was due to the increase in demands (Anon., 2015) of the products by 6.77%.
Trade raised by 14% in FY 2015. These all things increased the cash and sales tax refundable
but there was a decrease in income tax due to the decrease of current assets and liquidity of
company lowered.
The directors planned new projects in Sheikhupura and Kabirwala due to the increase in trade
of company and proved as a suitable source for financing. (Nestle 2015 pp 5)
The ratio decreased from 0.72:1 to 0.59:1 due to the increase of 9% in current assets while
there was 31% increase in the current liabilities. (Appendices)
In FY 2016, PKR 4.1 billion was invested in various projects (Anon., 2017) and due to the short
term borrowing and a great increase in trade and others by 49%. The increase in company’s
cash others did not increase the current liabilities. To delay the payables of trade, it was easy to
investing in new launches to increase trade payables in FY 2016.
The comparison of Nestle with its competitors shows that current ratio of competitors was 0.61:1
in FY 2014 which in FY 2015, increased to 0.91:1 and increased the current assets of Unilever
by 45%. (Appendices) .This increased net taxation by 2% and helped in increasing the current
assets (Express Tribune, 2015)
In FY 2016, the liquidity increased to 0.94:1 from 0.90:1 and the reason behind it was the
increase in current assets of 8% and increase in current liabilities of 3%. There was remarkable
increase in current assets which includes stores and spares, loan, advances, cash and cash

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equivalents and short term borrowing was completely repaid. The liquidity of competitor was
less than one but it showed an increasing trend. (Annual Reports 2015,2016)

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3.1.6 Receivable Days:
Receivables Days
14.00
11.64
12.00
9.58
10.00 8.90
8.00
6.00
4.00
1.83
2.00 1.12 1.03
-
2016 2015 2014
Nestle took 1.03 receivable days in FY 2014which shows that the sales were cash based and it
increased to 1.12 days in FY 2015. This shows that there is 8% increase from the last year and
16% Increase in the receivables and 6.77% increase in the sales. Due to increase in sales in
2015, percentage in receivables days was higher than the day percentage (Anon., 2015)
In FY 2016, sales increased by 9.13% and 79% increase in the receivables due to the launch of
some new products and there was 64% increase in the receivable days and this also raised the
debts in trade (Business Recorder, 2017).
In FY 2014, Unilever’s receivable days were 9.58 and it declined to 8.90 which shows 2%
decline in receivables and 7% in receivable days and it was similar to that of Nestle (Express
Tribune, 2015).
In FY 2016, receivable days were 11.64 showed 31% increase in days and 44% receivables
increased because of 10.5% increase in sales (Pakistan Today, 2016) . This increase is due to
sale of tea bags and late payments of corporate clients.

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3.1.7. Payable Days:
Payables Days
250.00
207.67
200.00 180.89
168.10
150.00 125.27
100.00 88.80
75.83
50.00
-
2016 2015 2014
Payable days in FY 2015 increased from 75.83 to 88.80 with a slight decrease in sales but there
was an increase of 17% in payable days in year 2015 (Goraya, 2015). In 2015, salaries
increased and this increase was due to the increment in minimum wages by the government
(Goraya, 2015).
In 2015, there was decline I the prices of power and fuel (Dawn News, 2015).
There was also an increase in the expenditures of the information technology. (Nestle 2015 pp
37)
Overall costs were controlled effectively due to the up in costs, the increase in trade was
because of the increase in payables, payable days by 17%, and some other payables
increased. (nestle 2015 pp,25)
There was an increase in payables days from 88.8 days to 125.27 days in year 2016 which is
41% more than the previous year. Cost in 2016 increased by 5% and also there was a huge
increment in the payables by 49% and it was mainly due to the increase in the raw and packing
materials and the tax exclusions (Bhatti, 2016)
By the Government There was an increment by 49% due to the increase in worker’s funds.
There was an increase in the payables and late payments were the easy source of financing
due to the new launches and investment plans of Nestle.
The payable days of the competitors of Nestle were 207.67 days on year 2014 and it decreased
to 180.89 days in 2015 which was a decrease of 13%. In 2015, payables declined by 7% and
COS grow by 7%. The payable days declined to 168.10 days in year 2016 due to 11% increase
in cost of sales and 3% increase in payables due to 7% decline in payable days.

19
3.1.8. Inventory days:
Inventory Days
80.00 73.89
70.00
70.00 66.43
60.00 56.34
50.22 51.55
50.00
40.00
30.00
20.00
10.00
-
2016 2015 2014
The inventory days decreased from 51.55 days to 50.22 days in FY 2015 and inventory days
declined to 3% and there was a increase of 6.77% in FY 2015 due to higher demands of sales
due to the increase in demand of packed milk rather than loose milk (Express Tribune, 2015)
Sales increased by 9.13% in FY 2016 and 18% increase in inventory and increase in
inventory days was 56.34 days from 50.22 which is 12% increase in total . This increase in
sales was the due to the actions taken by the Punjab food authority. Nestle took advantage due
and as a result of it sales increased and also the new launches in 2016 helped Nestle to grow
its sales (Business Recorder, 2016).
The competitors of Nestle enjoyed an increase in inventory days of 73.89 days in FY 2015
which is higher than the previous year which was 70 days in FY 2014. (appendices)

20
3.1.9. Debt to Equity Ratio:
Debt Equity Ratio

70.00 63.97 63.30
60.00 55.05
50.00
40.00
30.00
20.00
10.00
0 0 0
-
2016 2015 2014
In 2015, the mechanism of company was increased to 63.30% from 55.05% . This increment
was due to the rise in long term finances of company and introducing some new products in the
market which include nestle milkpack 200 ml, nestle lacto grow 3, nestle fruita vitals Kinnow etc
(Nestle Annual Report 2015).
In FY 2016, there was a decline in equity percentage of 30.27% (Appendices) and long-term
finances of 30%. Nestle paid the loans of banks which declined the long term finances. (Nestle
2015, pp5)
In FY 2016, Nestle had payed more dividends than profits which caused the profits to decrease
which decreased equity. In FY 2015 & 2016, equity ratio and debts of Nestle increased which
were stable in FY 2014. This increase made the company geared highly and this increment was
due to the investment plans of 2016 (Customs Today, 2016).
Unilever showed zero debts as compared to Nestle and in the past three years, it did not take
part in any long term finances.

21
3.1.10. Interest Cover Ratio:

60.00
52.28 Interest Cover Ratio
50.00 47.15
40.00 34.94
30.00
18.75
20.00
9.47
10.00 6.11
-
2016 2015 2014
In FY 2014, interest cover ratio is 6.11 times and in FY 2015, it raised to 9.47 times. This
change was due to increase in profits and decline in FC. The PBIT increased in FY 2015 by 6%
(Khan, 2016).
In FY 2015There was a decline in finance cost of 31% due to decrease in interest rates. The
increase in sales helped in increase of profits. In FY 2016, the decrease in the financial costs
was due to decline in long term finances and decrease in interest rates (Rahman, 2016)
In comparison to Nestle, its competitors’ interest cover ratio increased in FY 2015 to 47.15 times
which were 34.94 times in FY 2014. In FY 2015, the PBIT decreased by 2%, there was a
decrease in finance cost of 28% due to the decrease in interest rates. Finance cost is due to
short term liabilities (Alam, 2015).
In FY 2016, there was an increment of 6% in PBIT and a decline of 4% in the financial costs due
in the decrease in interest rates (Rahman, 2016).

22
3.1.11. Earnings per Share:
EPS
300
261.23
250
207.24 200.09
193.18 190.29
200 174.85
150
100
50
0
2016 2015 2014

The Earning per share of Nestle give improving tendency. During the years, EPS in FY 2014
was RS,178.25,193.18 and 261.23 in the FY 2015,2016 consecutively. This improving trend is
due to the better profitability results.
Unilever Earning per share in FY 2014 was RS,190.29,200.09 and 207.24 in FY 2015,2016
consecutively. In comparison to its competitors, Nestle enjoyed more EPS of 35% and the EPS
of Unilever increased only by 5%. In this aspect, Nestle earned more value than its competitors.

23
3.2. Business Analysis:

3.2.1. Porter’s Five Forces:
Threat of New Entrants:
The economic condition of the country is getting better and this attracts new entrants like dostea
and cupshup are new threats to Nestle Pakistan. The legal and registration process take time
and cost but these could help to discourage the new entrants in the industry. Food industry is
the largest industry and need a lot of investment to take a start but it always appeals the new
players to enter in it. This kind of obstacles discourage the new entrants to step in and be
consistent (Imaduddin, 2014). Moreover, high inflation, energy crisis (Asif, 2017) and currency
fluctuation (pkrevenue, 2017) play as hurdles in the path of new entrant.
Threats of Substitute:
Nestle provides pasteurized milk (Mangi, 2015) which includes a lot of processing and it
includes raw milk in this process. Raw or loose milk is a major alternative of processed milk.
Being a developing country and high ratio of poverty, residents of the country prefer to use the
loose milk. It is considered full of nutrition but recent studies have proved that its use is full of
risks. With the passage of time, use of loose milk reduced and it decreased the rate of threats
being a substitute to processed milk (Saxena, 2016).
Due to the action taken by Punjab food authority, consumption of loose milk has reduced in year
2015 and 2016 due to the shutdown of a lot of milk farms (lhrtimes, n.d.)
Bargaining Power of a Supplier:
In Pakistan, suppliers of milk to Nestle are small dairy farmers and Nestle collects milk at its
own terms so the bargaining power of suppliers is less. Nestle enjoys a strong position in the
market and this is the reason it takes advantage and provide opportunities of business to the
suppliers. Suppliers are small dairy farmers and Nestle collects milk at own terms. This is the
reason suppliers fulfill the needs of the company (Business Teacher, n.d.)
Nestle is one of the largest provider of water to the country. It tries its best to eradicate the
issues it faces by making better plans with its suppliers including farmers for the betterment
(lhrtimes, n.d.)

24
Bargaining Power of Customers:
The trust of customers can be seen by the increase in its sales from2.1 billion to 18.1 billion
(Maqsood, 2016)
Pakistan has more customers for its Nestle products than some developed countries like India
and China. Consumption of Nestle is double in Pakistan than the neighboring countries (Haq,
2011)
Pakistan has more population in its rural areas than its urban areas and these rural areas enjoy
good economic conditions so Nestle is trying to find its way in these areas to enhance its sales
(Haq, 2011).
Rivalry among the Competitors
Nestle claims that it is not afraid of healthy competition and also they do not comprise over
quality and this thing helps them to stand prior than its competitors (forexpk, n.d.)
Nestle and Engro being rivals compete each other by introducing new products in the market.
Nestle always become successful in maintaining its position as a market leader (Tirimzi, 2013)
One of Nestle’s competitor, Engro foods has tried to compete Nestle and to give it tough time
but Nestle still maintained its position as a market leader. JK also made its efforts to compete
Nestle but it itself contribute its services to Nestle by providing milk to it (Shahram Haq, 2012)
3.2.2. SWOT Analysis:

Strengths:
Nestle being a largest multinational company works successfully in Pakistan and its
characteristic is not to compromise over quality (Rasheed, 2017).
Nestle for the marketing of its products follows the best strategies. It has a number of subsidiary
products like Nescafe, Kitkat etc. and it has merged with some other best products for the
successful results. It is enjoying good position from 140 years and is a well-known brand of 86
countries. More than 328,000 people have worked for this brand. This brand has proved loyal to
its customers as it has always used worthy strategies to maintain its position. It uses a good
advertising campaign to among top companies (Haseeb, 2016)

25
Weakness:
In Pakistan, the economic condition of the middle class is getting better and it has increased the
sales of Nestle products and there is a significant increase in sale of Nestle as well as its
demand has increased.
Due to its strong position in the world, nestle has to face a lot of criticism and controversies. The
biggest weakness of Nestle is to compete with new rivals in the market. Less prices of the
products trap more customers that Nestle and it is biggest hurdle for Nestle (Haseeb, 2016)
The increase in prices of the products, Nestle has to face many difficulties. Loose and fresh milk
is cheaper than the packed milk and people prefer to buy this Due to economic conditions of the
country, it is difficult for all masses to buy such products (Baloch, 2015)
Opportunities:
Economic conditions of the country are getting better and the decrease in inflation rate in the
country is making its residents to get their desired products in order to improve their living
conditions. Nestle is one of the largest multinational company of the country and market has a
great confidence on it. As CPEC is emerging in the country so many companies including
Nestle is hopeful for more opportunities (Business Recorder, 2017).
Nestle Pakistan offers healthy and good quality products. The aim of Nestle is to produce the
products which could meet the nutritional needs of the population of Pakistan. Pakistan is one of
the developing countries and it faces issues like nutritional needs in products so Nestle knows
there is potential in Pakistan for nutritional products (Kazmi, 2017).
Due to betterment in economic conditions of the country, many issues including energy crisis is
decreasing and the low prices of energy would help in prosperity of people and country
(Rasheed, 2017).
There is more margin for the company in Pakistan and it helps them to grow their business. It
allows them to invest in more projects. This thing creates more opportunities of employment. It
helps the farmers to increase their business by enhancing their stock and ratio of productivity
(Jamal, 2016).
Threats:
The difference between the loose and packed milk is great and the costumers prefer the loose
milk rather than packed milk (ANDREW, 2018)

26
The increase in prices of the products has affected the turnover. The prices of Nestle tetra pack
have increased from 80 to 110 and this has forced people to get low priced products (Baloch,
2014).
Contamination in milk is the largest threat to the company. Nestle feels it as a biggest threat to
its company as it uses 20% of the country’s milk for processing (Mahmood, 2017).
Nestle provides pure water to the country but the pressure it uses for purifying water which
removes main minerals from the water and deficiency of these minerals weaker the bones.
The tax and other policies of government will prove a hurdle in the growth of the industry. It will
reduce the new investments in market and it will affect the employment opportunities and health
related things. This will push the company to increase price of milk from RS 8 to RS 10 and this
will make more difference between the loose and packed milk which might reduce the
customers
There are more threats in Pakistan to grow a business or to invest more due to the security
challenges, energy crises and infrastructure challenges (Jamal, 2016)

27
3.3. Conclusion:
Nestle is one of the largest food industry of the country and stands as second largest company
out of 25 companies of the country. Over the period of three years its sales have increased and
it always maintains its position in the market. It always competes its rivals in the market by
introducing new products every now and then. Though it uses different strategies for its
progress but there is seen a decrease in gross profit margin as compared to Unilever and this
was due to the increase in costs. Net profit margin also increased due to the sales in past years.
The liquidity ratio of Nestle has increased in FY 2015 but it decline in FY 2016 because of the
decline in the CA and CL and its further decrease in coming year would make it more worst.
Nestle became successful in maintaining its efficiency due to decrease in its receivable days
which shows that the sales were cash based and late payments are beneficial for the company
because late payments help in making good relation with payables.
There is an increase in Nestle ESP in the last three years which shows is a positive sign and it
reflects the confidence of shareholders on the product and in future again they will decide to
make strong and profitable relation
The gearing of Nestle shows the trend of increase which means that the high geared of
company and this increased in FY 2016 though there was a decrease in long term finances.
This became possible due to the company’s strategy to repay for the projects to gain the loan
proportion.

28
3.4. Recommendations:
Nestle should change its policies towards the receivable terms and to lax credit terms to
increase its sales and yearly profit. These things will give credit to the customers and strengthen
the position of Nestle in the market. These relaxations will attract more and more customers
towards it due to economic conditions of the country.
Local raw materials could prove cheaper than the imported raw materials so Nestle should give
priority to the local raw materialist will help it to produce more things. This will help to meet the
customer’s needs as population of the country is growing day by day.
Debt proves cheaper than the equity so Nestle showed enhance its projects by loans as there is
a decrease in the interest rates. This decrease in interest rate will help in more production. It will
also help to introduce new products to attract the customers. With the betterment in economic
conditions of middle class, customers are increasing for nestle and for more and more
customers, there is need of best strategies.
Nestle should follow the just in time (JIT) system to make costs effective and to reduce the level
of inventory as there is increase in the inventory days in high sales.
Nestle should work on its weaknesses and try to minimize the threats as much as it can. It has a
number of opportunities to work on. It will make it to stand as a top company of the country.
There is a larger proportion of the population living in the rural areas of the country. Nestle could
start the awareness campaigns regarding hygiene and health issues in the country. It would
help to increase the sales of the company.

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Research and Analysis Project

Oxford Brookes University

An Analysis and Evaluation of Business and

WORD COUNT: 7,466

ACCA REGISTRATION: 2272065

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3.1.7. Payable Days: ............................................................................................................................ 18

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1. PROJECT OBJECTIVES and Overall Research Approach

1.2 Reasons for Choosing the Topic

1.3 Reasons for Choosing Industry

1.4 Reasons for Choosing Company

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1.5 Reasons for Choosing the Competitor

1.6 Project Objectives

1.7 Research Questions

1. Is there any increase or decline in the ratios over relevant period

1.8 Overall Research Approach

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2. Information Gathering and Accounting / Business Techniques

2.2 Information Gathering:

2.3 Limitations of Information Gathering

2.4 Ethical Issues Involved in Information gathering Process

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2.5 Accounting and Business Techniques Used:

2.5.2 Limitations of Ratio Analysis:

2.5.3 SWOT Analysis:

2.5.4. Limitations of SWOT Analysis:

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2.5.5. Porter’s Five Forces

2.5.6. Limitations of Porter’s Five Forces:

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3. Results, Analysis, Conclusions and Recommendations

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3.1. Ratio Analysis:

20,000,000 9,466,836 8,571,097 7,787,059

Nestle Pakistan Ltd Uniliver Food Pakistan Ltd

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3.1.2. Gross Profit Margin:

Gross Profit Margin (%)

Nestle Pakistan Ltd Uniliver Food Pakistan Ltd

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Net Profit Margin:

Net Profit Margin (%)

Nestle Pakistan Ltd Uniliver Food Pakistan Ltd

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3.1.4. Return on Capital Employed:

Nestle Pakistan Ltd Uniliver Food Pakistan Ltd

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3.1.5. Current Ratio:

Nestle Pakistan Ltd Uniliver Food Pakistan Ltd

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3.1.6 Receivable Days:

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