The controversial resignation of its CEO, Darius Ardeshir, pushes Nestle into the shadows.

By Sunit Arora

Darius E. Ardeshir's swansong was delivered in two-minute style. Exactly a fortnight before the 57-year-old ceo of the Rs 1,214-crore Nestle India (Nestle) put in his papers at the company where he had worked for 30 years--the last five as its CEO--Ardeshir was ebullient as he announced Nestle results for 1997. Sales were up by 18 per cent to Rs 1,425.60 crore, and the bottomline had surged by 41 per cent, to Rs 74.30 crore.

It was surprising to see Nestl shedding its traditional aversion to the media by hosting a press-conference at Delhi's Park Hotel on March 17, 1998. Jacques Emery, Nestle executive vice-president (finance and control)--who has since been transferred to Nestle parent, the Vevey (Switzerland)-based, $48.69-billion Nestl sa--was at this rare event too, throwing numbers around like confetti. And the bonhomie even prompted Ardeshir to promise that the consumer non-durables major would open up in the future.

It did. Like a can of worms. Even as the stockmarkets celebrated--the Nestl scrip shot up from Rs 339.50 on March 17 to Rs 450.75 on April 1, 1998--Ardeshir resigned from the company's board on All Fool's Day, later citing "irreconcilable differences with the top management of the majority shareholder, Nestle SA."

Promptly, Nestle shrink-wrapped itself, and issued contradictory statements, behaving like a company with something to hide. In doing so, it has opened itself to attack on several fronts. The Bombay Stock Exchange has issued three showcause notices, rejecting the company's explanations over its day-long delay in apprising the exchange of Ardeshir's resignation, and the appointment of an interim CEO, Rajendra Singh.

On another front came Nestle SA's appointment of the global audit firm, KPMG Peat Marwick (KPMG; 1997 income: $9 billion) to look into Nestle's operations. Says a spokesperson: "This does not reflect dissatisfaction with the way the company was run until now, but takes into account the fact that Nestle has grown extensively in the recent past."

Coupled with the mysterious recall of Emery--his successor, J.C. Waelti, is yet to take charge--this has raised doubts about the sanctity of Nestle financials. Hardly surprising, then, that the investigative agencies have swung into action. The Department of Revenue Investigations, which has been looking into the company's operations for a year, will summon Nestle executives soon. The Enforcement Directorate is examining Nestle coffee exports to the CIS: at Rs 330 crore in 1997, they have grown by 32 per cent, outstripping Nestle domestic sales growth of 15 per cent.

If that is not enough, the Securities & Exchange Board of India (SEBI)--which recently rejected Nestle SA's application to pick up 3.62 per cent of Nestle equity owned by B.M. Khaitan without making an open offer--is probing charges of insider trading by Nestle employees. While SEBI does not comment on ongoing investigations, there's no denying that rumours of good results and the possibility of Nestle SA increasing its stake in Nestle via an open offer were circulating before the results were announced.

Says a broker on the Delhi Stock Exchange: "The volumes and the type of trading in Nestl have been suspicious in the four-week period preceding its results." Actually, the scrip has been in the limelight since mid-December, 1997. From an average price of Rs 250.25 in the first fortnight of December, 1997 (average daily trading volume in December 1997: Rs 4.58 lakh) the scrip touched Rs 339.50 on March 17, 1998, the day the results were announced. (By that day, the average trading volume for March had shot up to Rs 2.26 crore.) While Ardeshir was unavailable for comment, it would be facile to attribute the insider trading probe as a motive, particularly as previous experiences have shown that it could take years for the charges to be framed, and even longer to be proved.

Moreover, Nestl SA could hardly have faulted its India subsidiary's performance under Ardeshir. His volumes-led strategy--driven by furious product-launches and line-extensions--clearly had the parent company's backing. Indeed, in 1995, Helmut O. Maucher, Nestle SA's chairman, said: "The next few years are going to be crucial as more brands will be introduced in India." Ardeshir didn't disappoint him--at least, on this front.

Nestl launched 31 products and line extensions in 1997, and hoped to do as well in 1998. In fact, since Ardeshir took over, Nestl has been adding an average of 15 new products and line-extensions a year. Buoyed by the success of KitKat--Nestle Rs 181-crore chocolates and confectionery business grew by 31 per cent in 1997--new launches accounted for sales of Rs 183 crore in 1997. And the company has stuck to its target of doubling sales every three years.

From Rs 539.70 crore in 1993, when Ardeshir took charge, Nestle sales in 1997 were Rs 1,425 crore--a figure the company wants to double by 2000. This message had got across to his team, which was fiercely loyal to him. Says a former colleague: "He is a good manager. I can't understand why he was forced to quit." Adds another: "As a homegrown CEO, he was competent and professional." But Ardeshir must have certainly had some differences--accentuated by personality clashes--with Vevey. What were the possible points of conflict?

For one, Nestl SA was keen on its subsidiary entering the ice-creams segment--where it has a major presence globally--which Ardeshir was resisting as he was convinced that the chocolate-and-confectionery business presented better avenues for growth. On another front, Ardeshir was, apparently, not aware of the scope of the KPMG audit. Such a move would definitely set alarm-bells clanging in any CEO's head Given that Nestl is audited in the country by A.F. Ferguson & Co., the scope of such an audit could centre around fraud. Both A.F. Ferguson and KPMG did not speak to BT.

Initial reports of the KPMG team sealing parts of Nestle office in Delhi indicate the serious nature of the probe. KPMG's coo, John Curtin, has sent an e-mail to all employees in KMPG's India office ordering a complete embargo on the Nestl affair. As KPMG has, apparently, made a pitch for the Nestl India account in the past, delicate ground is being tread. Says the Nestl spokesperson: "Nestle has no reason to be dissatisfied with A.F. Ferguson's services." But Nestl SA's move to bring in KPMG indicates that its mind was made up: Ardeshir had to go.

Perhaps Nestl SA was not convinced about the success of its Indian offshoot's strategy. Unfortunately for Ardeshir, there are certain question-marks in Nestle results. Quite simply, Nestle performance is thanks to some abnormal results in the second half (H-2) of 1997. On sales growth of 15.30 per cent, it showed an operating profit margin (OPM) of 17.40 per cent--a growth of 7.80 percentage points over H-2 of 1996. In contrast, although sales grew faster in the first half (H-1) of 1997 (22.50 per cent), OPM, at 9.80 per cent, went down by 1.60 percentage points over the same period of the previous year.

Nestl has argued that steep price increases in its products in H-1 of 1997 were reflected in second-half realisations. But prices went up in the second half too albeit not as drastically. And then, Nestl raised prices again in the first half of 1998. For instance, Milkmaid prices increased by 23.80 per cent in H-2 of 1997, and by a further 11.50 per cent in H-1 of 1998. Similarly, Milo prices went up by 10.30 per cent in H-2 of 1997, followed by an increase of 4 per cent in H-1 of 1998. The discordant note here is the lower domestic sales growth in H-2 of 1997 (15.30 per cent versus 22.50 per cent in H-1).

Nestl argues that growth was mainly driven by exports. States Mumbai-based equities firm First Global, in its post-results report: "Assuming 70 per cent of the year's exports occurred in H-2 of 1997 (H-1 of 1996 actuals: 60 per cent), domestic sales growth would be 4.70 per cent in H-2 of 1997." The implication is that Nestl is following a price-push growth strategy that runs contrary to its stated volumes drive. And the company admits that volumes growth in 1997 was a mere 6 per cent, which compares unfavourably to 11 per cent in 1996 and 22 per cent in 1995.

So, how did Nestle deliver such smashing returns in H-2 of 1997? Says Hozefa Topiwalla, 26, securities analyst, First Global: "Given the general slowdown, the sharp improvement in second-half margins wasn't expected." Indeed, examining Nestle OPM movements over the past three years shows that margins in the first half have always been greater than the second.

Sure, with stable coffee prices--and the devalued rupee--export realisations have been high. And the company says that improvements in productivity--stable milk prices, improved yields, and lower packaging-costs--and contained overheads helped it improve margins. True, a higher raw material-to-sales ratio has pushed up the company's OPM by 1.90 percentage points. What is unusual is the higher reflection of these savings in H-2 of 1997.

Another possible area of conflict: Ardeshir could have sought a stabilisation in royalty payments to Nestle SA. In 1993, Nestle royalty payments to its parent stood at Rs 5.80 crore (1.20 per cent of sales). In 1996, the figure went up to Rs 44.40 crore, which translates into 3.90 per cent of sales. In fact, the First Global report states: "In the last few years, royalty on technical assistance has been the main cause for the decline in the company's OPMs." While royalties on old products get extended for improvements in product quality and process, the avalanche of new products from Nestl sa implies that royalties could increase in future.

Clearly, the KPMG audit, and other investigations, will shed more light on a shy company. With its CEO quitting under a shadow, and the investigative agencies breathing down its neck, bitter is the flavour of the month at Nestle.

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