Nestlé is resilient but a storm of inflation looms

The company follows a January to December financial year.

“Given that many FMCG companies disappointed in the December quarter, Nestle India’s results seem relatively better. It has been able to sustain revenue growth, primarily led by volume, unlike peers, that saw higher contribution from price hikes,” Himanshu Nayyar, analyst, Yes Securities Ltd, said. FMCG stands for fast-moving consumer goods.

View Full Image

Nestlé India’s domestic volume and mix growth during the quarter stood at 8%. Furthermore, growth was partly aided by continuous momentum in Maggi Noodles due to increased availability. On the flip side, export revenues declined 6.6% on account of a change in product mix.

On the profitability front, Nestlé India was affected by inflation pressures. Its gross margin contracted by 205 basis points (bps) to 57%. One basis point is 0.01%. This was broadly on account of higher edible oil and packaging material costs. While gross margin has improved sequentially by 130bps, inflation remains a big concern for all FMCG companies and Nestlé India was not an exception.

During the earnings call, the company said there are “storm clouds” ahead in terms of rising commodity prices and that six of its input products are touching 10-year highs. From a near-to-medium term perspective, the company’s commodity price outlook for key categories, such as edible oils, coffee, wheat and fuel remains firm to bullish. Moreover, costs of packaging materials are on an uptrend amid supply constraints, rising fuel and transportation costs. “Fresh milk prices are expected to remain firm with continued increase in demand and rise in feed costs to farmers,” said the company.

Having said that, Nestlé India was able to expand its operating margins even as gross margin dipped. Earnings before interest, taxes, depreciation, and amortization (Ebitda) margins rose about 50bps y-o-y to 23.2%, supported by a decline in staff costs. Overall, Nestlé India’s profit before tax and exceptional items increased by 11% to ₹743 crore.

Meanwhile, the company did well on innovation, launching over 100 new products in the last five years. New product development contributed 4.9% of domestic sales in 2021, up from 1.5% in 2016. “Nestlé’s performance over the past quarters is consistent but also boring given that revenue growth has been in the range of 9-14% y-o-y in the past six quarters. Nevertheless, the company has done a commendable job on new product launches and venturing into adjacent categories, which is healthy in my view,” said Varun Singh, analyst, IDBI Capital Markets and Securities Ltd.

As such, the growth outlook is not bad. “Improvement in urban demand, where Nestlé has a 75% exposure, and product launches are likely to support revenue growth ahead. Also, a bumper rabi crop harvest would help improve rural cash flows, in turn boosting demand in this market,” said Abneesh Roy, executive director, institutional equities, Edelweiss Securities Ltd.

To be sure, Nestlé India’s shares have declined 8% so far in calendar year 2022. But there is no respite on the valuation front. Bloomberg data showed that the stock trades at about 67 times estimated CY22 earnings. “Nestle’s Q4CY21 results demonstrate its resilience and justify its rich valuations. However, the high valuations also cap significant upsides in the near future,” said Yes Securities’ Nayyar.