Nestle is resilient but the storm of inflation looms

The company follows a January to December fiscal year.

“Nestlé India’s results look relatively better, given the dismay of several FMCG companies in the December quarter,” he said. Yes Securities Ltd analyst Himanshu Nayyar said, it has been able to sustain revenue growth, mainly led by volume, unlike peers, which saw higher contribution from the rise in prices. FMCG stands for Fast Moving Consumer Goods.

Nestle India’s domestic volumes and compounded growth stood at 8% during the quarter. Furthermore, the continued pace of growth in Maggi noodles was partially aided by increased availability. On the other hand, export revenue declined by 6.6% due to change in product mix.

On the profitability front, Nestle India was hit by inflationary pressures. Its gross margin declined by 205 basis points (bps) to 57%. One basis point is 0.01%. This was largely due to higher edible oil and packaging material costs. While gross margins have improved by 130 bps sequentially, inflation remains a major concern for all FMCG companies and Nestle India was no exception.

During the earnings call, the company said there are “storm clouds” ahead in terms of rising commodity prices and six of its input products touching 10-year highs. From a near-to-medium term outlook, the company’s commodity price outlook remains bullish for key categories like edible oil, coffee, wheat and fuel. In addition, there is a sharp rise in the cost of packaging materials amid supply constraints, rising fuel and transportation costs. “Fresh milk prices are expected to remain stable with continued increase in demand and increase in feed costs to farmers,” the company said.

Having said that, Nestle India was able to expand its operating margin even though the gross margin declined. Earnings before interest, taxes, depreciation, and amortization (Ebitda) margin rose nearly 50 bps to 23.2%, supported by a decline in employee costs. Overall, Nestle India’s Profit Before Tax and Extraordinary Goods grew 11% 743 crores.

Meanwhile, the company did well on innovation, launching over 100 new products over the past five years. New product development contributed 4.9% to home sales in 2021, up from 1.5% in 2016. “Nestle’s performance over the past quarters is consistent, but it is also boring as revenue growth in the last six years has been in the range of 9-14%. 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 & Securities Ltd.

So the growth outlook is not bad. “Improvement in urban demand, where Nestle has 75% exposure, and product launches are likely to support further revenue growth. Further, the bumper rabi crop harvest will help improve rural cash flow, in turn boosting demand in this market, said Avneesh Roy, executive director, institutional equity, Edelweiss Securities Ltd.

Of course, Nestle India’s shares have fallen 8% so far in calendar year 2022. But there is no relief on the valuation front. Bloomberg data shows the stock trades at around 67 times CY22’s estimated earnings. “Nestle’s Q4CY21 results demonstrate its resilience and justify its rich valuation. However, higher valuations also limit significant volatility in the near future,” said Nayyar of Yes Securities.