Nestle India’s steep price increases in response to rising costs in recent months and soft demand has resulted in muted volume growth for the September quarter. While sales growth (year-on-year) was in single-digits for the first time in many quarters, net profit grew a mere two per cent.
The stock has lagged the FMCG (fast moving consumer goods) index of the Bombay Stock Exchange by a wide margin in the past year. After the results, it has fallen 1.5 per cent to Rs 4,744 against a one per cent fall in the Sensex. Analysts do not expect any improvement in the trend until volume growth picks up or there are no further price rises, which is unlikely. They expect pressure to remain on the stock, trading at rich valuations.
The company missed analysts’ expectations on all major parameters and reported single-digit growth in net sales, operating profit and net profit. Sales growth, affected by volumes and single-digit growth (7.6 per cent) in the domestic business (95 per cent of total revenue), has been the lowest in 18 quarters and below analysts’ expectations of 13.3 per cent. Says Antonio Helio Waszyk, chairman and managing director, “Domestic sales growth has been adversely affected by portfolio/channel optimisation and pricing for value in certain products.”
|GROWTH SLOWS DOWN|
|In Rs crore||CY11||Jan-Sep 2012||Sep 2012 *|
|% change y-o-y||20.0||11.2||7.9|
|% change y-o-y||21.3||16.8||8.3|
|Adjusted net profit||980||780.9||267|
|% change y-o-y||20.0||6.7||2.0|
|Nestle’s year ending is December * For quarter ended September 2012
Anand Shah, analyst, Elara Capital, estimates a sharper volume decline of three to four per cent in the current quarter versus one per cent in the first half of calendar year 2012, led by channel/portfolio optimisation and consistent price rises.
While raw material prices remained stable or benign in the September quarter, increase in headcount or employee base (with increased capacities) and other expenditure (such as advertising and promotions to support a new campaign for Maggi, innovations like MilkMaid Creations, Munch Rollz and a re-launch of Nescafe Classic) led to a flat operating profit margin of 20.9 per cent (though mostly on expected lines).
Despite a 48 per cent jump in other income and reversal of exchange differences (expenses in earlier periods) adjusted under interest costs, net profit margin dropped 73 basis points (bps) to 12.6 per cent, as depreciation costs galloped to form 3.5 per cent of sales (up 146 bps), thanks to near-completion of the 2,5000crore manufacturing expansion.
Volume growth continues to be an issue. Says Waszyk, “2012 is proving a challenging year. While some actions like portfolio rationalisation, channel prioritisation, focused innovation and Nestle Continuous Excellence implementation have started to yield results, other corrective actions on demand generation in specific categories will take some time.”
Margin expansion also looks unlikely, as the outlook for prices of wheat, milk, sugar and coffee is up, which will put upward pressure on input costs. Abneesh Roy, analyst, Edelweiss Securities, said in his preview note that competitive intensity remains high in coffee, noodles and chocolate (major contributors to revenue).
In this backdrop of growth challenges and margin expansion concerns, the stock valuation of 41 times the estimated earnings in calendar year 2012 is difficult to justify. Gautam Duggad, analyst, Motilal Oswal Securities, is neutral on the stock as he feels valuation appears expensive, given the context of sub-par volume growth.
Says Shah of Elara Securities, in his post-results note, “Management’s strong focus on margins (driven by pricing) versus volumes is clearly hurting the latter in the near to medium term and could potentially drive consumers away from the Nestle portfolio, in our view. We find Nestlé’s premium valuations demanding, given that earnings growth is volatile in view of volume uncertainty and high depreciation/interest costs, both payouts and return ratios have dropped significantly and likely consensus earnings downgrades and consequently P/E de-rating.”