2010 looks like a tough year for Nestle India

2010 looks like a tough year for Nestle India
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First Published: Mon, Nov 23 2009. 09 40 PM IST
Updated: Mon, Nov 23 2009. 09 40 PM IST
At first sight, food and drink company Nestle India Ltd’s growth so far in 2009 appears to have been driven more by volume than prices. That is always a healthier position to enter 2010, as a slowdown in volume growth can be made up by an increase in prices. But a closer look reveals that one category—prepared dishes and cooking aids—is responsible for tilting the balance towards volume growth.
In the nine months ended September, Nestle’s domestic sales grew by 18.8% to Rs3,540 crore, contributing around 94% of sales. Volumes grew by 13.2% while price and product mix made up for the rest. Exports began the year on a weak note, though it recovered in the September quarter. Exports during the nine-month period were down by 8.9% by volume and 6.6% by value.
Nestle’s largest category is milk products and nutrition, contributing 46.3% of sales. This category comprises infant formula, baby foods and other milk-based products including dairy products. While value sales grew by 18.3%, volumes grew by just 10.8%. Rising milk prices have led to higher product prices. Average prices in the nine months were up 8%, and are up by 11% year-on-year. Demand in this category is relatively insular to price hikes, especially in the infant formula and baby foods category. Volume sales growth in calendar 2008 was around 10%.
But Nestle’s main growth driver is noodles, sauces and instant soups under the Maggi brand. This category contributes about a quarter of sales, with volumes rising by 19.6%, while value growth was just a little higher at 24.7%. Relatively flat wheat prices and sharply lower palm oil prices would have ensured good margins, even with lower price increases.
The sale of chocolates was affected, with volumes growing by just 5.1%, much lower than the 12.4% growth seen in calendar 2008. It is price-led growth that contributed to sales growing by 16.5%. Beverages—coffee and tea—too disappointed, as volumes declined, chiefly due to exports dropping. But bad weather has affected its domestic coffee output too.
Looking at 2010, in this backdrop, it seems unlikely that Maggi’s volume growth will sustain at these levels. Nestle will thus need to improve volume growth in its other segments. Otherwise, it may have to increase profits through price increases and lower raw material costs. Consensus estimates have projected profit growth of 20% on sales growth of around 17%. On Monday, Nestle’s share price was down by 0.8% and is down from its 52-week high of Rs2,739 seen in October.
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First Published: Mon, Nov 23 2009. 09 40 PM IST