BackNestle India: will 2014 be any better?
In 2013, Nestle stocks rose 9.4% compared with a 9.3% increase in the index, but that may be of little consolation to investors
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Will 2014 be the year that Nestle India Ltd will finally give a treat to its investors? In 2012, the stock ended with a gain of 21%—good but nearly half the increase shown by its peers, as the BSE FMCG index rose by 44% during the year. In 2013, the Nestle stock rose 9.4% compared with a 9.3% increase in the index, but that may be of little consolation to investors. Whether Nestle does manage to break free in 2014 depends on whether its performance climbs out of the hole it has dug itself in.
Some years ago, Nestle’s sales growth was on a tear as the company did everything possible to spur growth, keeping price increases in check, targeting all customer income groups and expanding its distribution reach. Then it changed tack as it was unhappy with the quality of the growth. The past few years have been spent in chasing profitable growth.
Initially it meant passing on input cost increases through price hikes to consumers. It did help margins but pulled down volume growth. But that’s not all. Nestle has also been cleaning up its portfolio of products or variants that are unprofitable or do not fit with its ideal portfolio mix.
Raw material costs continue to increase overall, but the second half has brought relief. Among its main raw materials, domestic milk prices continue to increase though the pace is less alarming than in previous years. Sugar has entered a bear phase. Wheat flour and palm oil are stable. Green coffee was steady in the first half but has turned weak towards the end of 2013. That gives Nestle room to improve profitability in 2014.
But higher profitability is of little use for investors if sales growth is not accelerating too. It would be reasonable to assume that 2013 has seen the brunt of the portfolio clean-up, and offers a low base for sales growth to accelerate in 2014. But the bigger push can come from a recovery in consumer confidence which, in turn, hinges on better GDP growth and lower consumer inflation.
While the odds are in favour of Nestle’s sales growth recovering in 2014, its products are mainly targeted at better-off consumers. They need to feel happy enough about their economic conditions to feast on its food products.
Unless condition worsen, 2014 should see Nestle’s performance recover, though the extent of recovery will be determined by how well the economy does.
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