Nestle India Ltd’s need to look beyond noodles is only practical. Between its June and December 2016 financial results, the company’s share of the instant noodles category has risen by three percentage points to 60%. The good news is that it has risen. The pace of increase tells us that it’s been a gradual build-up in share, even as Nestle India has been rebuilding a lost empire since the reintroduction of noodles in November 2015.
Any future increase in share will continue to be gradual, meaning its own sales growth depends on the instant noodle market’s growth and how competitors fare. Nestle India once had a more than three-fourths share of the market. Existing rivals and new ones such as Patanjali Ayurved Ltd have taken positions in a market that the company was forced to vacate.
Nestle India’s domestic sales in the December quarter have risen by 16.9% to Rs2,094 crore, partly due to higher contribution from noodles while demonetization may have crimped sales to some extent. Since the company ’s target market is mostly urban, it appears to have weathered demonetization rather well. While sales growth is good, the absolute figure is still less than the Rs2,358 crore it netted in the December 2014 quarter.
From the next quarter onwards, the base effect of noodles will begin to wane, giving a more realistic picture of its core sales growth. Since noodles’ growth appears to be tapering, the focus will shift to how its other categories are performing. It is on a product launch spree, having launched 30 new products during the year. While the company does not break out segment sales quarterly, its periodic analyst meets do give this detail. One has to wait for that to get a better picture.
On the cost front, materials are becoming expensive as items such as edible oil, flour and sugar have seen prices increase. Nestle India’s gross margin (sales less material cost as a ratio of sales) has declined by a bit, about 40 basis points sequentially. That’s an encouraging sign as it means the company ’s product mix is good enough to weather price increases, despite input costs rising by 18.7%. But the decline in its operating profit is a bit more severe, at 84 basis points, chiefly due to higher employee costs. A watch on how these margins move in future quarters will tell us if there is need to be concerned.
The operating profit growth of 15.8% did not percolate down to the net profit, which actually declined by 8.7% due to a mixture of provisions and a hit due to higher tax incidence. Nestle India’s performance gives a picture of a company that has recovered from the worst but has not regained its glory days. That is reflected in its share too, which is up 22% from a year ago, but is down 11% since 30 October. While the dip in earnings may worry shareholders, the March quarter should give a more complete picture, with the low base effect of noodle sales waning, as also the effect of demonetization’s hit on December quarter sales.