Nestle India: missing its pricing power
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Has Nestle India Ltd completed the rebuild of the Maggi noodle business?
A definitive answer is not available, as Nestle does not share volume growth or segment results, leaving one to parse what little its release says.
In the December quarter, Nestle said sales growth was 16.2% on a base impacted by the Maggi noodles issue. It did not say that in the March quarter, and said total sales increased by 9.1% and domestic sales grew by 9.7%, “mainly due to increase in volumes across product groups, including rebuild of Maggi noodles, supplemented by marginally better realisations”.
How does one read this?
Domestic sales growth was much lower at 9.7%, compared with 16.9% in the preceding quarter (despite the hit to sales in that quarter due to demonetisation). The Maggi rebuild had some impact but not as much on sales growth in the March quarter.
Does that mean 9.7% is the new growth rate (volume-led) one can expect from Nestle and not the 12-15% sales growth some analysts had pencilled in for the quarter?
That maybe so and noodle sales may have settled at a lower level, for now. The overall sales growth figure is respectable. The company says it is volume-led, across the board, with marginal contribution from price increases, and some contribution from the Maggi rebuild.
Of course, Nestle could have done better by disclosing the actual volume growth figure.
Nestle’s net sales rose by 8.7%, with exports rising by 0.6% and higher excise cutting into domestic sales growth. Excise increased after exemption ended at one of its units in June 2016 and due to a change in its product mix. More than the sales growth disappointment, its profitability raises a red flag.
Nestle’s results reflect a highly competitive market. Its material costs increased at a higher rate than sales did. Input costs rose, mainly of milk and its derivatives. Employee costs and other expenses also rose considerably and the net result was to lower its Ebitda margin over a year ago by 2.9 percentage points to 21.1%, although it did improve sequentially by 2.4 percentage points.
Nestle’s net profit rose by 6.8% from a year ago. That is not a result you want to see, when your stock trades at a plum valuation of 66 times 2016 earnings per share (EPS) and 51 times estimated 2017 EPS (mean of analyst estimates polled by Reuters).
The one aspect in Nestle’s favour at present is its healthy volume growth. This volume growth needs to sustain or improve, but it also needs price increases to cover higher input costs. That is what investors should watch for, although the picture may get muddled due to uncertainty in the short term due to the implementation of the goods and services tax, or GST, from 1 July.