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Nestle’s profits may recover if costs fall

Nestle’s profits may recover if costs fall
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First Published: Thu, Jun 10 2010. 10 10 PM IST

Graphic: Yogesh Kumar/Mint
Graphic: Yogesh Kumar/Mint
Updated: Thu, Jun 10 2010. 10 10 PM IST
Nestle India Ltd’s shares have been facing rough weather since its March quarter results were declared. The price is now around 1% from the level before the results were declared, but is still underperforming the FMCG (fast-moving consumer goods) Index of the Bombay Stock Exchange, which has gained by around 5%.
Nestle’s March quarter performance was hit chiefly due to rising raw material prices. It had decided to limit price hikes at the cost of profitability to ensure demand does not suffer due to inflation.
In the March quarter, its sales rose by 17%, most of it on account of growing volumes, the firm said. Price hikes were limited and staggered. Input costs rose by 23%, 6 percentage points more than sales. Also, heightened competition meant it could not save on advertising costs.
Graphic: Yogesh Kumar/Mint
Other expenditures, which includes advertising, rose by 25%. As a result, operating profit margins fell by 3 percentage points over the year-ago period and net profit rose by just 2.5%.
In the current year, another worry faces the personal and home care products sector: slowing growth. High food inflation is eating into the pockets of consumers, especially the urban poor. By keeping prices under check, Nestle has escaped its effect so far, but this is a phenomenon that needs to be watched.
While Nestle’s strategy works to its advantage, for investors, the drop in margins and earnings is a worry. The turning point will be when commodity prices ease. There are already some signs of that happening.
In one key commodity—milk and milk powder— while there are no signs of prices easing, the pace of increase has slowed. Between January and end-May, the index of milk prices in the Wholesale Price Index has risen by only 7%, while in fiscal 2010, it rose by 22%.
Wholesale sugar prices have fallen since January, dropping from around Rs40 a kg to around Rs29 a kg now. Wheat prices are down from around Rs13 a kg in January to Rs11 a kg in end-May. Raw coffee prices were down in 2009 and have not moved up in the year so far. Overall, it appears that price rises will be less of a worry for Nestle in 2010.
This does not consider the possibility of what a good monsoon might do to prices. Even if prices do not fall much, sustained volume growth and a moderation in input cost hikes should see Nestle’s profit growth revive during the current fiscal.
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First Published: Thu, Jun 10 2010. 10 10 PM IST