Nestle India Ltd has had another year of strong double-digit growth.
Net sales grew by 23% to Rs4,335 crore, while net profit rose by an even higher 29% to Rs535 crore. This comes on the back of a 15% compounded annual growth rate in sales in the preceding five years. This makes Nestle one of the few fast-moving consumer goods stocks that is backing up high valuations with strong growth. A number of stocks in the sector trade at trailing price-earnings multiples of over 20 times, but their earnings are growing at lower rates.
The key question, of course, is whether growth will continue at the same pace. The performance in the December quarter, when sales grew by 22% and profit by 29% (in line with the performance in the rest of the year), doesn’t show any signs of the slowdown. But it may be too early to judge its impact. Indeed, an economic downturn can be expected to result in demand contraction for Nestle’s products, which cater mainly to urban India.
The strong growth in the past has been aided by regular pricing increases. Even last year the company undertook sizeable price hikes. It certainly won’t be as easy to raise prices in the midst of a downturn.
Also See Strong Growth (Graphic)
According to a research report by Citigroup Inc., Nestle’s growth has slipped to below 10% in previous downturns. The brokerage expects growth to slow to 10-12% in the coming two years.
As far as profit margins go, prices of the company’s raw materials, mainly comprising agricultural and dairy products, haven’t come down as much as other commodities. On the contrary, some costs have risen.
Of course, the company has thus far passed this on to consumers by hiking prices, so this may not dent margins. But the company is not expected to benefit like other consumer goods firms where commodity costs have come off sharply but prices of finished goods have more or less remained intact.
Citigroup expects the company’s net profit to grow at an average rate of 14% in 2009 and 2010. Keeping this in mind, the valuation of 25 times earnings may need some correction.
Graphics by Paras Jain / Mint
Write to us at email@example.com