Good news on Nestlé’s volumes; effervescence in stock overdone
The Street lapped up what it heard at Nestlé India Ltd’s annual investor meet held on Friday. The company’s shares were up by 6.9% on Monday, a day when the FMCG (fast-moving consumer goods) sector index was up 1.1%.
Nestlé India’s results were declared a month ago, and since then its shares were down by 2.8% as of Friday. It had reported an 8.8% increase in net sales, but profitability fell due to higher costs.
That may have worried investors a bit as valuations are rich. After Monday’s increase, the stock trades at 63 times 2017 earnings and 46 times its 2018 earnings, based on estimates compiled by Reuters.
Its analyst presentation shows that Nestlé India’s strategy statement does not disclose any significant shift. But it provides additional financial data that was not disclosed with its results.
In the January-June period, domestic market sales growth was 9.3% and volume growth was 9.5%. The volume growth is a surprise. While it had mentioned earlier that volume was mainly responsible for growth, here it exceeds value growth.
The break-up of Nestlé India’s value sales growth shows that 2.8% came from Maggi noodles, 2.4% due to new products and the remaining 4.1% from the rest of its portfolio. That assuages the fear that the noodles’ sales rebuild was mainly responsible for growth. While it remains significant, the rest of its business is contributing substantially to growth.
The category-wise break-up tells us more. The prepared dishes and cooking aids business (products such as noodles, ketchup and soups) saw 17.9% growth. The company’s milk and milk products business did not do too well, with sales increasing by only 3.4%. The two categories of chocolates and beverages businesses did well, however, pulling up overall growth.
The Maggi noodles business appears to have reached a steady state and sequentially it may not grow by much more. The good news is the company has been able to secure growth from other categories, barring the milk business.
Note that this growth has been achieved during a period when demonetization and the goods and service tax roll-out have affected business. The underperformance of rural markets does not affect Nestlé India much and a recovery in urban markets can help its sales growth accelerate. It is reasonable to expect that overall sales growth should remain healthy in the second half of 2017 too.
One concern is that the company seems to be absorbing higher material costs in a bid to keep up sales growth. That focus on regaining sales growth can hurt profitability for a while, unless higher material prices reverse. That’s why, while the volume growth numbers are definitely good, the sharp jump in Nestlé India’s share price is overdone.