Nestlé India: a recovery is no two-minute job
Nestlé is making a slow climb back to its position before the Maggi recall episode, but it’s proving to be an uphill task
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Nestlé India is making a slow climb back to its position before the Maggi recall episode, but it’s proving to be an uphill task. The packaged food sector’s sales growth is best assessed on a year-on-year basis, as sequential comparison can be affected by seasonality. In Nestlé India’s case, the depletion in Maggi’s sales calls for an exception.
Sequentially, the company’s sales rose 12.8% to Rs.1,791 crore although it fell by 24% from a year ago. The decline was less than the 32.1% decline in sales seen in the September quarter. The product was relaunched in the December quarter—the masala variant was first and the chicken flavour was added recently.
On a sequential basis, margins have improved, chiefly due to lower raw material costs. Thus, the margin of sales left after deducting material costs has increased by 1.3 percentage points sequentially and by 3 percentage points from a year ago. That benefit carried through to the operating profit margin, which rose by 2.4 percentage points sequentially but declined by 3.3 percentage points sequentially over a year ago.
That does seem like a reason to celebrate. However, it is early days yet for Nestlé India and its investors. Sales in the near-to-medium term can be expected to increase, as it refills the market. Investors will want to see if the instant noodle market will bounce back to the pre-crisis levels, in terms of volumes.
The Maggi episode did affect other categories and the company has become more aggressive in the market, with price discounts on some categories, to drive sales growth. This may be a function of competition too. But that has not hurt margins, at least on a sequential basis.
Two factors are in Nestlé India’s favour. Its products are largely urban-centric, making it less vulnerable to the rural demand slowdown that is playing out. Urban consumption is not healthy either but has been picking up slowly, in recent quarters. The second is commodity costs and food prices remain low broadly. Sugar and palm oil prices have seen some volatility. A low raw material price situation gives the company ample legroom to grow volume sales growth even while sustaining its margins.
It may seem like the proverbial fairy tale ending is just a few quarters away for Nestlé India. But investors don’t think so. Its share price is down by 23% from mid-October. One major fear is that even if the noodles market recovers, it will be the likes of Patanjali noodles that may reap the benefit. This quarter’s sales growth was also a bit lower than what some analysts had expected.
There is also the matter of the government’s pending appeal in the Supreme Court on the Maggi issue. If it goes in the company’s favour, and if Nestlé India’s sales growth continues on an upward trajectory at a pace that inspires confidence, then investors may regain interest in its stock.
The writer does not own shares in the above-mentioned companies.