Nestlé India’s results promise higher volumes, better margins this year2 min read . Updated: 16 Feb 2018, 08:09 AM IST
Nestle India's December quarter results hold out promise of a good showing in 2018, barring another major disruption
Is this the year Nestlé India Ltd will fire on all cylinders? Investors seem to think so. If 2015 was taken away by the noodles controversy, 2016 went to demonetization and 2017 saw the initial chaos of the goods and services tax (GST) roll-out affect performance. All that is behind it. The company’s December quarter results hold out promise of a good showing in 2018, barring another major disruption.
Most consumer goods companies reported an upswing in growth. So Nestlé India’s 18.1% comparable domestic sales growth is not unusual—Hindustan Unilever Ltd’s sales grew by 17%. Still, the fact that it is higher than the market leader’s growth is good news; Nestlé India attributed it to higher volumes and better realizations.
Due to changes in accounting post-GST, sales numbers are not comparable. The company’s reported sales rose by 15.6% while its material costs increased by 11.4%. While the numbers may change, once the low base effect fades, if sales grow ahead of input costs, then it’s still good for profitability.
Nestlé India had flagged rising material costs in its August 2017 analyst meet, but that does not seem to have affected margins. Government data shows that milk prices have indeed risen, but prices of other inputs such as sugar and coffee have declined while wheat flour has held steady. On a sequential basis, the gross profit margin has risen by 2 percentage points. That allowed Nestlé India to absorb a sharp increase in other expenses (most likely due to higher advertising costs) and its Ebitda (earnings before interest, tax, depreciation and amortization) margin rose by 22 basis points sequentially.
While its Ebitda rose by 26.7% over a year ago, lower depreciation and a lower tax rate saw its profit increase by 59.6%. The metric to focus on is the Ebitda margin, which seems to have stabilized at around 23%. If the company can maintain this and then get volume growth going, that would be good.
Parent company Nestlé SA too released its results this week, and while sales growth disappointed, one of its priorities for 2018 is to maintain volume growth. That should set the tone for Nestlé India’s priorities, and while the parent also talks about margin improvement, the two together make for a better combination in India.
Most consumer goods firms have talked about sales recovery in India’s urban markets and that augurs well for Nestlé India’s urban-centric product portfolio. If economic growth picks up as expected in 2018 and consumer demand also moves up, then it is reasonable to expect the company’s performance to improve.
Nestlé India’s shares were already expensive before its results were announced, trading at 47 times its forecast earnings per share for 2018, based on the mean of estimates polled by Reuters. Its shares still rose by 4.5% on Thursday—a day after the results were announced—partly due to good results but also reflecting a bounce-back from recent underperformance versus its peers (see chart). The jump in its shares signals hope its earnings growth may improve by more than expected in 2018, and investors need to see if the next few quarters lend strength to that hope.