Nestle India’s volume growth trailing a healthy trajectory

Nestle India’s volume growth trailing a healthy trajectory

Nestle India Ltd’s results for the December quarter are good, but they need to be seen in the light of a low-base effect. Higher raw material costs and one-off increase in expenses had resulted in higher expenditure growth in the year-ago period. While higher input costs hit other consumer companies too, Nestle, being a foods-only company, was hit harder.

Despite sales rising by 26%, Nestle’s net profit actually fell by around 7% in the December 2009 quarter, over the year-ago period.

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That created a low-base effect, affecting the comparison for its December 2010 quarter results. But Nestle gets full marks for domestic sales growth, which rose by 27%, despite having to better a 25% sales growth in the year-ago period. Export revenue was, however, disappointing and fell by 17%.

Domestic sales growth for Nestle has been primarily due to volumes, and to a smaller extent owing to price increases.

The company has been following a volume-led strategy, keeping prices in check, which also helps in thwarting competition.

Domestic sales have risen by 19% in volume terms and 22% in value terms, between January and September. This trend would have continued in the December quarter as well. The main increases in prices are visible in milk products, and in prepared dishes and cooking aids (sauces, noodles and soups).

Inflation in food prices is still a concern, but not a dominant one now.

Nestle’s material consumption cost rose by 22%, lower than the 23.6% jump in overall net sales, in the December quarter. This was one reason for better profitability.

Its operating profit margin improved by nearly 5 percentage points to around 20%.

Other key reasons were one-off in nature: a 14% drop in employee costs and an 18% increase in other expenditure.

While net profit rose by 80%, these one-off events mean that annual results give a better picture. In 2010, its operating profit margin rose by about 20 basis points to 20%, which is more realistic. Net profit growth is very healthy at 25%.

At Rs3,460, its stock trades at around 40 times 2010 earnings per share.

Expectations from shareholders are high but they don’t seem to be factoring in its sizeable capital expenditure plans. These will be part-funded by debt, and could see earnings slow a bit, before recovering.

Graphic by Ahmed Raza Khan/Mint

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