Nestlé India brews a strong one for March quarter
Nestle India’s net profit for the March quarter came in at Rs424 crore, higher than Street expectations
Calendar year 2018 was always expected to be a good one for Nestlé India Ltd. Those hopes have been met at least as far as March quarter results go. Gross margin improved 300 basis points year-on-year, helped by softer raw material prices, especially in the milk and milk solids segment. Net profit came in at Rs424 crore, higher than Street expectations.
What’s more, the company has done better than peers in terms of volume growth. Domestic revenue growth on a like-to-like basis was 13.4%. Analysts from Jefferies India Pvt. Ltd reckon Nestlé’s sales growth was largely by volume growth of about 10-11%. New launches and market share gains have helped the company report double digit volume growth, says Jefferies. As a result, Nestlé has outperformed other consumer goods peers who have reported their March quarter numbers such as Dabur India Ltd, Emami, Marico Ltd and Godrej Consumer Products Ltd, added the brokerage.
Little wonder then that investors gave a thumbs-up to March quarter numbers, pushing the stock to a new 52-week high during trading hours on Friday. The stock eventually closed 5.8% higher, which means what was a pricey stock earlier has become pricier now. Currently, the stock trades at a huge 59 times estimated earnings for 2018. But if Nestlé continues to impress with volume growth and margin expansion, it looks like investors won’t have to worry much about a bitter aftertaste. Most FMCG stocks in India enjoy high valuations, but few have backed it up with decent growth.
Sure, Nestlé’s March quarter was aided by a favourable base quarter. During the March 2017 quarter, Ebitda had declined 7.5% year on year. Still, compounded annual growth rate of 12% in Ebitda over last two years is “healthy and better than most peers,” according to Kotak Institutional Equities. Ebitda is short for earnings before interest, tax, depreciation and amortization.
Healthy sales momentum and an environment of generally benign raw material costs should mean a fairly strong 2018, reckons Kotak. The company plans to introduce breakfast cereals to its portfolio and analysts say Nestlé’s wide distribution reach should put it in a sweet spot to capture the market share in that space. New launches and promotions too should aid sales growth. As such, there seems to be reasonable support for the high valuations to sustain.