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Graphic: Ajay Negi/Mint
Graphic: Ajay Negi/Mint

Nestlé India: Growth worries beyond noodles

Excluding Maggi Noodles, Nestle's volume growth was a mere 0.5%, and actually declined in value terms by 0.7%, in the June quarter

Nestlé India Ltd aims to expand sales in double digits led by volumes, while sustaining profitability. How has it done on that front so far in 2016? Investors can get valuable information from a recent investor presentation which is not ordinarily available along with its results.

Maggi noodles are contributing significantly to sales growth. The product’s recall last year means growth is coming off a low base; even so, reports suggest Nestlé India has gained back share quickly in the segment. But while the noodles segment is doing well, there are concerns of growth slowing in the rest of the business.

In the six months ended June, the company’s domestic sales grew by 7.3% in volume terms and 2.6% in value terms. However, this number is skewed by the restart of instant noodle sales, culling of products and revenue earned from selling surplus fat. Excluding these, volume growth was a mere 0.5% and actually declined in value terms by 0.7%. The bright side: things have picked up compared to the March quarter—sales in the June quarter rose by 0.7%.

In the six-month period, sales of milk and milk products declined by 1.4% over a year ago, chocolates grew by 1.8% while beverages (mainly coffee) fell by 7.8%. Nestlé India is addressing this decline by launching new products and focusing on distribution. This appears to be working, as can be seen from better growth in the second quarter. If this sustains in the second half, that will be a positive for the company.

Commodity costs remain broadly in favour of Nestlé India, with respect to its main inputs. Advertising costs as a percentage of sales (otherwise not disclosed in its results) rose in the June quarter sequentially. That could remain high as it will have to support new product launches.

Nestlé India’s shares have been flat since its June quarter results were announced. The recovery in sales of Maggi noodles and market share gains are old news now; its stock is up 14% compared to three months ago. How the rest of its portfolio does in the second half and beyond is what will determine if it can deliver further returns.

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