Nestle y-o-y revenue growth of 2% falls short of Street estimates whereas Britannia's 26.4% growth was slightly better than the estimates
Opportunity knocks but once. And, the covid-induced opportunity was the spike in demand for packaged food. In that sense, Nestle India Ltd has missed the boat, but peer Britannia Industries Ltd was able to capitalize on it. Nestle’s June-quarter year-on-year revenue growth of about 2% fell short of analysts’ estimates. In contrast,
Britannia’s 26.4% revenue growth was slightly better than the Street’s optimistic estimates, following the company’s indications prior to the results that the quarter was shaping up well.
Nestle maintains that its sales were adversely impacted due to the lockdown, leading to production disruption across factories. Further, demand in the “out-of-home" channel saw a considerable decline. Nestle derived 4.4% of its operating revenues from exports, which fell by 9%. Domestic sales contributed 95.6% of revenues and increased by 2.6% over the same period last year.
Note, the food and beverage segments of Hindustan Unilever Ltd and ITC Ltd, too, performed relatively better in the June quarter. Nestle’s performance in the March quarter had raised hopes as well. Analysts from Kotak Institutional Equities said: “Given this (strong March quarter) and, in view of Nestle’s portfolio and execution strength, we hadn’t expected any supply-chain issues; to that extent, supply chain issues in Maggi surprised."
Kotak analysts wrote in a report on 28 July: “We note that other FMCG companies smartly leveraged third-party distribution (including startups), rationalized SKUs to drive cost savings and cut down on trade incentives or promotions (aided gross margins). Nestle’s higher urban salience hurt as well." Meanwhile, Nestle’s e-commerce channel increased by 122% in the June quarter, and now contributes 3.6% to domestic sales. Jefferies India Pvt. Ltd said: “Earnings before interest, tax depreciation and amortization (Ebitda) margin expanded 80 basis points year-on-year to 24.9%." One basis point is one-hundredth of a percentage point. “Margins however came to the rescue and allowed Nestle to meet our forecast," it added.
A sharp decline in other expenses boosted Ebitda. This looks good considering gross margin declined by 180 bps owing to inflation in dairy inputs.
Even so, the subdued revenue growth was more disappointing. After its results, on Wednesday, the Nestle stock fell 3%. The company has restored its eight factories almost to their pre-covid manufacturing capabilities. With growth momentum back, it would be interesting to watch the extent to which Nestle can offset the demand loss it had incurred in the first half of 2020. Nestle’s financial year ends in December and the June quarter is its second.
While the firm is well-placed to ride the packaged food consumption theme, the stock’s expensive valuations leave little room for an upside. Nestle’s shares trade at a valuation multiple of nearly 77 times trailing 12 months earnings and that’s hardly cheap.