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Business News/ Markets / Mark To Market/  Nestlé India: revenue growth up, but dearer milk eats into margins
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Nestlé India: revenue growth up, but dearer milk eats into margins

Company was less affected by slump in demand, given its relatively higher exposure to affluent urban consumers
  • A slower rate pace of growth in other expenses helped Ebitda performance
  • Nestle India follows a January to December financial year.Premium
    Nestle India follows a January to December financial year.

    Nestlé India Ltd reported impressive domestic revenue growth of 10.5% year-on-year for the September quarter. Analysts estimate this came on the back of 9% volume growth, which is easily the best when compared to other consumer firms. For perspective, volume growth of Hindustan Unilever Ltd, Godrej Consumer Products Ltd, Dabur India Ltd and ITC Ltd (cigarettes) stood at 5%, 7%, 4.8% and 3%, respectively.

    Nestlé India is relatively less impacted by the current consumption slowdown, given its relatively higher exposure to affluent urban consumers, analysts at Jefferies India Pvt. Ltd said in a note to clients.

    “Nestlé ’s stronger growth also indicates market share gains and a strong core portfolio. The aggressive pace of new innovations, success of new launches, and an improvement in demand environment could further accelerate its growth momentum," said analysts at Emkay Global Financial Services Ltd.

    Despite the good showing, the company’s shares fell 2.5% after the results were announced. What gives?

    To start with, volume growth was more or less along expected lines and was, therefore, factored into the share price. Besides, while revenue growth did not disappoint, profit margins were weak. Gross profit margin declined by 214 basis points year-on-year to 57.3%.

    “The quarter witnessed higher commodity prices, particularly in milk and its derivatives, which are likely to continue in the near-term," said Suresh Narayanan, chairman and managing director of Nestlé India, in a press release. Some of this was offset by a decrease in other operating expenses as a percentage of revenues.

    Analysts at ICICI Securities Ltd expect that the impact on margins from input cost inflation will be partially mitigated by the price hike in infant food products in 3Q CY19, cost efficiencies (like in 3Q) and a high base for 4Q CY18 (when the company had increased ad spends). Nestlé India follows a January-December fiscal year.

    As pointed out earlier, the company’s impressive growth and much more is factored into its share price. The Nestlé India stock trades at around 60 times estimated earnings for calendar year 2020, after having risen more than 25% so far this year.

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    ABOUT THE AUTHOR
    Pallavi Pengonda
    Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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    Published: 11 Nov 2019, 11:14 AM IST
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