The Chinese use two brush strokes to write the word ‘crisis’. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger—but recognize the opportunity," John F. Kennedy had said.
Nestlé India Ltd appears to have taken inspiration from that rather earnestly in recent years. After all, its shares have doubled since the Maggi noodles ban in 2015, suggesting the company navigated the crisis well.
In fact, after the ban on Maggi noodles sales in June 2015, the company’s stock had settled at ₹5,828 by the end of December 2015. Since then, the stock has risen at a compound annual growth rate ( CAGR) of as much as 24%.
The Maggi ban had resulted in a 17% year-on-year drop in the annual revenues in 2015 to ₹8,175 crore. Nestlé India follows a January to December fiscal year. For perspective: If one annualizes revenues for the half-year ended 30 June 2019, the company is set to earn revenue worth about ₹12,000 crore for 2019. This represents an average annual growth of 10%.
What’s more, analysts seem pleased with the company’s strategy amid the current slowdown. “Nestlé’s narrative at its analyst meet was marked for a forthright constructiveness, especially the ‘no point bemoaning the (tough) macro’ bit at a time when several companies in the consumer packaged goods’ (CPG) space are doing just that," said analysts from Kotak Institutional Equities in a report on 11 August.
To be sure, Nestlé India fared relatively well in the recently concluded June quarter clocking 11% year-on-year growth. The company’s higher urban exposure helps at a time when the rural market is growing at a relatively slower pace.
Additionally, commenting on the performance for the half-year ended 30 June, analysts at SBICAP Securities Ltd point out: “Growth outperformance has been driven by multiple factors including thrust on expanding penetration, mix improvement, 61 launches since CY16, of which 70% have been successful (compared to the industry’s 5-7% success rate)." CY stands for calendar year.
Last week, Nestlé India stock rose by about 4%, helped by the news that it will be included in the Nifty 50 index. Of course, given how pricey valuations are right now, it will be interesting to watch whether the good run continues on the bourses.
“The stock is currently valued at a price-to-earnings ratio of 61 times for CY20, which calls for sustained, healthy double-digit earnings growth (like in CY01-CY12, when earnings grew 20%)," wrote SBICAP analysts in a report on 6 August. The broker, however, sees revenue and earnings CAGR at about 11% each over CY18-21.
Having said that, if financial performance remains consistent, Nestlé India’s valuations could well find a reason to sustain, even at these levels.