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Nestlé India serves up a profit miss as selling expenses mount in Q3

  • Sales have been particularly strong in prepared dishes, beverages, chocolates and milk products
  • The pleasant news is that the company’s revenue growth continues to be in double digits

Nothing energizes more than a cup of joe in the morning, and for many, that would be courtesy Nestlé India Ltd’s Nescafe coffee powder. But, such a gratification has been sadly missing from the company’s latest quarterly figures.

Its December quarter (Q3) net profit rose a mere 9.6% to 341.7 crore, the lowest in the past four quarters. To boost sales and volume growth, Nestlé India has been incurring higher other expenses. After a string of launches, it has been vigorously promoting its chocolates, confectioneries and beverages. This has pushed up its advertising and promotion costs.

Although this is typical after product launches, this has dragged down the Ebitda margin by 210 basis points. Ebitda is earnings before interest, tax, depreciation and amortization.

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There’s some more not-so-good news on the cost front. Raw material prices are beginning to inch up. Skimmed milk and wheat prices have increased about 12% in the past two months, according to analysts. That can continue to put a cap on margins in the coming quarters.

The pleasant news is that the company’s revenue growth continues to be in double digits. Revenue has been growing and has even met analysts’ forecasts, rising 11.17% year-on-year in Q3. Average revenue growth in the past eight quarters has been hovering at these levels. Analysts also mention that Nestlé India’s quarterly revenue growth has increased from single digits to low-teen levels on average.

Some of the company’s product launches have received a good response in the market. The management highlighted that almost all its product categories experienced double-digit growth. Sales have been particularly strong in product categories such as prepared dishes, beverages, chocolates and milk products, thanks to its strong brands.

The good news is that analysts are once again raising the optimism bar on Nestlé India’s revenue growth due to its string of product launches.The company has been focusing on increasing market share over profitability. “We like the improving execution of Nestlé and the focus on driving volumes and top line. Although margins would see an impact in the interim, we believe it is necessary for creating new growth drivers and increasing the overall share of growth from new categories," said Jefferies India Pvt. Ltd in a note to clients.

Shares of Nestlé India, though, have taken a whipping lately due to the lower margins. Some analysts have even lowered their target prices for the stock after its significant run-up. This past year, the stock zoomed 40%, driving valuations to 64 times trailing earnings.

As things stand, Nestlé India may have to whip up a tastier performance to maintain its past upward trajectory.

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