The company follows a January to December financial year
The company follows a January to December financial year

Nestlé stock factors strong growth but watch for the margin squeeze

  • Nestlé India’s relatively higher exposure to urban consumers has kept sentiments upbeat for the stock
  • The stock’s meaningful outperformance vis-à-vis the broader markets also mean valuations capture a good share of the optimism

Fast-moving consumer goods (FMCG) major Nestlé India Ltd’s investors are a happy lot. So far in 2019, the company’s shares have appreciated as much as 32%. In comparison, the Nifty 100 index has increased at 11%. Nestlé India’s relatively higher exposure to urban consumers has kept sentiments upbeat for the stock.

Graphic: Santosh Sharma/Mint
Graphic: Santosh Sharma/Mint

Click here to view enlarged graphic

“The company has been able to sustain the growth momentum because inflationary factors have aided growth in baby foods, steady new launches under Maggi continue to aid growth and margin has expanded steadily led by better growth in premium offerings and cost operating leverage," pointed out a report from SBICAP Securities Ltd on 19 December.

But the stock’s meaningful outperformance vis-à-vis the broader markets also mean valuations capture a good share of the optimism. Currently, the stock trades at 61 times estimated earnings for 2020, based on Bloomberg data.

The company follows a January to December financial year. Though Nestlé India has been growing faster than some of its peers, growth rates are slower than what valuations suggest. For the nine months to September (9MCY19), revenue has increased by about 10% year-on-year (y-o-y) to 9,164 crore. Within this, domestic revenue, which accounts for almost 95% of overall revenue, increased by 11%, while revenue from exports has declined. During the period, the company’s net profit increased 18% on the back of faster growth in other income and lower depreciation costs.

Going ahead, new launches should support revenue growth. Under the Maggi brand, the company has also introduced ready-to-eat poha and upma. “We don’t know yet how this will play out, but it is understandable that Nestlé would look at Indian cuisine for incremental growth," said Nitin Gupta, analyst, SBICAP. “While this is a difficult category, it helps here that Nestlé has a strong brand recall."

In 9MCY19, earnings before interest, tax, depreciation and amortization (Ebitda) margins declined y-o-y, primarily owing to higher raw material costs. Analysts said, to boost volumes, the company has taken limited price hikes. “Focus on volume growth and new launches will limit scope for margin expansion, which will keep the earnings growth trajectory muted versus consensus expectation, in our view," wrote Varun Lohchab, equity analyst, Jefferies India Pvt. Ltd, in the September quarter results review report.

Close
×
My Reads Logout