Home / Markets / Mark To Market /  Nestlé India’s June qtr growth moderates, but stock is pricey

Nestle India Ltd’s June-quarter results (Q2CY21) are not appetizing. This is at a time when the base quarter is favourable as the same quarter last year was terribly affected owing to the disruptions caused by the covid-19 lockdown. Nestlé India follows a January to December financial year and the June quarter is its second.

The packaged foods company’s revenues for the June quarter increased by 13.8% year-on-year (y-o-y) to 3,462 crore. Note that revenues in Q2CY20 had grown by just 2% y-o-y. Credit Suisse Securities (India) Pvt. Ltd said Q2CY21’s revenue performance implies a 7.7% two-year CAGR (compound annual growth rate), which is a moderation.

“While Nestlé’s growth rate is healthy, the company is no longer the outlier within the FMCG industry, as it was over CY16-20 when it grew ahead of all other FMCG companies," said Credit Suisse analysts in a report on 28 July. FMCG refers to fast-moving consumer goods.

Nestlé derived more than 95% of its June-quarter revenues from domestic sales and the rest came from export sales. Domestic sales rose 13.7% y-o-y last quarter, largely driven by volume and mix.

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E-commerce channels saw robust growth of 105%, contributing 6.4% of domestic sales. Export revenues grew at a faster rate of 17.7%, but this comes on a lower base.

While the revenue show has been underwhelming, it is not as if margins have impressed. Commodity prices have been rising across oils and packaging materials and this impacted Nestlé, too. For the June quarter, gross margin rose 62 basis points y-o-y, but the measure was 157 basis points lower vis-à-vis the March quarter. One basis point is one-hundredth of a percentage point.

Meanwhile, Nestlé India has already invested 1,000 crore so far out of its capital expenditure plan of 2,600 crore (spread over three-four years).

“While this is necessary for the long-term growth of the company, it could have an adverse impact on near-term earnings as capacity utilization will take a few years to ramp up. There could be some pressure on earnings due to the rise in depreciation and other costs related to starting up new capacities," said Credit Suisse’s analysts.

As things stand, the Nestlé stock has meaningfully underperformed the broader Nifty 50 index in the past one year. But valuations aren’t cheap what with the stock trading at nearly 62 times estimated earnings for calendar year 2022, based on Bloomberg data.

Emkay Global Financial Services Ltd said it does not find the valuation attractive.

The brokerage added in a report on 29 July, “Overall growth trends have been largely steady. Increased in-home consumption and Nestlé’s innovation and distribution push have not led to any further improvement in growth as per expectations."

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