In the Indian consumer staples world, investors of Nestle India Ltd, the company popular for its Maggi noodles, are a happy lot. At a time when the Nifty FMCG has declined 5% so far this calendar year, the Nestle India stock has risen nearly 8%.
This is after taking into account the 4% gain in the share price since it announced its June quarter results. One reason for the optimism is that the company’s revenue growth in the June quarter was encouraging. Nestle India follows a January to December financial year and the June quarter was the second one for the company.
Domestic revenue, accounting for nearly 95% of total revenue, increased 13% over the same period last year to Rs2,835 crore. Putting it in perspective, domestic revenue had risen 10% in the March quarter. To be sure, in the backdrop of the consumption slowdown in the economy, Nestle India’s June quarter performance appears commendable. According to ICICI Securities Ltd, domestic volume growth was 11% compared with 9.3% during the March quarter and continues to be best in India consumer staples.
“This outperformance was as expected given its predominantly urban portfolio, which is the least impacted (as yet) from the ongoing consumption deceleration," pointed out the brokerage firm in a report on 4 August.
The company said growth was helped by a combination of volume & mix, positive influence of sales to canteen stores department (CSD) and sale of surplus fat. On the other hand, export revenue fell 14% year-on-year due to lower coffee exports to Turkey. Overall, it helped that contribution from exports was relatively much smaller.
Gross profit margin, however, contracted 132 basis points year-on-year to 58%, due to sharp increase in milk prices. This, in turn, weighed on net earnings. Net profit increased about 11% to Rs434 crore. One basis point is one-hundredth of a percentage point.
The company has pointed out that the environment continues to be challenging with headwinds in commodity prices and softer demand conditions. It will be interesting to watch whether these factors impact profitability, going ahead. In any case, the Nestle India stock trades at a high price-to-earnings valuation of nearly 60 times estimated calendar year 2019 earnings. As such, investors seem to have factored in a good portion of the brighter picture in he price, leaving little room for meaningful upside in the near term.