In the Indian fast-moving consumer goods (FMCG) world, Nestlé India Ltd is the odd man out. At a time when FMCG firms are finding it difficult to boost sales, Nestlé India’s December quarter year-on-year revenue growth of 8.7% is much better than that of its peers. As the chart shows, the firm’s growth is more than double the industry average growth rate of 4%.

“Steady show in a weak environment affirms Nestlé India’s supremacy," said analysts at SBICAP Securities Ltd in a report on 13 February.

Of course, investors took note of this. The Nestlé India stock touched an all-time high on NSE in Friday morning’s early deals. In fact, the stock of the company, popular for its Maggi noodles, is the priciest in the FMCG sector as far as valuations go. The stock trades at about 69 times estimated earnings for 2020, based on Bloomberg data. Nestlé India follows a January to December fiscal year. In comparison, shares of FMCG leader, Hindustan Unilever Ltd, trade at 56 times estimated earnings for FY21.

Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

Nestlé India’s domestic sales, which account for 94.5% of revenue, have increased by 10% year-on-year. The company has clocked double-digit domestic sales growth consistently over the past few quarters. Exports, which account for the remaining revenue, have declined by nearly 10%, as coffee exports to Turkey were lower. However, since exports form a smaller portion of its overall revenue, it doesn’t move the needle in a big way.

Gross profit margins contracted by a little over 200 basis points. A basis point is one-hundredth of a percentage point. Higher commodity prices, especially those of milk and its derivatives, weighed on gross profit growth. “The trend of higher commodity prices witnessed in recent quarters is likely to continue in the near future," said the company.

Thankfully, other expenses declined, helping Ebitda (earnings before interest, tax, depreciation and amortization) margins to expand slightly.

Overall, Nestlé India’s net profit of 473 crore is marginally ahead of a poll of Bloomberg analysts’ estimates.

Where do we go from here? Analysts expect the company’s relatively better run on revenue to continue. “Growth visibility remains better than peers but upsides to earnings are not visible given steep input inflation and higher spends to drive growth," said analyts at Emkay Global Financial Services Ltd in a report on 13 February.

In any case, Nestlé India’s valuations suggest a good share of the optimism is baked into the stock. According to SBICAP, current valuation calls for sustained 20%-plus earnings growth. And, this is a tall ask.

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