Nestle India Dec qtr  soft  on  volumes;  long-term outlook upbeat

On Friday, the stock closed at  ₹19,021.30 apiece and that is almost 10% lower than its 52-week high seen in October (Photo: Mint)
On Friday, the stock closed at 19,021.30 apiece and that is almost 10% lower than its 52-week high seen in October (Photo: Mint)

Summary

A primary factor that has weighed on revenue growth last quarter was the subdued volume performance. Q4 volume growth (including mix impact) was muted at below 4% versus 7-8% in prior quarters.

Nestle India Ltd’s year-on-year operating revenue growth for the three months ended December (Q4CY22) at nearly 14% was a sore point. This is the slowest growth seen in the past three quarters. The company follows a January to December financial year.

A primary factor that has weighed on revenue growth last quarter was the subdued volume performance. Q4 volume growth (including mix impact) was muted at below 4% versus 7-8% in prior quarters and was lowest since June 2020, said analysts from Jefferies India. Lower-than-expected volume growth last quarter was mostly driven by a weak show in the low unit packs (LUPs) of Maggi noodles. Steep price increases in the price sensitive LUPs of Maggi noodles hurt these volumes. Here, peers have maintained prices, resulting in Nestle losing share. However, the company told analysts that the share loss due to LUPs price hike is temporary and that it can recoup volumes over a period. The pace of volume recovery would be a key monitorable ahead. Overall, this means that the revenue growth in the December quarter was largely price led.

Graphic: Mint
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Graphic: Mint

Even so, the steep price hikes have helped the company perform better on the margin front. While gross margin was lower y-o-y, the measure has risen by about 210 basis points sequentially to 54.9% One basis point is 0.01%.

Meanwhile, Nestle is looking to invest 5,000 crore in capital expenditure (capex) over the next three years. Jefferies analysts reckon the company’s long-term outlook appears upbeat given the capex plans. There is some respite on the costs front. The company maintains edible oil prices have moderated towards the last quarter and with some respite in crude oil, input materials such as packaging have witnessed relief.

Nevertheless, analysts reckon the stock’s pricey valuations capture the bright outlook for the foreseeable future adequately, leaving limited room for large upsides in the near-term. “Changes to the model have led to about 6% and 2% reduction in CY23 and CY24 earnings per share (EPS), respectively. However, sales forecasts have been increased in CY24, owing to capacity expansion and good momentum in prepared dishes and chocolate volumes," said analysts from Motilal Oswal Financial Services. However, the broking firm has a ‘Neutral’ rating on the stock and values it at 55x March 2025 EPS to arrive at its target price of 19,875. On Friday, the stock closed at 19,021.30 apiece and that is almost 10% lower than its 52-week high seen in October.

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