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Margin headwinds loom for Nestlé India after unappetizing June quarter
MUMBAI: Shares of Nestle India Ltd (NSE: NESTLEIND)have fallen nearly 3% since the company announced its June quarter (Q1FY25) results on Thursday. The numbers reflect a significant slowdown in the packaged food company’s growth with revenue growing just 3.3% year-on-year. Analysts at Kotak Institutional Equities said this is the lowest print since the Maggi crisis in 2015 (excluding the June 2020 Covid quarter). Nestle said the external operating environment posed challenges such as low consumption growth, persistent food inflation and volatile commodity prices.
In Q1FY25, volumes and sales mix grew 1% – a multi-quarter low. In comparison, Hindustan Unilever Ltd, which also announced June quarter results this week, said a July 25 report by Jefferies India, “The trend differs from other peers which are seeing sequential growth led by rural segment in the first quarter, although this may not be strictly comparable given Nestle’s high urban prominence and unique portfolio segmentation.”
Nestle said five of its top 12 brands saw double-digit growth. Encouragingly, despite the scorching heat in many parts of the country, its beverages business recorded strong double-digit growth. The company said ready-to-eat dishes and cooking accessories also maintained their growth momentum, with innovations contributing nearly 30% of the growth in the quarter. In addition, e-commerce is growing in double digits and accounted for 7.5% of domestic sales. The company continued its Rurban strategy of expanding its distribution footprint (added over 800 new distribution touchpoints in Q1) and increased its village coverage from 5,000 in the previous quarter to nearly 205,000 villages.
Profitability concerns
Talking about profitability, lower raw material costs meant a 283 basis point increase in gross profit margin to 57.6% year-on-year. One basis point is 0.01%. But cost pressures are mounting, with commodity prices hovering at all-time highs in coffee and cocoa. Also, there is a structural increase in the cost of cereals and pulses, driven by the increase in MSP. Also, there is relative stability in milk prices, edible oils and packaging. Against this backdrop, margin pressure cannot be ruled out in the coming months. To deal with this, it becomes important to evaluate the extent of price hikes that Nestle India will make, to assess how margins take shape.
But expectations have come down. Analysts at Jefferies have cut their earnings per share forecasts for FY25-28 by 3-8%, factoring in the first quarter setback and inflationary headwinds seen in coffee in the last few months. “Revenue forecasts have been cut by 2% due to a weak start to the year, along with some revisions to margins, resulting in a 2-3% drop in earnings per share forecasts for FY25-27,” Kotak analysts said.
Investors in Nestle India stock have had a tough ride so far in 2024, as the stock has underperformed the sectoral benchmark Nifty FMCG index. The stock is trading at around 70 times FY25 earnings based on Kotak estimates. Valuations are expensive. Irrespective of the company’s execution prowess, the pace of recovery is crucial to determine further upside in the stock.
Disclaimer: The views and recommendations expressed in this article are the views of individual analysts. These do not represent the views of GoldSilverReports.com. We advise investors to check with certified experts before making any investment decisions.
