Nestle India's shares fell over 3% on Thursday as investors gave a thumbs down to the dairy and food company's first quarter results.
The company's net profit in Jan-March was up just 8% from a year ago to Rs 275.7 crore, while net sales rose 13% year-on-year to Rs 2047.5 crore.
Nestle's earnings were impacted by higher depreciation and provisions for contingencies and lower other income in the three-month period.
But analysts are more worried by decline in volumes.
It's a wake-up call for Nestle as exaggerated focus on margins has likely impacted volume growth, said Manoj Menon and Amrita Basu of Kotak Institutional Equities.
"Our on-the-ground research suggests higher consumer promotions are likely indicating stress on volumes after 30% price increase in milk products over the past two years. While we believe in the market potential for Nestle's categories, we do not share the street's optimism that Nestle's capacity expansion by itself will lead to volume growth (economic environment, execution capabilities including reasonable product pricing also matter, in our view)," the analysts said.
Nestle India's CMD Antonio Helio Waszyk said as anticipated 2012 was turning out to be a challenging year as low consumer confidence and the economic environment was creating pressure across sectors.
MF Global analysts Naveen Kulkarni and Ennette Fernandes said Nestle's volume growth may have contracted by 4% year-on-year against their expectation of 5% uptick in the first quarter.
"We have downgraded our earnings estimates by 6% on account of slower revenue growth, higher operating cost structure including estimated sharp increase in ad spends to drive flagging volume growth and higher than expected below the line cost items," they said.
MF Global downgraded Nestle India to "neutral," Kotak advises investors "sell" the shares.
Morgan Stanley's Nillai Shah and Girish Achhipalia too were disappointed with Nestle India, and said the stock would correct post the weak revenue growth, which was lowest in last five years.
However, Morgan Stanley still maintains "overweight" rating on the company, which makes Nescafe instant coffee, Maggi noodles and Kitkat chocolates.
"We believe that packaged foods in India are nearing an inflection point and are likely to deliver around 1,000 bps growth ahead of disposable income growth for the next 10 years. Nestle is well placed to capitalize on this growth potential," Shah and Achhipalia said.
At 11:45 hrs, Nestle India shares were down 3.2% at Rs 4,780 on NSE.