Nestle India’s September quarter revenue was broadly in line with expectations, although margins were a sore point. The gross profit margin contracted by 242 basis points (bps) year-on-year to 55.5 percent in the three months ended September owing to higher commodity prices. One basis point is one-hundredth of a percentage point.
Nestle India’s margin stood at a 17-quarter low, according to ICICI Securities. Investors can expect margin pressures to continue, given the steep rise in input costs.
“Price outlook for key categories like wheat, coffee, edible oils remains firm to bullish while costs of packaging materials continue to increase amid supply constraints, rising fuel and transportation costs. Input prices expected to be on bullish trend both globally and to some extent locally,” Nestlé India said in a statement on October 19.
Nestlé India’s total sales increased 9.6 percent to Rs 3,865 crore from a year earlier. Exports accounted for about 5 percent of operating revenue and grew by a mere 1 percent. Domestic sales contributed the remaining revenue with a 10 percent growth.
Maggi Noodles and Maggi Masala‐ae‐Magic posted healthy growth. On the other hand, Maggi Sauces saw somewhat muted growth owing to decreased in‐home consumption, high base and increased competitive intensity.
Also read: Nestle India: Should you buy, sell, or hold it after Q3 figures?
The toddler range (Ceregrow, Nangrow) and Milkmaid posted strong double-digit growth. Power brands Kitkat, Munch and Milkybar saw high double-digit growth.
Overall, the subdued margins, higher finance costs and tax outgo meant Nestlé India’s net profit grew 5 percent to Rs 617 crore.
To be sure, the growth outlook for packaged foods in India is robust and that augurs well for Nestlé India.
“Our long-term positive view is intact driven by (1) structural tailwind from increasing consumer propensity to consume packaged foods, (2) continued investment behind brands, (3) renewed focus on distribution expansion, particularly rural and e-commerce and (4) significant increase in capex (Rs 2,600 crore planned over CY20-23 which is = cumulative capex of CY12-19),” ICICI Securities analysts said in a report on October 20.
The only hiccup is that valuations of Nestlé India shares are pricey. The stock has advanced by about 14 percent from its pre-pandemic highs in early 2020.
As analysts from Motilal Oswal Financial Services point out, “Valuations at 60.8 times CY23E earnings per share (EPS) are, however, expensive and do not offer any upside from a one-year perspective. We value the company at 60 times CY23E EPS to arrive at our target price of Rs 19,100.”
Nestlé India shares fell 1.5 percent to Rs 19,092.05 on the BSE at 12:46 pm.
The packaged foods company follows a January-to-December financial year and the September quarter is its third.