MUMBAI
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Nestlé India Ltd’s shares have dropped by about 3% since its June quarter (Q1FY25) results were announced on Thursday. The numbers mark a substantial slowdown in growth of the packaged foods company with revenue increasing by a mere 3.3% year-on-year. This is the lowest print since the Maggi crisis in 2015 (excluding the June 2020 Covid quarter), said analysts from Kotak Institutional Equities. Nestlé maintains that the external operating environment had challenges such as lower consumption growth, concerns on continued food inflation and volatile commodity prices.
In Q1FY25, volume and sales mix increased by 1%—a multi-quarter low. In comparison, Hindustan Unilever Ltd, which too announced June quarter results this week, clocked an underlying volume growth of 4% in Q1, much better than the 2% growth seen in each of the previous three quarters. “Trends are unlike peers who are seeing a sequential uptick in Q1 led by rural, although this may not be strictly comparable given Nestlé’s higher urban salience and unique portfolio split,” said a report by Jefferies India on 25 July.
Nestlé said five out of its top 12 brands saw double-digit growth. Encouragingly, its beverage business reported strong double-digit growth, despite a scorching summer across many parts of the country. Prepared dishes and cooking aids too maintained its growth momentum, with innovations contributing to about 30% of the growth in the quarter, said the company. Further, e-commerce is growing at double-digit and has 7.5% of the domestic sales. The company continued its RUrban strategy of expanding its distribution footprint (adding over 800 new distribution touchpoints in Q1) and had increased its village coverage by 5,000 to about 205,000 villages last quarter.
Profitability concerns
Coming to profitability, lower raw material costs meant 283 basis points year-on-year expansion in gross profit margin to 57.6%. One basis point is 0.01%. But cost pressures are inching up with commodity prices in coffee and cocoa hovering at all-time high. Also, cereals and grains are going through a structural cost increase led by higher minimum support prices. At the same time, there is relative stability in milk prices, edible oils and packaging. Against this backdrop, pressure on the margin cannot be ruled out in the coming months. To combat this, the extent of price hikes Nestlé India manages to take, becomes crucial to evaluate how much margins shape up.
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But expectations have moderated. Jefferies’ analysts have cut its FY25-28 estimated earnings per share by 3-8% to factor in Q1 miss and inflationary headwinds seen in coffee in the last few months. “A weak start to the year drives a 2% cut in revenue forecasts, with some tweaks to margins, resulting in a 2-3% decline in FY25-27 estimated earnings per share,” said Kotak’s analysts.
Investors in the Nestlé India stock have had a tough ride so far in 2024, as the shares have underperformed the sectoral benchmark Nifty FMCG index. The stock trades at about 70 times FY25 earnings based on Kotak’s estimates. Valuations are pricey. Notwithstanding the company’s execution prowess, the pace of recovery is crucial to determine further upsides in the stock.
