Nestle India’s growth may continue to be under pressure if the raw material prices remain elevated and urban demand is muted, analysts said.
However, in the long run, its “RUrban” strategy may prove beneficial. Under it, Nestle India, which counts urban India as its majority consumer, aims to increase the company’s reach in rural and semi-urban areas.
Against expectations of 5-6% growth, the company’s revenue grew 1.3% during the July-September quarter. Its key brands faced pressure from weak demand and high raw material costs. This is the company’s slowest quarterly growth in the last eight years.
Its standalone profit jumped 8.6% to Rs 986.3 crore, compared to Rs 908 crore in the year-ago period.
The company’s gross margins stood at 56.4%, improving by 12 basis points year-on-year. Its Ebitda margins, however, fell by 144 bps YoY to 23%, primarily due to higher ad spends.
In the past few quarters, many consumer brands, including Nestle India, have raised the prices of their coffee and chocolates to tackle rising raw material costs. It was due to low supplies from major producers like Brazil and Vietnam owing to unfavourable weather conditions.
Analysts suggest this has played a role in its weak performance.
“Inflation pressure (in all major commodities – Milk, Cocoa, Coffee, and Palm oil) led to steady price hikes in the portfolio, which has started affecting sales growth,” Emkay Research said.
“We see any further inflation to be detrimental to its growth, given more than 20% cumulative price hikes in the last couple of years,” it added.
Milk prices have remained stable, but cocoa and coffee prices remain elevated. HDFC Securities considers this a key near-term risk for the company.
“Aggressive stance of competitors in the high-margin infant milk category” is another key risk for the company. Nestle has a large portfolio in this category, but several companies like Amul have been expanding there.
However, in the long run, analysts expect the company to perform well given its “RUrban” strategy.
“With the rural market anticipated to recover in the coming quarters, Nestle is well-positioned to benefit, given its substantial expansion in rural presence over the last three years, increasing its reach from 110,000 to 200,000 villages,” it said.
“Most of Nestle’s categories have been reaping the benefits of distribution penetration. Packaged food penetration has improved in the tier-2 and rural markets,” said Motilal Oswal Financial Services.
Premiumisation in some products like Nescafe Gold has also benefitted the company.
Another area that may prove beneficial is the focus on e-commerce. In its results, the company said that this channel grew 38% in terms of total sales. Its share in revenue expanded to 8.3% of domestic sales in Q2FY25 from 7.5% in Q1FY25, according to analysts.
“Quick commerce is the key driver fueled by the following brands; Kit-Kat, Nescafe, Maggi, and Milkmaid,” HDFC Securities added.
“Nestle’s portfolio is relatively safe from local competition, so it does not need much overhead costs to protect market share. We believe Nestle will be able to sustain its Ebitda margin at 24-25% for FY25/FY26,” Motilal Oswal added.
According to Axis Securities, Nestle’s Sales, Ebitda, and net profit are likely to grow at 11%, 13%, and 13% compounded annually between 2022 (CY22) and 2026-27 (FY27).
From: financialexpress
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