Nestle: EBITDA margin at 23 quarter high

Price hikes aid profitability even as revenue growth remains weak

Nestle India’s results for the March 2015 quarter came in slightly below expectations, the exception being the beat on margins. The company’s net sales grew 8.4 per cent year-on-year (its lowest sales growth over the past four quarters) to Rs 2,507 crore and was 3.6 per cent short of the Bloomberg consensus estimate of Rs 2,600 crore. Notably, sales growth looks optically higher given the low base of last year (net sales grew 2.9 per cent) and is largely driven by price hikes. According to analysts, the company posted flattish volume growth in the quarter in line with the 0-2 per cent volume growth witnessed in the past few quarters. Weak consumption demand along with intensifying competition in chocolates and noodles business from Hindustan Unilever, ITC and Kraft are key pressure points resulting in the weak top line growth in the quarter. Healthy traction in export revenues, which grew 19 per cent year-on-year to Rs 174 crore, too, aided top-line in the quarter.

Price hikes and lower input costs helped improve margins in the quarter. Input costs fell by a sharp 542 basis points costs to 44.3 per cent of sales fuelling a 269 basis points expansion in Ebitda margin to 24.4 per cent in the quarter. Large part of the margin increase was on account of price hikes as the benefits of falling milk and derivatives prices was largely offset by higher priced finished goods inventory manufactured at the start of the quarter when milk prices were relatively higher. Interest costs fell 66.8 per cent to Rs 3 crore as the company fully paid off its outstanding external commercial borrowings. Consequently, net profit came in at Rs 320 crore and grew 23.7 per cent year-on-year. This number, too, fell short of Bloomberg consensus estimates of Rs 333 crore by 3.8 per cent. Net profit growth looks slightly higher given that the year-ago quarter witnessed a net profit decline of seven per cent.

Going forward, analysts remain positive on the company and believe it is highly levered to potential revival in urban demand. This, coupled with the company's efforts, could push volumes, albeit gradually. Continued softness in input costs, further price hikes and improving mix in favour of high-margin products such as Maggi, Lactogen (infant nutrition) could provide additional impetus to margins going forward. Nestle's focus on premiumisation across its portfolio (chocolates, confectioneries, prepared dishes, beverages, milk) augur well for its margins going forward. While the company is stepping up innovation to push volumes and increase its competitive positioning, analysts will keenly eye the success of these efforts.

At Friday's closing price of Rs 7,013, Nestle scrip trades at 44.9 times CY15 estimated earnings and appears to be fairly valued.