Launches, innovation key to Nestle's growth

Valuations appear full, limiting significant upsides from here on

Even as Nestle India (Nestle) reported its highest year-on-year domestic revenue growth in eight quarters, driven by price hikes, volume growth at low single digits continues to disappoint. The 9.7 per cent June quarter domestic revenue  growth was driven by price hikes in milk products and infant nutrition portfolio. While the company is playing on recovery in urban demand, it is likely to be only gradual, believe analysts. Slowing volumes have been a key concern for Nestle in recent quarters. Apart from weakening consumption demand, the company has been slow on innovations and consequently there have not been many new launches. However, under Etienne Benet, the new MD, this seems to be changing.

Nestle launched three new products in the June quarter, namely, low fat Nestle Sweet Lassi, Nestle Buttermilk with ayurvedic herbs and spices and Maggi Oats noodles, a move cheered by most analysts. Edelweiss Securities’ Abneesh Roy believes that the company has finally embarked on course correction which is bound to spur growth.

While domestic sales picked up in the quarter, exports remained under pressure, up 4.1 per cent year-on-year to Rs 181 crore, due to a higher base and 7.1 per cent fall in exports to affiliates. Overall, net sales grew 9.3 per cent to Rs 2,419 crore. Even after taking price hikes, Nestle’s EBITDA margin contracted 180 basis points to 20.6 per cent, thanks to milk prices being on the boil, pushing up input costs by 238 basis points to 47.6 per cent of sales.

Positively, the company paid off the last instalment of $35 million towards its ECB of $192 million, leading to lower interest costs (down 55.3 per cent to Rs 4 crore). This along with higher other income (up 50.1 per cent to Rs 23 crore) due to improved yields led to better than expected net profit of Rs 288 crore, up 6.1 per cent). Going forward, the company is revamping its coffee brand Nescafe to boost growth. Success of its new launches will be the  key for future prospects.

For now, the stock appears expensive at 42.7 times CY14 estimated earnings versus historical average one-year forward price/earnings ratio of about 29 times. Of the 24 analysts polled by Bloomberg this month, two have a Buy and 11 each have a Hold and Sell rating on the stock. Their average target price stands at Rs 5,058, about 6 per cent lower than the current market price of Rs 5,413. Thus, long term investors can consider the stock on dips.