Milk, beverages a drag on Nestle

While beverages posted 1.3% volume growth, milk products declined for the fifth year in a row

Although Nestle India seems to have recovered most of the lost ground in its Maggi noodles portfolio, pressure in other businesses refuses to subside. This is visible in its results for the March quarter, when domestic sales growth came off from 17 per cent in the December quarter to only 10 per cent. 

Analysts say this growth is disappointing, given the low base in March 2016 quarter, when domestic revenues had dipped nine per cent year-on-year. Growth in domestic revenues in the preceding three quarters was in the 17-38 per cent range on the back of a healthy bounce-back in its Maggi portfolio. Exports (seven per cent of total revenue) remained flat in the March quarter on weak showing in Nepal and Bhutan. 

While the company did not share details of segmental volume performance in its quarterly results, a look at its 2016 annual report throws up some insights. Volume growth in all four segments had contracted in 2015. These are milk products (50 per cent of 2016 revenues), prepared dishes — which houses the Maggi brand (24 per cent of revenues), beverages (14 per cent) and chocolates (12 per cent). 

In 2016, the prepared dishes’ volumes grew 73 per cent as Maggi regained its leadership position. Chocolates, too, witnessed volume growth of 7.7 per cent in 2016 against a fall of 19.5 per cent in the preceding year. While beverages posted a mere 1.3 per cent volume growth, Nestle’s largest segment of milk products continued to see declines for the fifth year in a row. 

Analysts at Axis Capital, in a report dated May 12, said, “There has been a structural slowdown in the core baby food segment.” Rising competition from Danone, Amul and Abbott is another reason behind this pressure. Relatively higher prices of Nestle’s products are yet another factor. 

Nitin Mathur, consumer analyst at Jefferies, says, “A key monitorable now is if Nestle will be able to defend the turf in the milk and nutrition segments as competition is heating up.” 

Even as Maggi has grown at a healthy growth rate, its market share is still at 60 per cent as compared to the mid-70 per cent levels witnessed before the crisis. Whether this is an indication of some permanent loss of market share due to high competition should be known in the coming quarters. 

Meanwhile, a surge in input costs in the March quarter coupled with higher other expenses (towards brand building and ad spends) pulled down Nestle’s earnings before interest, tax, depreciation and amortisation (Ebitda) margin by 169 basis points, year on year, to 20.8 per cent. This was offset partly by a lower tax rate, higher finance income, lower finance expenses and absence of any provisions for contingencies. But for these items, the year-on-year net profit growth would have been even lower than the 6.8 per cent registered during the quarter to Rs 307 crore. The quarterly results were disappointing. 

Given these pressures, it may be difficult to justify Nestle’s premium stock valuations. The stock trades at 43 times 2018 estimated earnings, much higher than its historical average valuation of 37 times and at about a 30 per cent premium to the FMCG sector.