Nestle Q1: Input cost rise, Sri Lanka crisis could hit profit, say analysts

Analysts expect the maggi maker to report muted profit in the March quarter 2022 due to sluggish rural demand sentiment and input cost inflation.

Nestle Q1 preview: Analysts expect FMCG giant Nestle India to report muted profits for March quarter due to subdued domestic demand and commodity cost inflation. The company had posted a 1 per cent year-on-year (YoY) decline in its profit at Rs 587 crore in the December quarter. The company is slated to report its earnings on Thursday, April 21, and follows January-December financial year.

As the ongoing war between Russia and Ukraine exacerbated prices of wheat, edible oil, and crude, Nestle India hiked prices of Maggi noodles, tea, coffee, and milk products in a bid to offset margin pressure. Given this, analysts expect domestic revenue to grow anywhere between 5 per cent and 10 per cent YoY. The Maggi maker had seen revenue growth of 10 per cent YoY in Q3FY22.

Yet, the price hike may not be enough to cushion margin as analysts estimate input cost inflation to dent gross margin between 200 to 220 basis points (bps) YoY.

At the bourses, Nestle India has slumped over 7 per cent this year, as against 0.59 per cent rise in S&P BSE FMCG index. The stock has outperformed peers like Hindustan Unilever and Britannia Industries that tanked over 8 per cent and 7 per cent respectively during the same period.

Factors to watch out

Investors will track the management’s commentary over consumption trends, rural demand sentiment, raw material prices amid supply chain imbalance due to the Ukraine war, export numbers due to the Sri Lanka economic crisis, pricing action, and new product launches.

Here is what top brokerages expect from Nestle India’s Q1 numbers:

Axis Securities: The brokerage firm forecasts moderate revenue growth of 5.5 per cent YoY at Rs 3,800 crore on account of weak consumer demand, sluggish rural sentiment, and exports. On the other hand, raw material prices could dent gross margin by 96 bps YoY. However, with cost rationalization measures, analysts see margin pressure to expand sequentially by 190 bps.

ICICI Securities: Analysts expect 10.4 per cent YoY revenue growth led by price hike and surge in volumes. The brokerage firm expects 205 bps contraction YoY in margin in Q4 due to commodity cost inflation. However, with reduction in ad-spend and cost saving, they expect operating margin to contract by 110 bps YoY. On the other hand, net profit is estimated to grow at 4.5 per cent YoY to Rs 629.4 crore. 

Kotak Securities: The brokerage firm pencils broad-based domestic revenue growth with recovery in out-of-home consumption. Analysts model 9 per cent revenue growth YoY on two-year CAGR basis. Meanwhile, they expect gross margin to contract by 215 bps YoY due to input cost inflation.

Sharekhan: It expects exports to remain muted due to economic unrest in Sri Lanka. It also anticipates decline in operating profit, with PAT declining by 3 per cent YoY  to Rs 585 crore. While the brokerage firm expects gross margin to reduce by 227 bps YoY, operating margin could likely contract by 212 bps YoY.