Nestle: Slow moving
Analysts have lowered earnings estimates as rising competition and input costs could hurt growth
The world’s largest foods company, Nestle, finds itself under pressure in India, with discretionary spending slowing over recent quarters.
Domestic sales volumes have been flat (a rise of just 1.1 per cent) in the first half of calendar year 2012, while export volumes fell sharply by 27 per cent. The fast moving consumer goods giant has more reasons to be worried, as competition has intensified in its best-selling categories such as chocolates, coffee and noodles. A big reason for this tepid volume growth is the increase in the price of milk, which contributes 49 per cent to total sales. The company has also exited low-margin segments like eclairs in chocolates and discontinued milk supply to the armed forces. These factors have contributed to sales growth moderating over the last two quarters. Also, certain products have not clicked in the market.
The milk division, for instance, saw volumes decline 2.4 per cent, though it reported value growth of 21 per cent. A series of price rises and phasing out of low-volume products have caused the drop in volumes, says Motilal Oswal Securities.
The beverages division has also seen volume growth of 0.2 per cent and value growth of 7.1 per cent. This division has seen deceleration in growth mainly due to intense competition from rivals and failure of its recent “My First Cup” campaign in Nescafe, explain analysts.
Edelweiss Securities says competition remains high with Hindustan Unilever becoming the market leader in the instant coffee segment in volume terms. Though the company has launched Nescafe Caramel Macchiato, analysts are wary.
The worst affected category is chocolates, which has seen volumes decline 15 per cent in the first half of 2012. Though volume growth in the last few quarters has been dismal, the company maintains it will not compromise on margins to boost growth.
Analysts say this might be challenging as input costs have risen sharply. Nestle’s commodity basket price index has risen 7.3 per cent from 138 in CY2011 to 148 (year-to-date) CY2012. Key raw materials like milk (up 10 per cent), sugar (six per cent) and green coffee (14.4 per cent) are up this year. It's not a surprise, therefore, that analysts have lowered revenue and earnings estimates.