Nestle India could sustain sales growth outperformance in coming quarters

Near-term margins, however, may remain under pressure

Powered by double-digit growth across segments, the Indian subsidiary of the world’s largest food and beverage maker, Nestle India, posted a strong revenue performance in the September quarter for the 2022-23 financial year (Q2FY23). Sales growth for the company, which owns brands such as Nescafe, Maggi, Milkmaid, Sunrise, and KitKat among others, was up 18 per cent year-on-year (YoY), led by a rise in volumes, product mix and realisations.

Edelweiss Research estimates that volumes would have grown by 8 per cent while a price hike of 10 per cent reflects strong pricing power in a quarter of hyperinflation.

What aided the company in achieving its highest quarterly growth over the last five years was higher advertising and promotions, distribution expansion and festival season demand.

Nestle India had posted a 9.6 per cent YoY growth and 16.1 per cent in the preceding quarter. This helped improve the three-year annual growth rate to 13 per cent. After a muted show over the last few quarters, exports registered a healthy growth of 15.7 per cent, aided by new markets and expanding product categories.

The company indicated that new emerging formats of quick commerce and click and mortar (both online and offline retail), fuelled growth for the ecommerce channel; the segment accounted for 7.2 per cent of overall sales.

In order to expand its online presence, the consumer major has launched a direct-to-consumer platform which will initially cater to the National Capital Region and will be expanded to other parts of the country. Most brokerages expect the company to sustain its growth momentum, given portfolio and distribution expansion.

While revenue growth has been strong, profitability has been under pressure due to higher commodity costs. Gross margins, at 52.8 per cent, was down 293 basis points with margin pressures much worse than what analysts estimated. The company highlighted that they were witnessing early signs of stability in prices of some commodities such as edible oils and packaging materials. On the other hand, costs of fresh milk, fuels, grains and green coffee remain firm, given increase in demand and volatility. This could weigh on near-term profitability.

Analysts, led by Krishnan Sambamoorthy of Motilal Oswal Research, however, say that gross margins may have bottomed out in the Q2FY23 and a recovery, led by lower input costs and better realisations is imminent in the coming quarters. While most brokerages did not make changes to its earnings per share (EPS) estimates, Edelweiss Research has increased its EPS by 3.8 per cent each for calendar year 2023 (CY23) and CY24 on the back of revenue outperformance and easing palm oil prices.

While September quarter performance was strong and the stock gained 1.5 per cent in trade on Thursday, valuations could limit further gains. At the current price, the stock, which has gained 9 per cent since its October lows, is trading at 65.7 times its CY23 earnings estimates.