Nestle India: Sweet spot
Share of Nestle India gained 5% to Rs 17,023 on the BSE on Tuesday. The stock has risen 7% in the past two trading days after the company reported stronger-than-expected recovery with double-digit sales growth for the quarter ended September 2020 (Q3CY20). The board has declared an interim dividend for 2020 of Rs 135 per equity share amounting to Rs 1,302 crore, which will be paid on and from November 20, 2020.
The packaged foods company’s total sales and domestic sales both increased by 10.2%, driven by volume and mix. Export sales increased by 9.4%. The demand in Out of Home channel improved through the quarter but continues to be impacted by COVID. The company stated that double-digit growth was seen in the Noodles, Coffee, and Chocolates categories.
However, the company reported flat net profit of Rs 587 crore in Q3CY20 against Rs 595 crore in Q3CY19 due to lower effective tax rate in the base. Ebitda (earnings before interest, taxes, depreciation, and amortization) margin improved to 24.2% from 23.1% during the quarter.
The net profit after tax are not comparable as the cumulative effect of lower tax rate made applicable from April 1, 2019 was adjusted fully in quarter ended September 2019.
After a blip in Q2CY20 (led by supply-chain issues), the company resumed double-digit sales growth in Q3CY20 – which appears likely to sustain given the continued benefits of an in-home consumption boost. Lower milk, wheat, and sugar costs also led to sequential gross margin improvement. Consequently, Ebitda also grew in double-digits, a first after seven quarters.
The capex of Rs 2,600 crore over the next 3–4 years would boost longer-term growth prospects. However, it also signifies an end to the sweet spot that the company enjoyed until CY19, when it was able to take advantage of erstwhile significantly underutilized capacity. It benefited particularly after the resumption of strong sales growth, driven by a change in leadership post the Maggi crisis in 2015.
Nestle India’s domestic business grew 10%, beating estimates by 3%, with strong performance from noodles, coffee and chocolates, benefitting from in-home consumption.
Softer commodity prices and control on other overheads are likely to help maintain a positive margin outlook.
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