Nestlé India: Urban demand boosts earnings, operating margin

FMCG major Nestlé India delivered strong performances during the year to 2019 owes to Maggi Noodles, Kitkat, Nestlé Munch, Ceregrow, Maggi Masala-ae-Magic, Nescafé Ready-To-Drink and Nangrow, the products that continue to tickle urban consumers tastebud.
In fact, Nestlé India managed to outperform its peers by clocking double-digit sales growth in a tepid demand scenario, benefiting from relatively lower exposure to rural India (25% of sales) which has seen a significant slowdown in demand from past few quarters.

Nestlé India’s net profit grew at its fastest pace in six quarters, defying the broader slowdown that affected everyone from the makers of soaps and shampoos to cars and appliances.

Net profit rose 38.4% on the year, the fastest pace since the quarter ended June 2018, to Rs 473 crore in the October-December period.

Nestlé India – that follows January-December fiscal – reported an 8.7% rise in its revenue at Rs 3,149 crore during the quarter.

This comes at a time Indians cut back spending amid stagnating wage growth, dragging the economy’s GDP to a decade-low.

Value growth—a combination of volumes and price-led expansion—for fast-moving consumer goods makers slowed for the fifth straight quarter.

Nestlé India’s domestic sales, too, increased 10% on year to Rs 2,961 crore during the quarter. Its exports, however, declined 9.5% to Rs 170 crore as exports to Turkey fell. Exports contribute 6% to overall revenue.

The company’s operating margin expanded to 21.5% in the fourth quarter from 19% a year ago.

But its gross margins contracted 220 basis points to 56.8% as raw material costs rose, which was because of an increase in the prices of milk and dairy products. Raw material costs rose 22% to Rs 1,469 crore during the quarter.

For the full financial year ended December 2019, Nestlé India’s profit rose 22% year-on-year to Rs 1,970 crore. Revenue rose 9.5% on year to Rs 12,369 crore.

Domestic sales increased 10.9% to Rs 11,656.79 crore while Ebidta margin remained flat at 23.1%. Meanwhile, the trend of higher commodity prices witnessed in recent quarters is likely to continue in the near future.

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