Nestle to Launch Organic Food Products in Milk Products and Nutrition

Nestlé’s better urban reach could well put the company is a sweet spot when the rural market is slowing down. The company said it will launch organic food products in the ‘milk products and nutrition,’ category in the coming months. Investor would do well to watch the progress on this front. 

The company popular for its Maggi noodles delivered a satisfactory performance for the March quarter. Revenue rose 9 percent year-on-year to ₹2,982 crore in January-March. Within this, domestic sales accounting for 9.6 percent of total revenue fared well, clocking a 10.2 percent revenue growth. According to Jefferies, volume growth is expected to be about 7 percent year-on-year. The remaining share of revenue comes from export sales, which declined by 9 percent owing to lower coffee exports to Turkey. 

The company’s shares traded higher, after its March Quarter Numbers (MQN)  were announced. While last quarter’s results were not overly impressive, it is possible that investors are taking some comfort from the management commentary. At a time when consumer companies are harping on demand slowdown, Nestle’s management commentary was contrary. 

“The market momentum remained strong," said Suresh Narayanan, Chairman and Managing director Nestle India, in a press statement. 

But, “This is also due to lower salience of rural in the portfolio (~25-30 percent) where the impact of slowdown is higher," point out analysts from Jefferies India Pvt. Ltd in a report on 14 May. 

Earnings before interest, tax, depreciation, and amortization (Ebitda) margin declined by 83 basis points year-on-year to 24.4 percent . One basis point is one-hundredth of a percentage point. Still, it is encouraging that the extent of decline in the Ebitda margin was lower than that seen in the December quarter. Some analysts feel that advertising spends growth may have been relatively lower during the March quarter. 

In January-March, gross margin declined as well, considering raw material costs remained higher. Overall, this meant Ebitda increased at comparatively slower pace of 5.3 percent  to ₹729 crore. Nonetheless, strong other income growth and decline in depreciation costs resulted in 9 percent growth in pre-tax profit to₹713 crore. 

In the past one year, shares of Nestle India have gained around 9 percent , though the stock has fallen so far in this calendar year. Currently, the shares trade at 52 times estimated earnings for this financial year.