Net profit of ₹473 crore is marginally ahead of estimates


When times are rough, no bad news may appear like good news. At Nestle India Ltd that seems to be the case. Investors rewarded the absence of negative surprises in the Indian fast-moving consumer goods’ (FMCG) December quarter results by pushing the stock to an all-time high on the NSE in Friday morning’s early deals.

Net profit of ₹473 crore is marginally ahead of a poll of Bloomberg analysts’ estimates.

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Analysts reckon that a higher exposure to urban markets helps revenue momentum and also cope with the demand slowdown in the country. Domestic sales, which account for 94.5% of the company’s overall revenues, have increased by 10% on a year-on-year basis. This performance is substantially ahead of peers, said analysts from Emkay Global Financial Services Ltd in a report on 13 February. Note that Nestle has consistently delivered double-digit domestic sales growth in the past few quarters. This comes at a time when other FMCG companies are finding it hard to boost sales.

Export sales, which account for Nestle India’s remaining revenues, have declined by nearly 10%, as coffee exports to Turkey were lower. However, since exports form a smaller portion of the overall revenues, it doesn’t move the needle in a big way.

Gross profit margins contracted by a little over 200 basis points. One basis point is one-hundredth of a percentage point. Commodity prices were higher during the quarter, especially that of milk and its derivatives. “The trend of higher commodity prices witnessed in recent quarters is likely to continue in the near future,” said the company in its press statement.

On the brighter side, a decline in other expenses during the quarter saved the picture at the earnings before interest, tax, depreciation and amortisation (Ebitda) level. Ebitda margins expanded marginally.

“Steady show in a weak environment affirms Nestle India’s supremacy, current valuation calls for sustained 20%+ earnings delivery,” wrote analysts from SBICAP Securities Ltd in a report on 13 February.

The company’s shares trade at about 69 estimated earnings for calendar year 2020, based on Bloomberg data. Nestle India follows a January to December financial year.

Pricey valuations suggest a good share of the optimism is baked into the stock price. As such, meaningful upsides could well be at bay. “Growth visibility remains better than peers but upsides to earnings are not visible given the steep input inflation and higher spends to drive growth,” point out SBICAP analysts.