Nestle India’s growth prospects intact but valuations pricey
Nestle India Ltd’s CY22 annual report sheds light on volume performance across product groups. This data is not made available during the interim results. The packaged food company follows the January-to-December financial year. In 2022, overall volume grew by 5.2% year-on-year (y-o-y). The key villain for subdued growth was the largest category in terms of volume—prepared dishes and cooking aids, which saw only 5.7% y-o-y growth. This product category comprised 61% of Nestle India’s overall volumes. One factor that has weighed on this category is the adverse demand impact due to sharp price hikes in low-unit packs of Maggi noodles.
Further, milk products and nutrition volumes in 2022 were down 0.5% y-o-y, marking the third consecutive year of decline. Other verticals, beverages and confectionery, saw relatively higher volume growth of 12-14%. To fight commodity cost inflation, Nestle India resorted to price hikes across categories. Overall, revenue growth stood at 14.5%, the highest in a decade.
With wheat and milk prices remaining elevated, gross margin in CY22 fell by 280 basis points y-o-y to 54.1%, the lowest since 2014. As pressure on gross margin persists, the company has the lever to cut advertising spends to protect Ebitda margin. But note that the advertising expense-to-sales ratio fell for the fourth consecutive time in 2022 to 4.1%. With rising competitive intensity, it remains to be seen if ad spends are lowered further.
Meanwhile, Nestle India’s solid return ratios are comforting on the back of higher dividend payouts. The parent company has allocated capital expenditure (capex) of ₹5000 crore for India over 2022-25. According to Nomura Financial Advisory and Securities (India), this can lead to compound annual growth rate of 10-15% in sales over the next 4-6 years, assuming historical asset turns at three times. Even so, increase in capex would lead to a slight drop in return ratios and rise in depreciation. Nomura has cut 2023/2024 earnings per share estimates by 1%/3% on higher depreciation charge due to strong capex announcements.
In 2023, to fuel growth, Nestle India’s focus areas would include building volumes, deepening rural and urban expansion, bringing innovations and nudging the premiumization trend. As such, besides volume and margin trajectory, the company’s growth in relatively new segments such as the pet food business remains key to track. Valuations are pricey, though. The stock trades at nearly 55 times its 2024 estimated earnings, according to Bloomberg data. “Key issues in the near-term are El Niño and volume impact in Maggi due to price hike,” said analysts at Nuvama Research.
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Ganesh
http://ganesh@finplay.inFinance enthusiast, Mutual fund expert.