Coronavirus impact: Nestle Q1 an outlier as consumers focus on food

Topics Coronavirus | nestle | Lockdown

Strong sales growth also led to a 10.7 per cent year-on-year rise in operating revenue to Rs 3,325 crore for Nestle, higher than Bloomberg consensus of Rs 3,076 crore
Nestlé India recorded a better-than-expected performance during the March 2020 quarter (Q1), thanks to its large food portfolio that falls under essentials. This was despite most firms being hit by the disruption due to Covid-19.

The owner of brands such as Maggi, Nescafé and KitKat follows a January-December calendar. 

Nestlé’s domestic sales growth of 10.7 per cent year-on-year to Rs 3,124 crore was the best among peers. It was also in line with the 9-11 per cent top line growth it had posted in the previous four quarters. 

Marico had also reported a similar trend last week, with its Saffola edible oil volumes rising 25 per cent in the quarter. However, overall top line was down as volumes in the personal care segment declined. Most FMCG peers, which have declared their March quarter results, posted a decline in top line. 
Analysts at Kotak Institutional Equities said: “Relatively speaking, Nestlé has among the most resilient portfolios as regards the Covid-19 impact.” Another analyst at a domestic brokerage said: “In the current situation, consumption demand has tilted more towards good quality food products.” 


The strong sales growth also led to a 10.7 per cent YoY rise in operating revenue to Rs 3,325 crore, for Nestlé, higher than the Bloomberg consensus of Rs 3,076 crore. Domestic sales were driven by both its volume and 
product mix.

Up-stocking of prepared dishes, milk and nutrition products is likely to have supported sales growth, despite muted demand for out-of-home products. According to the company, Maggi, KitKat and Munch put up a strong show and contribution from e-commerce rose significantly. 
However, higher input prices (milk and derivatives, which form 40-45 per cent of the total raw material cost) led to a 121-bp YoY fall in Ebitda margin to 23.9 per cent in Q1, despite cost-efficiency measures. Therefore, pre-tax profit was up just 0.5 per cent to Rs 704 crore, against expectations of Rs 678 crore. Net profit growth of 13.6 per cent to Rs 525.4 crore was driven by a lower tax rate. 

Despite the results and Sensex’s 2 per cent rise ahead of the stimulus package announcement, the Nestlé India stock fell 5.4 per cent on Wednesday. While part of the fall was on account of profit-booking — given the 35 per cent rally (from March 23 till May 12) — its valuation of 72x its CY20 estimated earnings is quite pricey. 
Analysts believe Nestlé’s robust portfolio and cost efficiency will keep its earnings momentum strong, but the high valuation may cap gains for the stock.

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