Nestle India slips 5% after Q1 profit margin contracts YoY

Analysts at Prabhudas Lilladher believe lower other income will curtail EPS CAGR at 11.6 per cent over CY20-23
Shares of Nestle India declined 5 per cent to Rs 16,634 on the BSE on Wednesday after the company reported 140 basis points contraction in Ebitda (earnings before interest, taxes, depreciation and amortization) margin at 24.1 per cent in March quarter (Q1CY20) over the previous year quarter.

The gross margins, meanwhile, declined more-than-expected by 220 bps year on year (YoY) to 56.3 per cent due to higher commodity costs, particularly milk and its derivatives. Higher raw material price led to fifth consecutive quarter of gross margin compression.

On the upside, the FMCG major’s total sales increased 10.8 per cent YoY at Rs 3,306 crore driven by volume and mix. Profit before tax, however, came in flat at Rs 711 crore in Q1CY20, as against Rs 712 crore in the year ago quarter. Other income decreased 41 per cent during the quarter under review due to lower average liquidity owing to the payment of special interim dividend in August 2019 and lower yields.

Thus far in the calendar year 2020, Nestle India has outperformed the market by surging 18 per cent, as compared to a 24 per cent decline in the S&P BSE Sensex till Tuesday.

Analysts at Prabhudas Lilladher believe softening of input costs in milk, sugar and palmoil will reduce gross margin pressure, but lower other income will curtail EPS CAGR at 11.6 per cent over CY20-23 despite 2 per cent upgrade in EPS.

"Although Nestle India is better placed to face any impact from slowdown in rural demand due to lower exposure (25 per cent), structural concerns on low growth in Infant Nutrition and Beverages, accounting for nearly 36 per cent of sales, remain. Strong parentage, brands and market leadership in key categories are positive, but valuations at 66.5 times March 2022 EPS force us to retain REDUCE rating," the brokerage firm said in its result update report.

On the other hand, for Motilal Oswal Financial Services, the longer-term narrative on Nestle India’s top line and earnings growth remains extremely attractive. "Not only the successful implementation of its growth strategy in recent years is a positive, but also the packaged food segment in India offers immense growth opportunities, particularly for a company with strong pedigree and distribution strength,” analysts at the brokerage said in result update.

At 11:07 am, Nestle India was trading 3.5 per cent lower at Rs 16,840 on the BSE, as against a 2.4 per cent rise in the S&P BSE Sensex. A combined around 270,000 shares have changed hands on the counter on the NSE and BSE till the time of writing of this report.

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