Not very long ago, Nestle India, the maker of Cerelac and Maggi and a 62% subsidiary of Nestle SA of Switzerland, had a clear monopoly in certain sectors. But it has been struggling to grow in the past two years.
And if analysts are to believed, a dramatic comeback by Nestle is unlikely anytime soon. Experts said Nestle’s volume growth, which has been historically in double digits, slipped to single digits in the January-March quarter of 2011.
Brokerage Motilal Oswal said in a report on Nestle that volume growth in 2012 was only 0.8%, lowest in ten years.
Nestle India, which follows a calendar year format for reporting its financials, has not shown any improvement in the first quarter of this year: volume growth is believed to be in the range of 0.5-1%.
Ongoing pressures on discretionary commodities – think chocolates and processed food – do not augur well for Nestle, experts said. As a result, such items in Nestle’s portfolio are expected to show subdued growth.
Things on the revenue front are not looking encouraging either.
In a research report, Naveen Kulkarni and Ennette Fernandes of Philip Capital said, “The domestic revenue growth has slowed considerably from 9.8% YoY in Q4CY12 and 13.7% in Q1CY12. It is important to note that the Q1CY12 base was low with a sharp decline in volume. Notwithstanding the low base, Q1CY13 volume growth continued to be sluggish.
We estimate that the domestic volume growth is likely to be negative and believe the operating performance may not pick up significantly over the medium term.”
Philip Capital has since downgraded the stock to ‘sell’ from ‘neutral’.
Another report by Puneet Jain, Aditya Soman and Indrajit Agarwal of Goldman Sachs pointed out that limited scope for price increase due to softer raw material costs will limit sales growth.
The company has been also dealing with increased competition from other players. For instance, in the packaged food segment, ITC and GSK are perceived as key threats to Nestle.
In coffee, HUL, the maker of Bru, has been leading with several innovations; Nestle has been unable to keep pace with it. Even Danone has sharpened its focus on India, posing a challenge to Nestle’s Cerelac in the milk food business segment.
Operating profit or Ebitda at 23.7%, Nestle’s highest in 16 quarters, is the only silver lining in the first quarter results this year. But an analyst explained that this has mainly come on the back of measures like controlled staff cost, lower operating expenses and product pricing action which are not sustainable in the medium to long term.
However, analysts agreed that the long-term growth story for Nestle is positive. But that does not hold any short-term attraction for brokerages such as Goldman Sachs, Deutsche, HDFC Securities and Credit Suisse which have stamped a ‘sell’ rating on Nestle’s stock (which closed at Rs 4,924.80, up 0.96%, on Wednesday in Mumbai).
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