Nestle India has quietly passed on some of the input cost spike to consumers, evidently in a bid to get margins back on track. Prices of select SKUs such as KitKat chocolates are back to Rs 6 and Rs 12 (from Rs 5 and 10 earlier); infant foods such as Cerelac have seen an increase of Rs 5-6; milk products such as Nestle Dahi are dearer by Rs 2 for a 400 gm pack to Rs 27 whereas Nestle Everyday Dairy Whitener now comes for Rs 230 per 950 gm against Rs 220 earlier.

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This pricing action has happened over the last few weeks and could perhaps lead to some improvement in margins, which took a beating in the December quarter due to steep raw material price increase.

An analyst with a leading brokerage pointed out that with categories such as the Maggi franchise (which comprises noodles, soups and ketchups), Nestle could look at playing with grammage — reducing product weight while keeping prices intact — to mitigate the impact of cost spurt. But the maximum impact has been felt in dairy and confectionery. In the last quarter, prices of milk and sugar touched record highs and these raw materials account for a substantial chunk of Nestle’s overall raw material costs — milk alone accounts for 40-45% of the raw material cost grid. For the quarter ended December 31, Nestle India’s gross margins declined by 110 basis points year-on-year, thanks to input cost spiral.

Nestle india reported a Q4 profit of Rs 112.92 crore on sales of Rs 1351.79 crore. For the fourth quarter of last fiscal, the company had a net profit of Rs 121.09 crore on sales of Rs 1090.10 crore. Latika Chopra, analyst at J P Morgan, said in a note: “Further higher employee costs and higher other expenses (+30% y-o-y) due to sharp rise in advertising spends (on existing and new launches) led to reported Ebitda decline of 7% y-o-y.

Agri-commodity inflation remains our key concern and assuming that there is no change in volumes and product realisations, a 10% increase in key raw materials (milk, wheat, sugar, coffee) could impact earnings by 1-8%.”

Another analyst said that though Nestle would like to maintain its small pack price points of Rs 2, Rs 4, Rs 5 and Rs 10, it could effect yet another round of grammage reduction and price hikes in the near future if raw material prices continued their spiral.

Anuj Bansal at Bank of America Merrill Lynch projected a decline of around 3% in profits for Nestle for calendar year 2010, even as he maintained EPS CAGR of 27% for the 2009-11 period. “Long term outlook remains robust as topline growth continues to surprise and Nestle can manage margin pressures through its pricing power, which it has not exercised for over one year now. We cut our CY10E est by ~3% on lower margins but maintain EPS CAGR of 27% over CY09-11E.”