Nestle India, the fast-moving consumer goods (FMCG) behemoth, has announced a massive surge in its net profit for Q4 2022. The company’s net profit soared to ₹628 crore, a 65% increase compared to the same period last year when it was ₹379 crore. Nestle India follows the January-December financial year. The significant growth in net profit can be attributed to a host of factors, including an increase in margins and cost-cutting measures that the company had undertaken.
Volume Growth Decelerates, Margins Rise
While Nestle India had seen an industry-leading growth for several quarters, the company witnessed a reversal of trends in Q4. The volume growth decelerated to a multi-quarter low at a time when margins climbed-up smartly. The management attributed part of the volume slowdown to the price hike in Maggi LUP (Rs5 to Rs7), which also resulted in share loss as the competition stuck to the existing price point.
Outlook Remains Positive
Despite the temporary share loss, Nestle India’s long-term outlook appears to be optimistic. The company intends to invest ₹50 billion in capex, and the management believes that the share loss due to LUP price hike is temporary and should normalize in the medium term. The company’s focus remains on rural distribution expansion, and innovation is expected to pick-up after a lull due to Covid. While edible oil and packaging inputs have corrected, other inputs remain elevated. Nonetheless, the management believes that margins have bottomed-out.
Jefferies and BOBCaps’ Views on Nestle India
Jefferies, a global brokerage, believes that Nestle India’s management’s strategy of penetration-led volume growth is yielding results. The company is expected to sustain its growth momentum underpinned by continued investments in innovation and premiumization, expansion of its direct reach with a focus on rural markets, and forays into newer categories.
BOBCaps, on the other hand, has a hold rating on the FMCG stock with a target price of ₹18,100. They assume coverage with a BUY and value the stock at 67x CY24E EPS, translating to a target price of ₹22,860. The stock is trading at 65.8x/57.5x CY23E/CY24E EPS.
Gross Profit Margin Contracts by 200 bps YoY
Despite the increase in margins, Nestle India’s gross profit margin contracted by 200 basis points (bps) YoY in Q4CY22. However, it expanded sequentially by 220bps QoQ, even though the prices of key commodities such as cereals, grains, and coffee remain at a 10‐year high.
Conclusion
Nestle India’s Q4 2022 net profit surge is a remarkable achievement that is the result of the company’s sound strategy of penetration-led volume growth, investment in innovation, and premiumization. The company’s long-term outlook appears to be optimistic, and it is expected to sustain its growth momentum underpinned by continued investments in various areas. The stock is trading at 65.8x/57.5x CY23E/CY24E EPS, and BOBCaps values the stock at 67x CY24E EPS, translating to a target price of ₹22,860.