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Nestle: Short-term hiccups - Views on News from Equitymaster
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  • Jun 19, 2001

    Nestle: Short-term hiccups

    Nestle India had recorded a sterling first quarter performance (January – March 2001). Its 1QFY02 sales growth at 30% YoY was ahead of analyst expectations. The company’s volume growth was amongst the best in the Indian consumer sector. Nestle reported strong growth across all product segments. Domestic sales grew at 27% largely driven by culinary, beverage and milk segments. Apart from the strong domestic showing, the company’s export performance was also good. Instant coffee exports saw a 47% growth YoY, boosting overall sales growth.

    However, the company may not be able to sustain this performance during the rest of FY02. The retail sales growth data indicates that Nestle has grown by a marginal 0.6% in value terms in April 2001 (YoY). Even the company’s chairman, Mr. Carlo Donati, has indicated in Nestle’s latest annual report that the company may not be able to sustain its earnings growth because of the sluggish market conditions. Mr. Donati has also said that the only way they can sustain Nestle’s earnings is through price increases, which looking at the difficult market conditions may not be easy.

    Recently, Nestle introduced chocolate flavored coffee and purified drinking water (Pure Life) in select markets. Earlier last year it had introduced milk in the urban markets. There are plans to introduce more dairy products in the future. Nestle has also commenced test-marketing its yoghurt in northern India. This is the company’s first foray into products, which have a really short shelf life. If the company successfully test markets this then one can expect more products that have a shorter shelf life from Nestle’s stable.

    Nestle seems to be going the Amul way. Amul is already present in the milk, butter, cheese and yogurt segment. Amul’s yogurt is fast gaining acceptance from the consumers especially in the urban areas. But Amul’s advantage is that it has access to quality milk for all its dairy initiatives and it has a lot of experience in the distribution and marketing of these products. No doubt Nestle’s strategy of tapping this segment is a step in the right direction, however, it has still to successfully distribute and market these products.

    The company is also looking to expand its portfolio in the other segments it is present in. It is facing competitive pressure from Hindustan Lever in the culinary segment. However, Nestle has introduced ready to eat variants of noodles to hold onto its market share. Tasting success with ‘Munch’ (wafer chocolate) the company is likely to introduce more brands in this segment to wean away market share from the leader Cadbury. In the health beverage segment too, Nestle may add another brand to give strength to its ‘Milo’.

    But all these initiatives mean more investments by the company at a time when the sector is facing difficult times. For the long term, Nestle has to continue expanding and strengthening its product portfolio. But for that, the company might have to give a short shrift to its margins in the short term.

    Nestle’s seems to be heading in the right direction. The short-term hiccups notwithstanding, the company is likely to hold a sizeable Indian consumer mass going forward. At the current price of Rs 530 the stock trades at a P/E multiple of 33 times its 1QFY02 annualised earnings.



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