The Hindu Business Line : Nestle: Sales up; but profit growth lukewarm

THE double-digit growth rates in profits and sales reported by Nestle India for the December 2003 quarter may appear striking, at a time when insipid numbers are the norm in the FMCG industry.

But Nestle India's 17.4 per cent sales growth, is led more by rising commodity prices, than by surging volumes. The 20.6 per cent rise in net profits comes from a lower taxation provision, rather than from operations. The company's operating profits for the quarter grew by 10.5 per cent, and failed to keep pace with sales growth.

Two factors appear to have propelled Nestle India's sales growth. One, coffee exports have staged a recovery after a sharp setback last year. Increased offtake from Russia and a sharp drop in production at some of the key export centres such as Brazil, have helped Indian coffee exporters grab a larger share of the global markets. The rise in export volumes has been accompanied by a firming up of global coffee prices, magnifying the impact of this recovery on Nestle's sales.

Second, in the domestic market, Nestle has managed to pep up the offtake for products such as instant coffee, chocolates and noodles by rolling out affordable low-unit packs. Since the company's business is urban-centric, it has been spared of any impact from sluggish rural growth.

While sales growth has been robust, rising input prices has dented Nestle's profit margins. Over the past year, there has been an upward price spiral in almost all of the company's key inputs — milk powder, coffee and cocoa. This has impacted on Nestle's profit margins. Profit growth has shown a distinct tendency to lag sales growth over the past two quarters.

For the full year 2003, the company has reported a 27 per cent growth in net profits on the back of an 11 per cent sales growth. But here again, operating profits have grown by just 12 per cent. What has propped up net profit growth is the cutback in the provisions towards contingencies and impairment of assets, both of which are a regular feature of the company's financials.

Going forward, export sales may make a rising contribution to Nestle's revenues, as coffee exports and realisations continue to surge. In the domestic market, Nestle India may not be as vulnerable to the tumbling selling prices in FMCG space, as are companies marketing soaps, detergents or personal products. So far, selling prices of products such as branded coffee and chocolates have managed to remain insulated from the price wars.

However, there is undeniable erosion in pricing power in these categories as players bank on low-unit packs to drive volume growth. Having lured new users to their brands by pricing them at price points of Re 1, Rs 2 or Rs 5, players such as Nestle India may find it quite difficult to peg up selling prices, if input prices begin to squeeze profit margins. This suggests that profit growth, for the time being, will continue to trail sales growth for Nestle India.

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