The Hindu Business Line : Nestle India: Margins healthy despite input pressures

The Nestle India stock has displayed unusual strength in recent trading sessions, moving up by 6.8 per cent on Wednesday’s trade. The stock price reaction should be seen in light of a strong set of numbers reported this week by the company for the quarter and year ended December 2007.

domestic sales

Nestle India’s net sales grew by 21.6 per cent for the quarter and 24.4 per cent for the year, making it one of the fastest growing companies among FMCG players. This growth is driven mainly by domestic sales, even as the coffee export business suffered pressure on realisations due to an appreciating rupee.

While the topline growth suggests strong domestic demand trends, growth in profits has exceeded that on the topline, with Nestle’s operating profits (before exceptional items and provisions) posting a 30.8 per cent growth for the full-year and 32.6 per cent for the quarter.

This suggests that the company has managed pressures from rising raw material costs (caused by escalating prices of milk and sugar) reasonably well, with cost-saving measures making up for higher input costs. This is a positive factor, as an inflationary environment for agri-commodity prices may continue over the coming year.

Nestle India has stepped up the pace of new products in recent months, with launches such as the Sanjivni range of healthy soups and Cerevita, a breakfast cereal. These may help Nestle take advantage of the growth potential in the health and wellness segments of the FMCG market, which are still under-penetrated.

After the recent rise, the stock trades at a PE multiple of about 36 times its trailing 2007 earnings; which is expensive within the FMCG space. But this appears justified by the company’s superior growth prospects and the fact that it remains a good defensive stock to own in a choppy market.

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