Nestle India
announced its June 2016 quarter results and if we take a superficial look, the
performance look poor on sequential basis. As regards the numbers, it posted a
topline of Rs 2256.09 crore in June 2016 quarter as against Rs 2295.73 crore
posted in March 2016. We are not comparing the numbers with June 2015 quarter
as at time the lead content controversy had impacted the sales in Maggi
Noodles. At EBITDA levels also the performance was below street estimates with
EBITDFA for June 2016 quarter at Rs 468.47 crore as against Rs 535.55 crore in March
2016 quarter. As regards the bottomline, with lower tax out go the net profit
for June 2016 quarter stood at Rs 230.84 crore as against Rs 259 crore posted
in March 2016.
While most on
the street are taking the results as poor and even the stock witnessed a
decline after that, we think this is a good opportunity to enter in the counter
with a long term perspective. One needs to understand that Maggi sales volume
have started to pick up pace and now markets share of Maggi Noodles is around
57 percent. Though it is lower as compared to 80 percent market shares it enjoyed
before the controversy, we think those levels would be easily achieved in
H2CY16.
Apart from this
we expect few factors to drive the growth going ahead for the company. Revival
in urban as well as rural demand would be driving growth. With revival in urban
demand we expect Nestle India, the country’s largest packaged foods company
whose brands are synonymous to their respective categories (Maggi, KitKat,
Cerelac and Nescafe) to witness some traction. Even the rural demand is likely
to pick up in H2FY17.
While the
re-launch of Maggi is already helping the company on sales recoveries, Nestle
has upped the ante with four new variants in Maggi, Munch Nuts, Kitkat duo,
Nestle a+ Grekyo and Nescafe sunrise Insta in filter coffee. The new management
under Suresh Narayan (CMD, Nestle India) is confident about the growth and in
one of his interview to a leading financial new channel he mentioned that
coming quarters will definitely be better than what you have seen and this is a
new dawn for Nestle.
If we take a
look at the stock price movement, the stock had witnessed an up move before
results. And profit booking has resulted in stock now witnessing some pressure.
However we think the stock has great potential owing the factors we have
mentioned above. Those having a horizon of more than 12 months can accumulate
the stock at current levels.
Understanding the Business
Nestle India has
four major segments to its business. First is Milk Products & Nutrition
(contributing to 55.50 percent of revenues). Second is Prepared Dishes &
Cooking Aids 15.50 percent of revenues, Chocolate & Confectionery 13.20 percent
and Beverages 15.80 percent. Under its Milk Products & Nutrition the
company stands Number 1 in Baby Foods, Dairy Whitener and sweetened condensed
Milk. It is ranked 2 in Infant Formula product. In prepared dishes it is ranked
1 in Instant Noodles, Sauces and Pasta. In this Segment it stands second in
Soup Segment. With products like Kitkat,
Milky Bar and Munch to its kitty it is one of the largest player in the
Chocolate and Confectionery segment with leading position in Wafers and Whites.
In the beverages segment it enjoys a dominant position being a No 1 in Instant
Coffee and a strong presence in vending as well.
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