Nestle India: Focus on sales likely to yield results

Low volume growth continued to hurt the performance of MNC foods major Nestle IndiaBSE 0.34 %. Its performance in the quarter to March was characterised by single-digit growth in local sales, mainly due to price realisations and better product mix rather than any healthy growth in volumes. The company, whose product portfolio includes brands such as Maggi noodles,Nescafe and Kitkat chocolate, has been facing the brunt of aggressive price increases in most part of 2012. 

In the last three quarters, Nestle's domestic sales growth has been only in single-digits due to poor volume growth. The benign trend in raw material prices helped the company expand its 
operating profit margin in these quarters. 

However, a major concern is the company's reduced spending on advertising. Other expenses, including advertising expenditure, rose by 6.3% against 13% for the calendar year 2012. Except for prepared dishes and cooking aids, the company faced a drop in volumes in all its other categories, such as milk products and nutrition, chocolate and confectionery, in 2012. 

In most of these categories, the presence of local as well as international players has resulted in intense competition. Nestle's stock performance has also been muted. In the past year, the stock has gained a mere 6.8%, against the 42% gains of the ET 
FMCG Index. However, the company's performance in the second half of the calendar year 2013 is likely to be better than in the last three quarters on account of increased focus on sales growth, coupled with a lowbase effect. 

Besides, the company has continued to launch new products and expanded its capacity, which will help it counter competition better. However, low ad spend continues to be a concern, especially in a highly competitive market that is marred by lower demand. For now, the outlook for the stock is negative from the perspective of the street. According to data from Bloomberg, Nestle's stock has 15 sell, 14 hold and only nine buy recommendations with the average target price being 3.5% less than its current price of Rs 4,853.