Higher costs across the board dented operating profit margins in the December quarter.
For the fourth quarter ended December 2009, Nestle India reported a 6.7 per cent year-on-year decline in net profit at Rs 113 crore, despite sales surging 24 per cent to Rs 1,352 crore (on a lower base). The drop is largely due to increase in costs across the board. For instance, prices of key inputs such as milk solids (up 15 per cent), wheat (up 30 per cent) and sugar (up 100 per cent) touched record levels in 2009, resulting in higher raw material costs. The company’s cost of goods (Rs 652 crore) sold as a percentage of net sales rose 105 basis points to 48.2 per cent. Likewise, one-off actuarial losses, arising due to revision of assumptions for retirement benefits, saw staff costs rise almost 65 per cent to Rs 137.62 crore.
Also, other expenditure rose 30 per cent to Rs 363.9 crore due to an increase in brand-building and demand-generating activities, along with new launches. Thus, operating profit margins slipped to 14.67 per cent from 19.17 per cent in the year-ago quarter.
For the year ended December 2009, net sales rose 18.6 per cent to Rs 5,129 crore. These were helped by a 20.4 per cent rise in domestic sales to Rs 4,801 crore (Rs 1,261 crore in the December quarter, up 25 per cent), led by an increase in volumes as well as realisations. However, exports fell 3 per cent to Rs 329 crore, due to lower sales to Russia and Bangladesh. The decline, though, was partially offset by improved realisations due to the depreciation of the rupee in the first nine months of 2009.
For the year, the 22.6 per cent rise in net profit to Rs 655 crore was positively affected by tax benefits. These also made sure that the company’s net profit slipped by a lower margin in the fourth quarter, given that pre-tax profits were down nearly 14 per cent.
Going ahead, analysts expect the company to increase its capacity to meet the growing consumer demand in India. Nestle recently secured approvals from the Himachal Pradesh government for a Rs 250-crore food processing unit. The domestic demand is expected to sustain, supported by product innovations across categories and focus on distribution.
Analysts expect Nestle to witness a compounded annual growth rate of 19 per cent in revenue and 25 per cent in profit over CY09-11. Pricing power and a robust product portfolio should help maintain operating margins. The subdued results (declared on Friday evening) saw the stock close 2.4 per cent lower on Monday at Rs 2,580, wherein it trades at 25 times estimated CY11 earning per share.
With inputs: Puneet Wadhwa & Sarath Chelluri