Increasing input costs, competition have taken a toll on the margins. There is little indication that this will improve.
Along with others in the country, the management at Nestle India would also be looking skywards and hoping for a normal monsoon. After all, a lot depends on rains, especially the company's profitability. Nestle India relies on the agricultural sector as it provides the company with key raw materials, the cost of which amounts to as much as 45 per cent of sales.
As witnessed in the quarter ended March, when liquid milk prices were higher by 30 per cent, wheat flour 70 per cent and sugar 25 per cent, the company's operating profit margins took a hit, declining to 20 per cent — almost 300 basis points below the previous year. Higher ad-spends and rising power and fuel costs also grew. As a result, net earnings for the March quarter were just about two per cent up.
Now, thanks to an unrelenting food inflation, pressure on the company’s margins remain. While sugar prices may have eased, milk and wheat flour rates remain on the higher side. The fuel price hike is also there for all to see. And, if the monsoon does not turn out well, there could be a telling impact. More so because the company finds it difficult to raise prices as competition is heating up, especially in noodles.
Maggi, the market leader with an 80-90 per cent share in the Rs 1,300-crore segment, is being challenged by Hindustan Unilever with its Knorr ('Soupy Noodles') and GSK Consumer ('Foodles'). The market, according to analysts, is not growing seamlessly to accommodate new players. So, Maggi would have to shed some share. Overall, the Maggi brand accounts for 20-25 per cent of Nestle’s revenues and is the largest contributor to Nestle’s incremental sales growth.
The company would also be facing competition in the coming months in the milk products segment, with French player Danone making an entry in the curd market and intending to expand further. And, there are other worthy adversaries like Kraft (along with Cadbury) waiting on the fence to encroach onto Nestle’s territory.
The management has mentioned it would look at volume growth and will launch its cereal brands, too. It would also be looking at staggered price rises, believe analysts. So, even as these plans fructify, the hope remains for a good monsoon as well as a cooling down of prices.
