That Nestle continues to command pricing power is reflected in its high gross margins for the June 2009 quarter, which increased by close to 200 basis points driven by price increases and efficiencies. That resulted in a top line growth of nearly 17 per cent despite exports coming down by about 13.5 per cent — the sixteenth consecutive quarter of high double-digit growth in the home market. Of course, over the past two quarters, sales in the domestic market have grown at close to 20 per cent compared with 24 per cent growth recorded for two years before that.
Nevertheless, it’s evident that the food major’s brands are popular and find takers even at high prices. Despite prices of milk and sugar having been fairly high during the quarter, lower prices of other key inputs helped push up operating profit margins by nearly 300 basis points to around 22 per cent.
While the company has spent more on employees, it has managed to save on overheads. Its profit after tax increased by a strong 34 per cent to Rs 162 crore, helped by some substantial savings in taxes. Nestle has not only built some strong brands, it is willing to sell to customers at varying price points.
As such the stock is a great play on the growing affordability and aspirations of Indian consumers. At Rs 2,179, Nestle trades at nearly 30 times estimated calendar 2009 earnings and is the most expensive stock in the FMCG universe. The stock has almost always commanded a huge premium to peers — it has outperformed the Sensex by about 50 per cent in the last three years — and should continue to do so.
