Domestic revenues saw a pick-up in growth to 23 per cent from 18.3 per cent in Q3. Growth was driven by volumes, which may have been enabled by the GST rate cut, capacity expansion and reach through channels like ecommerce, organised trade and out-of-home advertisements. Confectionery, pet care and powdered and liquid beverages delivered double-digit growth, prepared dishes and cooking aids witnessed strong volume growth, while milk products and nutrition saw steady performance. Exports saw a fourth consecutive quarter of double-digit growth, but other operating income saw a 57 per cent decline. Exports reached 28 nations, including new markets such as Maldives and Papua New Guinea.
Gross margins contracted by 48 basis points year-on-year to 54.3 per cent. Management pointed to mixed raw material trends, with positive signs of coffee and cocoa prices trending lower and sugar prices stable. But edible oil prices and wheat are also up. Milk is up and will trend higher through summer. El Niño may negatively impact rural consumption and push up raw material prices. Lower employee costs offset higher other expenses and raw material costs, with operating profit margins expanding 102 basis points year-on-year to 26.3 per cent. Reported net profit was up 25.8 per cent year-on-year. Operating profit rose 28 per cent year-on-year. Volumes grew in double digits.
Confectionery contributes 18 per cent of revenue. Powdered and liquid beverages contribute 16 per cent of revenue. Prepared dishes and cooking aids accounted for 31 per cent of revenue. Milk products and nutrition contribution is 35 per cent. Pet care is a new category.
Three of four categories posted strong double-digit growth. Prepared dishes and cooking aids saw double-digit volume and value growth, and gained market share. Milk products and nutrition grew at high single-digit year-on-year. Confectionery grew in high double digits year-on-year in value and volume. Increased distribution led to strong growth. Powdered and liquid beverages posted high double-digit growth, driven by higher coffee consumption and premiumisation. Pet foods grew in high double digits as distribution improved.
Nestlé’s growth is supported by a new quick-commerce push. Ad spends rose 50 per cent year-on-year in Q4. Staff costs were down 12 per cent quarter-on-quarter. The company also reported exceptional items of Rs 36 crore due to the new labour code.
Raw material trends are concerning due to edible oils, wheat and milk. Oil is up because of diversion to fuels and its correlation with higher crude prices, and geopolitical tensions driving crude oil prices higher imply further upside. Wheat is up due to unseasonal April rains, delaying harvest and impacting volumes. Milk is up and likely to go higher due to the seasonal summer factor. El Niño could add to raw material pressure and may affect consumption if rural growth loses momentum. Milk accounts for 20 per cent of Nestlé’s raw material costs.
Volume growth may have been in the high teens due to a low base. GST reform drove volume uptick across noodles, dairy, coffee and chocolates. Maggi may have grown sales by 25 per cent on a low base, with market share being reclaimed. Milk products grew on a negative base.
Prepared dishes and cooking aids produced strong volume-driven growth with greater rural reach and higher media spends in core brands. Confectionery and beverages grew in high double digits, helped by distribution expansion in confectionery and pricing in coffee.
Even though Q4 gross margin declined 50 basis points year-on-year to 55.7 per cent, operating margin expanded 100 basis points year-on-year to 26.3 per cent, the highest in a decade due to lower employee costs, operational cost savings and operating leverage, despite elevated ad and media spends (up 50 per cent year-on-year). Ad spends will continue to be high, given competitive intensity in noodles, infant nutrition and coffee.
Growth rates may have peaked, given raw material trends and likely normalisation of GST-driven demand. Margins could compress since high brand-building spends and distribution expansion costs will continue given competition. High pricing power and premiumisation-led mix improvement could offset costs to an extent. Valuations are high, as is typical for a market leader in a high-valuation sector.