Nestle India missed Street expectations and reported a 4.3% year-on-year (y-o-y) decline in the company’s net profit to Rs 515.35 crore for the quarter ended June 30, 2022, as raw material inflation bit into the bottom line.
The company’s revenue from operations surged nearly 16% y-o-y to Rs 4,036.57 crore during the quarter, driven primarily by pricing. The domestic growth came in at 16.4% — 8.5% of pricing and 7.9% of volume.
The commodity inflation CAGR was to the tune of 15% — 5x of the CAGR of 3% seen between 2018-2020. In 2021, it was 5%. Suresh Narayanan, chairman and managing director of Nestle India said in an earnings call, “Out of this 15%, 8.5% was the kind of pricing impact that we took.”
Highlighting immediate concerns about inflation, Narayan said, “The forces of inflation have been much larger than what we are normally used to. I dare say quite extraordinary in the last couple of months. In inflationary times it is most important for an organisation to protect its engine for growth. It is not managing for the quarter but the long-term. Sustained volume and mix-led growth in a steep inflationary context is the shorthand of the result that has been achieved so far.”
The maker of Maggi to Milkmaid witnessed 13.3% growth in the first half of 2022, which has a consumer price impact of 6.3% and volume growth of about 7%. Last year, the company recorded 13% growth for the same period.
The company’s growth was broad-based and while driven primarily by pricing, there was a healthy underlying volume and mix evolution. Growth was accelerated in Nestle’s ‘out of home’ space in channels like hotels, education centres and workplaces. Organised trade also witnessed broad-based growth across consumers and categories.
However, Nestle said in a statement that it is witnessing early signs of softening in a few of the commodities like edible oils and packaging materials. However, fresh milk, fuels, grains and green coffee costs are expected to remain firm with the continued increase in demand and volatility.
“Commodity headwinds still persist in parts, we are hopeful that some of it might abate over a period of time. The intention is to keep the growth model secure, and balance volume and prices,” Narayan said.
He added that in times of heightened economic distress and budgets being fairly constrained, the company is careful not to trigger significant downtrading or consumers moving out of its brands. “In the pricing that has been done, we have tried to secure our price point or popularly priced portfolio in terms of commodity vagaries that have been faced. We believe that the decisions we have taken we have a reasonable chance to sustain this,” Narayan said. The company is operating roughly on 50-50 model for volumes and pricing, which he said was optimum for Nestle.
The company has also seen an uptick in rural markets during the quarter and registered double-digit growth across mega, metro and smaller cities. However, Narayanan clarified that the company has a lower base in rural markets and its growth in those areas should be viewed in that context.
“We have accelerated our RURBAN strategy and the acceptance of Nestle brands is driving rural growth. But, do not get carried away by the growth numbers because we are coming from a low base. If you compare me to HUL or Dabur they have got a much higher rural penetration and have been there longer,” he said.
In terms of categories, the milk products and nutrition category witnessed double-digit growth across brands with Milkmaid leading the way. The confectionery category led by KitKat and Nestlé Munch performed with strong double-digit growth aided by media campaigns, attractive consumer promotions, trade inputs and focused distribution drives.
The beverages category turned in double-digit growth yet again across channels helped by Nescafe and a consistent strategy of customised communication in the summer, as well as driving penetration and distribution. The foods category continued its strong double-digit streak of growth, with improved market share in Maggi noodles.
As part of strengthening its premiumisation strategy, Nestle India announced the acquisition of the pet food business of PURINA Petcare India. The company also announced the launch of its global nutrition brand Gerber in India. In the coming months, Nestle will be introducing products tailored to the needs of the toddler nutrition segment under Gerber.
