Stock performance of Nestlé India Limited could be impacted in the near to medium term as storm clouds of rising food and commodity inflation continue to loom over FMCG companies. Six of the raw materials used by the world’s largest food and beverage company Nestle, including edible oil, plastic and paper, have been hitting a 10-year high, Nestle India’s Chairman and Managing Director Suresh Narayanan said Thursday, adding that the storm clouds of global commodity prices are on the horizon. Some analysts have lowered the price target for the stock citing continuing raw material inflation, which they say is expected to weigh in on the margins. Nestle stock fell about 2% intraday and recovered some losses in noon trading. The shares were trading at Rs 18,100 per share after 12:00 pm.
Analysts cut target price
ICICI Direct research said it maintains a ‘Hold’ rating for the stock, however, it has lowered the target price (TP) to Rs 19,500 a share from earlier TP of Rs 20,450. The incessant commodity inflation could adversely impact Nestle’s growth in the medium term, the brokerage said. “Nestlé has witnessed strong growth in Maggi, chocolates & coffee categories despite slowing consumption of FMCG products with the change in wallet share. The slower growth in milk based products and incessant inflation in some of the important commodities would continue to put pressures on margins & profitability. Though we believe commodity inflation would eventually cool-off, its medium term adverse impact on growth is imminent,” ICICI Direct research said in a note Friday.
Kotak Institutional Equities have also cut the fair value (FV) of the stock to Rs 19,250 from Rs 20,000 though it continues with a ‘Add’ rating for the company The brokerage cited continued raw material inflation in edible oils, coffee, wheat, fuel, packaging and milk which is expected to weigh on margin in the near-term. “Nestle’s strong brand equity and product portfolio position it well to drive robust growth and navigate inflationary pressures,” it said in a note Friday.
FMCG firms considering price hike; Nestle views raising prices as last resort
Major FMCG companies in India, including ITC, HUL, Dabur and Britannia, are considering yet another round of price hikes in the coming months, as businesses try to stand against the rising inflation. This rise will be anywhere ranging from a meagre 4 per cent to up to 20 per cent. Read more: FMCG companies gearing up to keep daily supplies running amid 3rd wave; increasing stock, production buffers
FMCG major Nestle India on Thursday reported a 20 per cent decline in its net profit to Rs 386.66 crore for the fourth quarter ended on December 31, 2021 on account of a one-time exceptional item on change of pension scheme for its employee. The company however said its operating margin improved to 21.7 % from 20% and the net profit before exceptional items was up 15.2 % from 14.1%.
While there was a sequential gross margin improvement leading to a margin beat, the management said further material cost pressures are here to stay for the time being and may impact CY22 margin, Motilal Oswal said in a note. “While we like the longer term investment case for Nestle, driven by its high topline growth potential, expensive valuations and commodity cost concerns lead us to maintain our Neutral rating,” it added.
Nestle India MD Suresh Narayanan in an earnings call with the investors said that inflation is a cause of concern, adding that food inflation and commodity inflation is here to stay and it is something we have to watch out for. Narayanan said the company has leverages at its disposal to address inflation concerns but increasing prices will be the last lever.
“Typically a company has three or four levers that it uses. Number one is portfolio, number two is economies and cost efficiencies, number three is sweating its assets or leveraging the impact of scale and fourth is pricing. How much each of it we will have to touch, only time will tell,” he said. Narayanan also said he believes in consumer power over price power.
Asked about how much price rises can pinch in future, Narayanan said “I can only tell that today the pain is being felt. Today my arm is hurting, that much I can tell. Whether I can play Nadal next year, I don’t know.”
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