Bottomline continues to take precedence over topline for Nestle

MUMBAI: Swiss foods major Nestle India's lacklustre show in the three month quarter to June comes as a disappointment with the company still focussed on profitability rather than volume growth.

It is odd that at a time when high inflation and a slowdown in demand has impacted consumption demand, Nestle appears to be more keen on protecting its bottom line instead of pushing volumes. Though its net sales grew by 11.4%- the highest in the last four quarters, this growth has been largely driven by price increases by the company and higher exports. While the company did not disclose the underlying volume growth, a result update by HDFC Securities has pegged the volume growth at close to 1% year on year - which is positive after five quarters of decline.

Unlike other major consumer goods firms which are beefing up their marketing spending to invest more in their brands to weather a storm, Nestle India appears to be going slow on this front. Other expenses, which includes spending on advertising, has grown 9.6% over the previous year - lower than revenue growth. Besides, the proportion of other expenses to net sales was 24.2%- 40 bps lower than the past year. Lower raw material cost and other expenses helped the company post a 30 bps increase in operating margin, which was 22%.

The flattish volume growth coupled with lower spending on advertising failed to enthuse analysts and investors. According to data from Bloomberg, the stock now has 21 sell, 10 hold and only 8 buy recommendations by analysts. This is in contrast to the recommendations three months ago, when the stock attracted 11 buy ratings, 14 hold and only 12 sell ratings. The company's stock is trading at 49 times its earnings of the trailing four quarters. These are expensive valuations, difficult to justify at a time Nestle is struggling to boost volumes. With a return of 23 % in one year, it has been one of the worst performers among its frontline peers in the FMCG industry. And the scenario is unlikely to improve in the near term unless the company is more aggressive in pushing volume growth. Being a market leader in most of its product categories, Nestle faces a threat of losing market share to its competitors.