Nestle aims at expansion of out-of-home consumption

Nestle reported ITS Q2results for 2023, which were in line with expectations. The company achieved double-digit growth across all its products, primarily driven by a favourable product mix, increased volume, and improved pricing. Additionally, during the quarter, the out-of-home (OOH) business experienced rapid acceleration. The gross profit margin (GP margin) expanded by 90 bps (0.9%) y-o-y, meeting the estimates.

Management highlighted that the costs of edible oils, wheat, and packaging materials remained in the lower range, while milk costs remained stable, and there was a softening in fuel prices. However, the prices of Robusta coffee remained high during this period. The e-commerce channel continued to show strong growth and contributed 6.5% of the sales in 2QCY23. This reflects Nestle’s successful efforts to capitalise on the growing online market.

In-line result with estimates

Nestle’s net sales grew impressively by 15.1% y-o-y to `46.6 billion, exceeding the estimated `45.9 billion. This growth was driven by a healthy combination of pricing, volume, and product mix. Domestic sales showed a strong performance, growing by 14.6% y-o-y, while export sales also saw significant growth. Ebitda also demonstrated substantial growth, rising by 25.4% y-o-y to `10.6 billion, surpassing the estimated `10.3 billion. Overall, the first half of CY2023 was successful.

Category performance

Milk Products: MILKMAID and Peptamen performed well, and new launches like Resource Fibre choice and Everyday Zero added sugar contributed to the growth.

Confectionery: Robust growth led by KITKAT and MUNCH.

Beverages: Double-digit growth in this category was primarily led by Nescafe Classic, Nescafe Sunrise, and Nescafe Gold for both hot and cold coffee occasions. A new launch, the cold coffee premix Nescafe all in 1 Frappe also contributed.

Valuation: Nestle maintains its FY24E and FY25E EPS estimates. The company holds a strong position in the domestic food market with an innovative product portfolio. It aims to expand out-of-home consumption and reach rural markets, driving sustained double-digit earnings growth. With substantial investments in capacity enhancement, brand support, and R&D initiatives, Nestle is well-prepared to capitalise on India’s Packaged Foods segment, ensuring promising long-term revenue and earnings prospects.