Consumer

NESTLE’s profitability declined by 13%

Aftab Ahmed

Islamabad: NESTLE’s profitability has declined by 13% YoY in 1HCY20 due to increased cost for raw milk and sugar, rupee depreciation and decline in beverages sales due to countrywide lockdowns during majority days of 2QCY20.

Nestle Pakistan Limited (NESTLE PA) held its analyst briefing on Tuesday to discuss financial performance for the 1HCY20. Following are the key takeaways of the briefing.

Impact

NESTLE’s profitability has declined by 13% YoY in 1HCY20. Management attributes decline in profitability to (1) increased cost for raw milk and sugar, (2) 10% YoY avg. rupee depreciation in 1HCY20 and (3) decline in beverages sales due to countrywide lockdowns during majority days of 2QCY20.

Company sales increased by 1% YoY in 1HCY20. Growth in sales remained limited due to 19.9% decline in beverages sales, while Dairy and Nutrition segment grew by 8.1% YoY in 1HCY20. To highlight, support to revenue also came from price hike for Milk Pak (UHT milk brand) during 1HCY20.

On cost front company has shared that its margins remained under pressure and declined by 0.7ppt YoY in 1HCY20. Management attributes decline in margins to (1) ~18% YoY increase in raw milk prices, (2) significant increase in sugar prices, (3) increase in packaging and direct material cost due to avg 10% rupee devaluation as one third portion of these cost is exposed to FX risk and (4) increased input cost due to inflation.

Among other major heads, NESTLE admin/finance cost increased by 26/25% YoY in 1HCY20. Management has attributed increase in finance cost to higher debt levels and increase in interest rates. Management has also discussed that its current level of debt (Rs30.7 bn) will remain at these levels in future, while it will benefit from recent 625bps cut in policy rate.

Furthermore, company has discussed detail of its market share in different categories. NESTLE market share in UHT milk (Milk Pak) category stands at 36.6%, tea whitener segment (both liquid and powder) market share stands at 40.5% and beverages segment holds 35.9% market share. To highlight, company has also discussed that NESTLE is currently at second position in UHT milk category due to increased market share of Olpers. Management has also shared that current market size of UHT milk is stands at approximately 400mn liters.

Management has shared details of its territory wise sales breakup. NESTLE is driving 35% of its revenue from south market (Sindh and Balochistan), 34% from center (Punjab) and 28% from north market (KPK, GB, FATA and AJK).

Moreover, management has also shared that company is driving 77.2% of its revenue from dairy and nutrition products sale, beverages is contributing 22.6% in overall sales and 0.1% in contributed by the others.

While discussing impact of COVID-19 on company’s sales, management is of the opinion that its dairy and nutrition segment has benefited from outbreak of COVID-19 and witnessed increase in sales due to change in preferences towards packaged milk along with enhanced sales through e-commerce channel.

Outlook

The stock is not under our formal coverage. However, company is expected to benefit from (1) conversion of consumer preferences from loose milk to packaged milk products (already triggered by outbreak of COVID-19), (2) recovery in beverages segment as economy reopens, (3) price hike of Milk Pak in 2HCY20 and (4) decline in finance cost due to 625bps cut in policy rate.

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