We have conducted a financial statement analysis of Nestle India and carefully studied its profitability ratios post the ban on one of its dominant products – Maggi noodles in 2015 which was lifted in the year 2016 and in 6 months the market share of maggi noodles in its segment had again become 57%. Here is a detailed look at the profitability ratios over the last 8 years audited financial statement analysis.
In India, giants like ITC, H.U.L., Colgate, Cadbury, and Nestle have long held sway in the FMCG sector, enjoying a formidable position bolstered by formidable entry barriers, including high import duties. This advantageous landscape allowed these companies to command premium prices for their offerings, resulting in generous profit margins. However, the winds of change have swept through the sector over the past decade with the gradual liberalization of the economy. As competition intensified, FMCG companies found themselves locked in a fierce battle for market share. Consequently, profit margins have been subjected to erosion amidst this cutthroat environment
About the Company
Nestle India Limited is a subsidiary of Nestle S.A., a multinational food and beverage company headquartered in Vevey, Switzerland. It is one of the leading food and beverage manufacturers in India, offering a wide range of products across various categories including dairy, beverages, prepared dishes and cooking aids, chocolates, confectionery, and infant nutrition. The product portfolio includes well-known brands such as Maggi, Nescafe, KitKat, Milky bar, Nestea, Nestle Milk, and Nestle Dahi (Yogurt), among others. These brands cater to a wide range of consumer preferences and are household names in India.
Surviving the Maggi Ban in 2015
In the year 2015, Nestle India faced a huge setback when one of its star products maggi noodles was banned on account of high levels of lead contained in them. However, the story of the comeback from them has been commendable. This comeback was built on the solid foundation of their brand loyalty, sensitization via better advertising and extensively investing in the product to ensure it meets all standards. In this period, Nestle India also improved its supply chain management which was also crucial during the supply chain issues faced in the Russia-Ukraine war scenario.
Financial Statement Analysis
We have completed a comprehensive financial statement analysis of Nestle India, meticulously examining its ratios and the results are as under:-
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Sales Growth
As discussed above, the sharp rise in the sales from 2015 to 2016 was on account of the ban being lifted on maggi noodles in the year 2016. The consistently rising sales of Nestle India is due to the pricing and mix growth by introduction of new high margin products with strong growth witnessed through e-commerce as well as out-of-home channels. The company is reporting an average YOY sales growth of roughly 11% every year which is an excellent boost in terms of the top line of the company.
Profitability Ratio – Gross Margin
Over the period from the fiscal year ending December 2022 to the fiscal year ending December 2023, there has been a notable and substantial rise in gross margin growth. This growth is particularly striking given that despite a significant increase in sales amounting to Rs. 2,229 crores, there has been a tangible reduction in direct costs by Rs. 153 crores in actual terms. The gross margins of the company have been consistently around 53% which shows excellent cost management and supply chain strength since during the last 8 years, there have been stress periods of COVID affected years as well as later on the raw material supply issues caused by the Russia-Ukraine war.
Profitability Ratio – EBITDA
As discussed above, since the gross margins have grown in the last year, it has reflected in the EBITDA margins as well. The EBITDA margins of Nestle India have been consistently around 23% over the last 8 years. This is a very crucial indicator of operational efficiency as even during the COVID affected years, the company has been able to record 23% EBITDA margins YOY.
Profitability Ratio – EBT
From FY 2015 to FY 2016, there was a sharp rise in the interest cost of the company however, the interest component in the financial statement analysis has remained consistent since this rise and there has been no subsequent rise in the interest expenses. This is the driving force behind the company reporting 19% EBT margins YOY which is roughly 4% below the EBITDA margins every year.
Nestle India has invested very heavily in the fixed assets in the last 5 years since it is an established company to expand its manufacturing in India. Previously, the company announced investments aggregating Rs. 2,000 crore spanning from 2000 to 2020. In 2022, the company revealed plans for a further investment of Rs. 5,000 crore towards expansion, with the intention to complete the investment by 2025. And thus the net block of fixed assets has been rising since the last few years after depreciation.
Profitability Ratio – Net Profit Margin
The company boasts of very huge net profit margins YOY of roughly 14% owing to the dominance of the company in its segment, effective cost management and operational efficiency.
Latest News
The Chairman and MD of Nestle India has recently expressed concerns over the festival season not giving the expected results this year in the segment of daily use products as there were more takers for the luxury products. In 2023, while overall headline inflation witnessed a decline compared to 2022, the trajectory of food inflation remained erratic. There is considerable anticipation regarding the economic activity surrounding elections, with hopes that it may provide a modest boost to companies.
The company has announced its first ever stock split with record date set as 5th January, 2024 in the ratio of 1:10 approved by the Board of the company in October, 2023. Thus, the impact of this stock split will have to be considered for the financial statement analysis in the next year.
Nestle India is planning to expand its share in the coffee, chocolates and noodles segment by substantial expansion in the manufacturing capacity of these products. In light of the same, the company has also received an in-principle approval from IPICOL i.e. Industrial Promotion and Investment Corporation of Odisha Limited for building a factory of about Rs. 900 crores for production of coffee, chocolates and noodles.
To know about the other FMCG giant Hindustan Unilever Limited, click here.