Stock Review: NESTLE INDIA

Nestle India managed to combat cost price inflation and growing competition that negatively impacted fast moving consumer goods companies in the quarter to December 2010. The better than-expected performance was fuelled by an increase in demand for its products. The foods company's domestic sales grew 26.5% backed by increased volumes and better realisations. Export sales dipped by 17.9% due to realisations being partly impacted by a rising rupee.

The company had incurred higher expenses on employees and brand building during the fourth quarter of 2009, thereby impacting its operating profit. This low-base effect led to a 72% YoY jump in operating profit for the quarter ended December 2010. This does not undermine the company's efforts to contain input cost inflation as the raw material to sales ratio has dropped for the first time in the last five consecutive quarters to 47.6%. Raw material costs also grew at 22% — lower than the 23.6% rise in net sales.

Unlike its peers, Nestle has been able to pass on the burden of input cost inflation to its consumers. Since the raw material cost remained high throughout the year 2010, the company is expected to witness lower pressure from input cost inflation in the coming quarters on account of a high-base effect.

The competition in the instant noodles segment is increasing with the launch of Knorr Soupy noodles by HUL, Foodles by GSK Consumer Healthcare and Yippee noodles by ITC. Reinforcing the strength and recall of the Maggi brand and rejigging its product portfolio may help Nestle maintain its leadership in its product categories.

The company's stock price has been sliding since mid-November over concerns that rising cost of milk and milk products amid increasing competition would impact the company's bottomline. With Nestle managing to contain this element of cost during a time of inflation, investors' confidence is likely to be restored. The company's stock is trading at 46 times its annual earnings. Considering that its peak valuation in the past one year has been 53.2, current valuations look fair considering the robust performance delivered by the company and the prospect of a repeat performance.