Stock Review: NESTLE & GSK CONSUMER HEALTHCARE

The June quarter performance of multinational food companies – Nestle and GlaxoSmithKline Consumer Healthcare – warrants some correction in their valuations on the bourses. The stock prices of these companies, like most FMCG stocks, had appreciated considerably in the recent past, stretching their valuations. Nestle's 20% growth in revenues, while appearing strong, is indeed the lowest growth in revenues logged by the company in the past five quarters. Its operating profit growth of 18% has been the smallest in the past four quarters.

Raw material cost has grown at 21%, higher than the growth in net sales. It constitutes over 49.5% of the revenues – marginally higher than that logged in the June quarter last year. The prices of key commodities like milk solids, coffee, edible oil and fats have remained high during the June quarter – putting pressure on the operating profit margins. Despite this, the operating profit margin dropped by a marginal 40 bps to 19.5%, thanks to the improvement in the product mix and other cost control measures undertaken by Nestle.

Logging a revenue growth of 21.5%, the June quarter performance of GlaxoSmithKline Consumer Healthcare was better than that seen in the preceding March quarter, when the company had posted a mere 9.5% increase in sales. Price increases effected by the company during the March quarter played out in the June quarter.

However, the operating profit margins took a beating – dropping by 124 bps over the previous year. Raw material cost, again the main culprit, rose by 35% — significantly higher than the sales growth. The proportion of this cost head to the total revenues increased to 32% from 29% a year ago.
While the consumption growth story has not come to an end, consumer goods companies are grappling with challenges like input cost inflation, intensifying competition and the looming threat of a drop in consumer demand.

While one factor, ie, raw material cost, may possibly abate in the near future, the other factor — competition— is here to stay. The eventuality of a drop in consumer demand is dependent on larger economic factors like inflation and the consequent monetary policies.