ICICI Direct: Nestle India Hit By Supply Chain Constraints In April
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ICICI Direct Report
Nestle India Ltd. reported muted revenue growth of 2% in Q2 CY20 with manufacturing and supply chain operations remaining disrupted in April.
The domestic sales growth was 2.6% while exports de-grew 9.3%. We believe supply in April was normal only for milk products and all other categories witnessed resumption of manufacturing in slow and gradual manner.
The quarter witnessed a strong growth in ‘Everyday’, ‘Nestlé a+’ and ‘Milkmaid’ mainly due to very high sales in initial weeks of April. We believe the company anticipated large scale disruption in milk supply or shift in consumer demand from pouch to powder and ultra high temperature milk.
However, pouch milk supply disruption did not last longer than few weeks, resulting in piling up of ‘Everyday’ inventory at the end of distributors. We believe milk products would see inventory rationalisation at the distributor level given demand conditions from hotels, restaurants and airline remain muted.
Operating profit saw growth of 7.2% with margins expanding 127 basis points. The margin expansion was led by cost cutting measures and reduction in advertisement and promotion spend (overhead spends down 487 basis points) partially offset by the 193 basis points contraction in gross margins.
Given the reduction in corporate tax rate, net profit increased 11.1% to Rs 486.6 crore (our estimate Rs 502.7 crore). Notably, e-commerce channel sales grew by 122% contributing now 3.6% of sales.
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