Nestle India Q2FY25 preview: Margins likely to get impacted by high commodity prices

Nestle India is set to announce its Q2FY25 financial results on October 17, 2024. In an environment marked by rising commodity prices and competitive pressures, let’s explore what we can expect from the company for this quarter.

During the July-September period, Nestle India’s stock underperformed the Nifty FMCG index, delivering a return of 5.27%, compared to Nifty FMCG’s 14.90% return in the same period.

What can you expect in Q2FY25?

Revenue and PAT (adjusted, as there was an exceptional item last year) are expected to rise in the mid-single digits. Earnings growth is likely to be driven primarily by pricing strategies as an inflationary environment has impacted coffee and cocoa prices. This situation is expected to exert some pressure on margins.

Why are margins likely to be under pressure?

As mentioned earlier, commodity price pressures, particularly for coffee and cocoa, are the primary reasons for margin strain. For context, cocoa prices started Q2 at around $7,300 per ton and peaked at just under $10,000 per ton by the end of August.

Additionally, higher overhead costs are likely to result in flat operating margins, expected to remain in the mid-20% range. How well the company manages these costs will be closely watched by market participants.

Volume growth and pricing strategy

Volume and price are the two main pillars of revenue. On the volume front, growth is expected to improve compared to the previous quarter. However, segments affected by significant cost inflation and where the company might have taken a price hike, need to be watched carefully. These pricing adjustments will play a key role in overall performance.

Performance across key segments

The infant nutrition segment is expected to face challenges, primarily due to competition from pharma companies. Flagship products like Maggi may also face pressure from local competitors offering more competitive pricing and trade margins.

Key focus areas for Q2FY25

Key areas of focus include the company’s commentary on demand trends and material costs. Raw material price inflation, which is affecting profitability, cost management efforts, and future price hikes, will also be closely monitored.

Ahead of its Q2FY25 results, Nestlé India fell for the sixth consecutive day, closing at ₹2,462.25 (-0.89%). The stock has delivered a return of approximately -10% year-to-date (YTD).

A look back at Q1FY25

In the previous quarter, Nestle India reported a net profit of ₹746.6 crore, marking a 7% growth year-on-year. Revenue stood at ₹4,814 crore, up 3.3% from ₹4,658.5 crore YoY.

A key highlight from management was, “Commodity prices are experiencing unprecedented headwinds in coffee and cocoa, with all-time high prices and an ongoing price rally. Cereals and grains are undergoing a structural cost increase due to MSP. There is relative stability in milk prices, packaging, and edible oils,” according to Nestle India.