“Rural markets and smaller towns are aspirationally emulating urban India. I see a strong traction, a new wave in consumption,” said Narayanan, who leads the India unit of the world’s largest packaged foods company. “Infrastructure development, two-way commerce, digitisation and impact of social media are aiding all this.”
Nestle India, which makes Maggi instant noodles, KitKat chocolate and Nescafe coffee, reported its highest growth in a decade in the March quarter, with the exception of 2016, which was off a low base in the previous year when Maggi noodles hit a hurdle. Sales rose 20.43% to ₹4,808.40 crore in the March quarter.
“People are living for the moment. Post-Covid consumer behaviour has undergone a change – the philosophy seems to have become kal ho na ho,” Narayanan said. “Might as well enjoy what is today and see what will happen — seems to be the thought process.”
Nestle, which follows a January-December fiscal year, reported a near-25% increase in net profit in the March quarter on April 25, attributing this to higher prices and steady demand.
Fastest growth among FMCG firms in Q4
This is also the fastest growth among fast-moving consumer goods (FMCG) companies that have declared March quarter earnings so far.
Consumer packaged goods makers increased product prices 5-25% over the past five-six quarters across categories to offset surging cost inflation as well as to protect margins. While global inflation, geopolitical tensions, monsoon uncertainties and fuel costs are challenges, there is an overall, positive sentiment. “There is a strong surge of aspirations and we have taken it upon ourselves to ensure that availability meets aspiration,” Narayanan said. “Consumers are looking for companies that have stayed the course.”
Unlike FMCG companies such as Hindustan Unilever Ltd (HUL), Marico or Dabur, up to 80% of Nestle’s sales still come from urban markets. However, other areas are now making their mark felt. “Rural markets are growing not only at entry level packs but also value-added packs,” Narayanan said.
Nestle’s revenue growth was above estimates, driven by price hikes, ICICI Securities said in an April 25 note. “This performance has benefits of continued deeper expansion in lower tier towns and villages and a portfolio which is better insulated to overall market slowdown,” the report said.
Stating that growth has not been restricted to particular geographies, Narayanan said metros and mega cities have been growing at strong double digits, while smaller markets have also turned in strong double-digit increases, despite prices being increased even for small packs. “This overall trend is likely to continue, assuming there is nothing major to derail the Indian economy and rural markets,” he said. “This should be a reasonably clear-cut case of enhancement of the consumption platform.”
Indian consumers are evolving and looking at value more than simply price points, he said.
While prices of commodities such as edible oils, wheat and packaging materials have softened, milk prices remain high, which could hurt margins of chocolates, confectionery and dairy. Analysts said gross margins of companies with a large exposure to dairy and coffee could come under pressure. “Key risks (for Nestle) are consumption slowdown linked to economic performance,” the ICICI Securities report said.
Profit margins of FMCG companies have started to pick up for the first time in five quarters with declining raw material costs, but rural continues to lag urban growth. “Improving product mix and easing inflationary pressures would aid margins further in FY24 across the board,” Nuvama Institutional Equities wrote in a report earlier this month. “But pace of rural recovery and rupee depreciation could negate raw material deflation — both remain key variables worth monitoring.”
Narayanan said inflationary pressures are expected to be lower than last year. “Last year, we were combating almost 20% inflation. It was a very, very difficult call for us. This year inflation looks a little more benign except for coffee and milk, which could continue to hurt margins,” he said.
Analysts said Nestle India’s growth was ahead of street expectations. Nuvama Equities said in its note that all products delivered double-digit sales growth, indicating strong execution by Nestle. While Nescafe reached an all-time high market share in the quarter, milk and nutrition products were among the key growth drivers of the company in the March quarter.
