Nestlé Third Quarter Overview: Gross Margin May Feel Shocks From High Commodity Inflation; likely to announce an interim dividend

Fast-moving consumer goods giant Nestle will be the center of attention on Wednesday ahead of its year-to-date third-quarter results. In the third quarter of 2022, Nestlé is expected to record double-digit sales growth. Despite strong inflationary pressure, the company’s food segment is expected to experience volume growth, but gross margins could be affected. Nestlé will notably announce a second interim dividend for 2022 outside of Q3.

On BSE, Nestlé shares closed at 19,385 each per 450.35 or 2.38% Tuesday. The company’s market capitalization is nearly 1.87 lakh crore.

In addition to the third quarter results, the FMCG player board will consider a second interim dividend on October 19.

Earlier this month, in its regulatory filing, Nestlé announced that the board would also consider declaring a second interim dividend for the year 2022, if any, on October 19.

For the second interim dividend, the company has set November 1 as the record date to determine eligible shareholders. If the board of directors approves the second interim dividend, the company expects to pay them from November 16, 2022.

Currently, Nestlé has a dividend yield of 1.03%.

In 2021, the company paid a dividend of 2,000% totaling 200 per share.

Nestlé tracks the calendar year to announce its financial performance. In the second quarter of 2022, the company recorded a net profit of 515.34 crore down 4.31% from 538.58 crore in the first quarter of 2021. However, revenue jumped 15.68% to reach 4,055.94 crore in the second quarter of the current year against 3,506.17 crores in the same period a year ago.

What to expect from Nestlé in the third quarter?

In its second quarter overview report, ICICI Direct said, “Nestlé is expected to experience sales growth of 11.1%, driven by both volumes and prices. Despite strong raw material inflation, the food segment is expected to experience volume growth.

He added: “Although milk prices have remained high, costs for edible oil, crude and other related costs have come down significantly.”

ICICI Direct estimates that a decline in raw material prices would be reflected in the company’s margins beginning in the third quarter of FY23. The report adds, “We estimate a gross margin contraction of 169 basis points and a contraction in operating margin of 139 basis points. Net income is expected to increase by 3.7% for 640.7 crores.”

For Q3FY23, ICICI Direct expects Nestlé’s revenue to reach 4,314.5 crore up 11.1% yoy and 6.9% yoy. EBITDA is expected at 994 crore up 4.8% yoy and 21.3% yoy. PAT is factored to 640.7 crore up 3.7% YoY and 24.3% YoY.

Additionally, HDFC Securities in its Q2 report said it models 13% year-on-year revenue growth for Nestlé. Three-year revenue CAGR at 11%. However, the brokerage firm expects a contraction of 220 basis points year-on-year from GM due to pressure on input costs. While the EBITDA margin is expected to contract by 146 basis points year-on-year to 23.3%. EBITDA is expected to grow 6% year-over-year.

HDFC Securities expects comments on the recovery of trade channels and rural demand, new product pipeline and packaged food demand trends among the key things to watch.

For Nestlé’s second quarter performance, IDBI Capital said in its report: “We expect overall revenue growth of 14% year-on-year, driven by (i) continued demand for home consumer products such as Maggi, Kitkat, Nescafé, etc. and (ii) sequential improvement in out-of-home consumption.”

In addition, IDBI Capital’s note added that commodity price inflation will cause gross margin to contract 130bps yoy to 54%. Wheat prices increased by 21% year on year, while the price of milk powder increased by 14% year on year. EBITDA margin down 102 bps year-on-year to 23.4%.

While Phillip Capital’s rating said single-digit volume growth was expected to hold, as the company moved into the backcountry. While higher agricultural inflation, the increased focus on LUP as it penetrates deeper into rural areas will put pressure on the company’s gross margin. Additionally, pressure from RM increased transportation costs to put pressure on operating margins.

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