Nestle Q3 preview: Gross margin may feel shocks of high inflation in raw materials; likely to announce interim dividend

On BSE, Nestle shares closed at ₹19,385 apiece up by ₹450.35 or 2.38% on Tuesday. The company’s market cap is nearly ₹1.87 lakh crore.

Apart from the Q3 earnings, the FMCG player’s board will consider a second interim dividend on October 19.

Earlier this month, in its regulatory filing, Nestle announced that the Board of Directors would also consider the declaration of a second interim dividend for the year 2022, if any, on October 19.

For the second interim dividend, the company has fixed November 1 as the record date to determine eligible shareholders. If the board approves the second interim dividend then the company plans to pay them on and from November 16, 2022.

Currently, Nestle has a dividend yield of 1.03%.

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

Nestle follows the calendar year for announcing its financial performance. In Q2 of 2022, the company posted a net profit of ₹515.34 crore down by 4.31% from ₹538.58 crore in Q1 of 2021. However, revenue jumped by 15.68% to ₹4,055.94 crore in Q2 of the current year against ₹3,506.17 crore in the same period a year ago.

What to expect from Nestle in Q3?

In its Q2 preview report, ICICI Direct said, “Nestle is estimated to witness sales growth of 11.1% led by both volumes as well as pricing. Despite high inflation in raw material, the foods segment is expected to witness volume growth.”

It added, “Though milk prices have remained high, edible oil, crude & other related costs have come down considerably.”

ICICI Direct believes that a dip in commodity prices would reflect in the company’s margins from Q3FY23 onwards. The report added, “We estimate gross margin contraction of 169 bps & operating margin contraction of 139 bps. Net profit is expected to grow 3.7% to ₹640.7 crore.”

For Q3FY23, ICICI Direct expects Nestle’s revenue at ₹4,314.5 crore up by 11.1% yoy and 6.9% qoq. EBITDA is expected at ₹994 crore up by 4.8% yoy and 21.3% qoq. PAT is factored at ₹640.7 crore higher by 3.7% yoy and 24.3% qoq.

Further, HDFC Securities in its Q2 report stated that they model 13% yoy revenue growth for Nestle. Three-year revenue CAGR at 11%. However, the stock brokerage expects a 220 bps YoY contraction in GM on account of input cost pressure. While the EBITDA margin is seen to contract by 146bps YoY to 23.3%. EBITDA to grow by 6% YoY.

HDFC Securities expect commentary on recovery in trade channels and rural demand, new product pipeline, and demand trends in packaged foods among key monitorable.

For the Q2 performance of Nestle, IDBI Capital in its report said, “we expect overall revenue to grow by 14% YoY driven by (i) continued demand for in-home consumption products like Maggi, Kitkat, Nescafe, etc and (ii) sequential improvement in out of home consumption.”

Also, IDBI Capital’s note added that inflationary raw material prices will lead to gross margin contraction by 130bp YoY to 54%. Wheat prices increased 21%YoY while the price of milk powder increased 14%YoY. EBITDA margin to decline 102bp YoY to 23.4%.

Whereas Phillip Capital’s note stated that mid-single-digit volume growth to sustain, as the company penetrates into the hinterland. While higher agri inflation, increased focus on LUP as it penetrates deeper into rural areas will put pressure on the company’s Gross margin. Further, RM pressure, increased freight costs to put pressure on operating margins.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.