Nestlé Pakistan announced its financial results for 1HCY19 continuing with its high dividend payout – announcing Rs90/share as interim dividend. Going has been rather tough for the FMCG sector especially in the last year or so. The after tax profits went down by a massive 29 percent year-on-year during 1HCY19 and 25 percent year-on-year for 2QCY19.
The challenging macroeconomic environment of the country is an open secret, and of all the industries, FMCGs are usually the ones taking the earliest brunt. The economic slowdown, rapidly rising inflation, and a massive depreciation in the value of rupee – all happened simultaneously, and combined to erode the purchasing power of consumers, which is evident from the top line.
The top line dipped by 8 percent year-on-year, which is a first in recallable memory. Not at least since CY06, has Nestlé Pakistan, ever witnessed negative sales growth. This is the first instance of negative sales growth in any six month period in at least 14 years if not more. Even in CY08 and CY09, when inflation had reached new highs and the economic growth was very limited, Nestlé Pakistan managed to post decent top line growth. It surely appears, these are more challenging times and the volumetric growth is missing. With sizeable increase in inflation, it appears that the dip in volumetric sales may well be in double digits.
A 319 basis points dip in gross profit margins year-on-year, gives credence to the assertion that not all cost increase is a pass on item. Nearly 80 percent of Nestlé Pakistan’s top line is based on dairy and nutrition products, and that segment too, may have taken a hit in terms of volume.
The rising interest rate scenario also meant the finance cost swelled massively during the period, further denting the operating profits.
The resultant dip in after tax profits is the highest in memory, and only the second time in last ten years that Nestlé Pakistan has faced year-on-year decline in net profits.
The previous instance was in 1HCY18, when the cracks in the economy had started to widen, and the top line growth was only limited to one percent year-on-year. All said, companies as pedigreed as Nestlé Pakistan are generally strong enough to ride a rough wave or two, as Pakistan’s demographic indicators have not changed for the worse overnight, and the potential very much remains there. Nestlé Pakistan would want to stay afloat and dig in.