21 August 2018
Good going, good prospects but fairly reflected in valuations
We attended Nestle India’s (NEST) Analyst Meet 2018. Key takeaways:
Over the past six quarters (starting 1QCY17), NEST’s volumes have increased
impressively at 11.3%, 7.7%, 8.9%, 18%, 6.9% and 11.5% YoY (note that volumes
data was not shared in the interim quarterly results).
NEST has been able to expand its market share in pasta and coffee (claims to be the
market leader again). The share in other categories has been stable.
Domestic volume growth was mixed in 1HCY18. Prepared Dishes & Cooking Aids
(PDCA) and Powdered & Liquid Beverages volumes grew at a strong 12.8% and 9.2%,
respectively. On the other hand, Milk products & nutrition (M&N) and Confectionary
volumes grew at a relatively slow rate of 4.6% and 6.1%, respectively.
New products contributed 3% of sales in 1HCY18, as against 2.8% in the year-ago
period (2.6% in CY17). Of the 36-38 new products launched recently, around 25 have
been retained. The rest did not scale up as expected, and thus, were either culled or
pulled back to the drawing board.
Comparable gross margin improved 400bp YoY in 1HCY18, majorly contributing to
the 470bp comparable EBITDA margin expansion. Management indicated that
material prices are on an uptrend and that price increases, if any, may not be
commensurate with cost increases.
Pet care products were not launched in the listed entity, which management
attributed to (a) the lack of synergies between customers and channels and (b) the
lack of expertise of the listed company management in this space. The breakfast
has received good response online just within a few weeks of
Among the various points discussed in the analyst meet, we were particularly
enthused by the volumes outperformance of 200bp (not shared in interim results)
versus our estimate, which consequently prompted us to raise our sales and PAT
forecasts for FY19. While the sales prospects appear promising for CY18 and CY20
(highest for Nestle since CY11), the risks on the margins front are high, particularly
after the windfall gross margin gains in 1HCY18. This is mainly because material
costs have started trending up and management has stated its intention of
protecting growth even if it means lower price increases than in the past in response
to material cost movement. We, thus, maintain our Neutral rating with a target price
of INR10,620 (49x Sep’20E EPS).
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
1049.8 / 15
11000 / 6585
Financials Snapshot (INR b)
EBITDA (INR b)
EPS Gr. (%)
Shareholding pattern (%)
Jun-18 Mar-18 Jun-17
FII Includes depository receipts
Stock Performance (1-year)
Sensex - Rebased
New products – mostly retained, fueling domestic growth
New products/innovations contributed 3% of domestic sales in 1HCY18, as
against 2.8% in 1HCY17 (2.6% in CY17). Of the 36-38 new products launched
recently, around 25 have been retained. The rest did not scale up as expected,
and thus, were either culled or pulled back to the drawing board.
Munch Nuts, Milkybar
have performed well.
On the other hand,
Pro Grow, Everyday
masala fusion and
have not lived up to the expectations. The key reason was the difference
between the intention of the product and the consumer perception.
Krishnan Sambamoorthy – Research Analyst
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 6129 1545
Vishal Punmiya – Research Analyst
(Vishal.Punmiya@MotilalOswal.com); +91 22 6129 1547
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