18 November 2014
Update | Sector: Consumer
Nestle India
BSE Sensex
28,163
S&P CNX
8,426
CMP: INR6,152
TP: INR5,400
Neutral
Volume growth back in the narrative
Portfolio rationalization to continue
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
NEST IN
96.4
6,625/4,536
9/16/-57
593.2
9.6
Following are the key takeaways from Nestle’s (NEST) analyst meet:
Focus on volume growth, though not at the expense of margins.
Portfolio rationalization to continue; re-launches and not new launches.
Changing communication and positioning in Infant Nutrition.
Financial Snapshot (INR Billion)
Y/E Dec
2014E 2015E 2016E
Net Sales
98.6 111.0 126.9
EBITDA
Adj PAT
EPS (INR)
Gr (%)
BV/Sh (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
20.6
12.5
7.1
50.4
52.3
47.6
23.1
23.6
14.7
18.0
54.5
67.7
40.4
21.1
27.4
17.4
18.4
58.3
71.9
34.1
18.8
129.2 152.4 180.5
266.8 292.1 327.3
Shareholding pattern (%)
Sep-14 Jun-14 Sep-13
Promoter
DII
FII
62.8
4.8
14.3
62.8
5.1
14.5
62.8
6.3
12.6
Others
18.1
17.7
18.3
*FII includes depository receipts
Stock Performance (1-year)
Nestle
Sensex - Rebased
10,000
8,500
7,000
5,500
4,000
“Volumes” back in the narrative:
Management emphasized on volume-led
growth (this was a key change versus earlier analyst meets) and
“protection” of market shares but “without sacrificing margins” as it
believes the first two objectives can be met without necessarily eroding
margins. Increased focus on volumes will necessitate higher investments in
brand spends. However, it will largely focus on renovation and not entry
into new categories, which, in our view, is a key disappointment.
9MCY14 domestic volumes down 1.6%:
NEST’s domestic volumes continue
to remain tepid and have declined 1.6% in 9MCY14. Volume growth was
weak in Milk Products (-3.4%), Beverages (-7.5%) and Chocolates (-11.6%),
while relatively better in Prepared Dishes (+1.8%). Continued portfolio
rationalization and high competitive intensity impacted Chocolates, while
Beverages category volumes were impacted by weaker performance in Out
of Home (OOH) segment and portfolio culling. We note that secondary sales
growth was marginally better versus primary growth and quarter on
quarter trends did not change much in 2QCY14 and 3QCY14, though
1QCY14 recorded the highest volume decline.
NEST has not materially underperformed the industry:
The FMCG industry
and F&B growth rates have slowed down sharply (from 11.9% to 6.7% for
industry and 13.6% to 8.5% for F&B). Even categories in which NEST is
operating have slowed down from 16.5% to 8.5%. Hence, company’s 7.7%
growth in domestic sales in 9MCY14 is not materially inferior.
NHW remains strategic priority; key changes in Infant products strategy:
It
has emphasized 1) protecting market share, 2) focus on volume-led growth
and 3) fostering an inspired organization as the key priorities. In Infant
Nutrition, it is taking several initiatives – 1) using third party field force to
drive penetration in unexplored geographies, putting 100gm packs of
Cerelac
in those markets etc, 2) innovative communication strategy –
demonstrate what happens inside a baby’s stomach, leverage digital media,
Superbaby campaign (5m views) etc and 3) addressing Cow’s milk
opportunity – no longer fighting cow’s milk as it is culturally well ingrained.
Instead, it is positioning
Lactogen
as the best adapted cow’s milk for infants
and driving the right communication with doctors through MRs.
Valuation and view:
Despite the benign base, NEST’s volume growth is yet
to show a recovery. Continued portfolio rationalization and lack of visibility
on entry into new categories (“re-launches and not new launches”) will cap
the near term volume growth, in our view. Rich valuations (41.6x CY15E and
35.1x CY16E EPS) do not provide any margin of safety. Maintain
Neutral
with a revised target price of INR5,400 (30x CY16E EPS).
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Manish Poddar
(Manish.Poddar@MotilalOswal.com); +91 22 3027 8029
Investors are advised to refer through disclosures made at the end of the Research Report.

Nestle India
9MCY14 volumes weak despite benign base
NEST’s 9MCY14 volumes declined 1.6%, with domestic volume declining 1.6%
and export affiliates saw 2% volume de-growth. Volume growth deceleration in
domestic portfolio was across the board, with only Prepared Dishes posting a
marginal 1.8% volume growth.
Exhibit 1: Industry growth rates have decelerated materially (%)y
Jan-Sep'13
13.6
8.5
8.5
Jan-Sep'14
16.5
11.9
6.7
FMCG Industry
Foods & Beverages
Nestle categories
Source: Company, MOSL
Exhibit 2: 9MCY14 volumes decline 1.6% despite benign base Exhibit 3: Sales growth in low single digits
16.9
13.8
8.3
5.1
4.9
14.9
17.0
23.9
22.6
16.8
6.8
0.8
1.9
(1.6)
22.1 20.3
11.8
9.3
7.1
Sales Growth (%)
Source: MOSL, Company
Source: MOSL, Company
Exhibit 4: NEST’s market share in various categories
96.3
Nestle Market Share (%)
80.2
68.5
65.7
51.8
49.9
41.4
26.9
18.8
Source: MOSL, Company
18 November 2014
2

Nestle India
Exhibit 5: Domestic volume decline of 1.6%
Domestic volumes ('000 Tons)
Milk Products
Prepared Dishes
Chocolate & Conf
Beverages
Total
Domestic sales (INR b)
Milk Products
Prepared Dishes
Chocolate & Conf
Beverages
Total
9MCY13
101
184
34.6
14
333.6
9MCY13
28.9
19.8
8.5
5.9
63.2
9MCY14
98
187
30.6
12.9
328.4
9MCY14
32.1
21.4
8.3
6.2
68
Growth (%
-3%
1.8%
-11.6%
-7.5%
-1.6%
YoY
11.1%
5.1%
-2.4%
5.1%
7.6%
Source: MOSL, Company
Milk products’
(47% of revenue) volumes declined 3.5% (CY13 volume decline at
3.6%), while revenue expanded 11.1%. As per the management, performance
was impacted by general weak market conditions and high price-led competitive
intensity in certain markets. NEST continues to enjoy dominant shares (96.3%
market share) in Infant Cereals and 41.4% in Infant Formula. In a separate
presentation made by the Head of Infant Nutrition business, it discussed the
evolving market and challenges posed by this category. It has emphasized three
specific strategic priorities a) protecting market shares: To focus on multi
segment 1,000 days’ portfolio. Apart from Formula and Cereals, it has also
introduced maternal folio. NEST straddles the pyramid in Infant Formula – is
present through
Nestogen, Lactogen
and
NAN
at popular, mid-end and premium
segments.
b) Focus on volume-led growth:
It is deploying third party (medical
representatives) to drive penetration in unexplored markets. It will also be
leveraging LUP packs to augment its presence in white spaces (100gm
Cerelac
packs). Also, it has done detailed research (spoke to anthropologists,
psychologists etc) on importance of cow’s milk in Indian culture and reached a
conclusion that it is futile to fight this as it is a culturally well ingrained notion.
Instead, it will change its communication and positioning of
Lactogen
as the best
adapted cow’s milk for infant.
c) Fostering an inspired organization:
Living its purpose by supporting the
breast feeding initiative. Company launched the Superbaby digital campaign
which received wide acclaim apart from 5m views.
Exhibit 7: Revenue growth led entirely by pricing and mix
22.6
23.0
19.2
Milk Products
20.1
20.7
15.2
11.1
-1.1
-5.1
5.5
-3.0
Exhibit 6: Milk Products - domestic volumes down 3%
10.1
5.4
13.1
Milk Products
7.6
2.5
Source: MOSL, Company
Source: MOSL, Company
18 November 2014
3

Nestle India
Prepared Dishes & Cooking Aids
(31.5% of revenue) posted a muted 1.8%
volume growth (3.9% volume growth in CY13) and 8.1% revenue growth. NEST’s
market share in Instant Noodles stood at 80.2%. It is focusing on driving
premium portfolio with value-added benefits. As per management,
Maggi Oats
noodles has received good response and fortified seasoning portfolio has
delivered strong performance.
Exhibit 9: Revenue up 8.1% led by pricing/mix
Prepared Dishes
30.6
34.7
26.9
29.2
24.9
12.8
3.8
1.8
2007
2008
2009
2010
2011
2012
2013 9MCY14
Exhibit 8: Prepared Dishes volumes up 1.8%
30.1
24.8
21.7
Prepared Dishes
24.4
13.2
8.0
11.0
8.1
2007
2008
2009
2010
2011
2012
2013 9MCY14
Source: MOSL, Company
Source: MOSL, Company
Chocolates and Confectionary
(12.2% of revenue) volumes suffered the most
and declined 11.5% (2.3% decline in CY13), while revenue declined 2.4%. Impact
of portfolio rationalization, high price-led competitive intensity and challenges
in certain products like
Munch
drove the underperformance (reworking on
Munch). Alpino,
the recently-launched premium chocolate, is doing well but is
still a very small business.
Exhibit 11: Revenue declined 2.4%
24.8
19.5
13.6
12.7
6.3
-11.6
10.0
-2.4
Chocolate & Conf.
26.4
Exhibit 10: Chocolates volumes decline sharply on a benign
base
17.6
21.2
12.4
9.7
Chocolate & Conf.
-1.5
-9.4
-2.2
Source: MOSL, Company
Source: MOSL, Company
Beverages
(9% of revenue) posted 7.5% volume decline (3% volume growth in
CY13) and 5% revenue growth. Performance was impacted by portfolio
rationalization and issues in Out of Home (OOH) segment. While retail
performance (consumption at home) was good, it is reviewing the business
model in OOH.
18 November 2014
4

Nestle India
Exhibit 12: Volumes declined 7.5% in Beverages
13.2
7.9
Beverages
9.3
19.4
0.0
0.9
10.9
0.4
-3.1
-5.0
-7.5
2007
2008
2009
2010
2011
2012
2013 9MCY14
Source: MOSL, Company
11.8
5.1
5.1
Exhibit 13: Revenue grew 5% driven by pricing/mix
Beverages
18.8
17.9
Source: MOSL, Company
Exhibit 14: Revenue break-up; Milk Products’ contribution up 200bp in 9MCY14 v/s CY13
Chocolate & Confectionery
Beverages
45.1
44.4
43.7
Prepared Dishes & Cooking Aids
Milk Products and Nutrition
47.3
45.2
47.2
26.0
14.0
CY09
27.5
14.5
CY10
28.1
14.3
CY11
29.5
13.3
CY12
30.8
13.6
CY13
31.5
12.2
9MCY14
Source: MOSL, Company
18 November 2014
5

Nestle India
Other takeaways
Nutrition business is up 3x in six years.
It has decided to re-advertize brands like
Everyday
and
Milkmaid.
Does not want to take 180 degree turn. Will build on strengths.
Rising MNC competition in Infant Nutrition is not a cause of concern as their
reach is limited. NEST reaches 70,000 doctors.
Ad spends were flattish YoY. However, demand generating spends have grown
ahead of sales – 8.6% growth and comprise 6.2% of sales in 9MCY14.
Made certain changes in trade inventory to facilitate better distributor return on
investments. Hence, secondary sales growth is higher versus primary.
RM inflation is stabilizing – better from gross margin perspective. Milk and MSK
prices have cooled off while wheat, sugar and palm oil are deflationary.
Operating cash flow declined from 20.9% of sales to 16% YoY due to higher
working capital.
Additional interim dividend of INR10 per share as capex programme has
concluded.
Exhibit 16: MSK: Cooled off sharply in 4QCY14
126
115
96
101
91
101
CY12
CY13
150
139
CY14
146
125
120
100
92
94
97
CY13
131
Exhibit 15: Fresh Milk Fat: cooled off in 4QCY14
CY11
125
100 94
100 99
CY12
129
102
108
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
Exhibit 17: Green Coffee prices remained largely stable in
YTD CY14
CY12
100 105
109
100 100
104
CY13
CY14
114 112
105
124
124
111
Exhibit 18: Sugar prices deflationary
CY12
111
97
CY13
CY14
120
100
106
100
99 110 103
112105106
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
Exhibit 19: Palm Oil prices also deflationary
CY12
114109
107 111 112
CY13
CY14
114 107 116
Exhibit 20: Wheat prices flattish
130132
100
CY12
125126
104
CY13
CY14
132126
114
128132131
100
122
112 113
1Q
2Q
3Q
4Q
Source: MOSL, Company
1Q
2Q
3Q
4Q
Source: MOSL, Company
6
18 November 2014

Nestle India
Financials and valuations
Income statement
Y/E Dec
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT
2011
74.9
19.8
15.4
20.5
1.5
13.8
-0.1
0.5
0.0
14.3
4.3
29.9
10.0
10.0
19.6
0.0
10.0
2012
83.0
10.8
18.3
22.0
2.8
15.5
-0.3
0.6
0.0
15.8
4.8
30.6
11.0
11.0
9.9
0.0
11.0
2013
90.6
9.2
19.7
21.7
3.3
16.4
-0.4
1.2
0.0
17.2
5.6
32.5
11.6
11.6
5.7
0.0
11.6
2014E
98.6
8.8
20.6
20.9
3.3
17.2
-0.1
1.4
0.0
18.5
6.0
32.5
12.5
12.5
7.1
0.0
12.5
(INR Billion)
2015E
111.0
12.6
23.6
21.3
3.6
20.0
0.0
1.7
0.0
21.8
7.1
32.5
14.7
14.7
18.0
0.0
14.7
2016E
126.9
14.4
27.4
21.6
3.8
23.7
0.0
2.3
0.0
26.0
8.6
33.0
17.4
17.4
18.6
0.0
17.4
Balance sheet
Y/E Dec
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2011
1.0
23.3
24.3
9.7
0.5
34.5
25.5
9.8
15.8
13.7
1.3
11.6
7.3
1.2
2.3
0.8
19.4
8.9
10.5
-7.9
22.9
2012
1.0
28.3
29.2
10.5
1.6
41.3
44.3
12.2
32.0
3.4
3.7
11.2
7.5
0.9
2.4
0.5
20.3
10.0
10.3
-9.1
30.1
2013
1.0
22.7
23.7
11.9
2.2
37.7
49.0
15.3
33.7
2.9
6.3
16.9
7.4
0.8
7.5
1.2
22.1
8.9
13.2
-5.2
37.7
2014E
1.0
24.8
25.7
0.0
2.5
28.2
52.2
18.7
33.5
0.5
7.5
15.2
7.6
0.8
4.2
2.6
28.5
12.1
16.5
-13.4
28.2
(INR Billion)
2015E
2016E
1.0
1.0
27.2
30.6
28.2
31.6
0.0
0.0
2.8
3.2
31.0
34.8
53.0
54.4
22.3
26.0
30.8
28.4
1.0
1.2
9.0
10.8
21.8
30.3
7.9
8.8
0.9
1.1
10.0
17.0
3.0
3.4
31.5
35.9
14.5
17.0
17.1
18.9
-9.8
-5.6
31.0
34.8
E: MOSL Estimates
18 November 2014
7

Nestle India
Financials and valuations
Ratios
Y/E Dec
Basic (INR)
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Valuation (x)
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
Profitability Ratios (%)
EV/EBITDA
Dividend Yield (%)
Turnover Ratios
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Leverage Ratio
Asset Turnover (x)
2011
2012
2013
2014E
2015E
2016E
103.8
119.7
132.1
48.5
7.6
59.2
51.4
46.6
8.0
39.1
0.8
114.1
142.8
186.5
48.5
6.9
53.9
43.1
33.0
7.2
32.9
0.8
120.6
154.8
245.7
48.5
6.8
51.0
39.7
25.0
6.6
30.4
0.8
129.2
163.8
266.8
89.0
11.4
47.6
37.6
23.1
6.0
28.6
1.4
152.4
189.5
292.1
125.0
11.4
40.4
32.5
21.1
5.3
24.7
2.0
180.5
219.4
327.3
155.0
11.0
34.1
28.0
18.8
4.5
21.0
2.5
94.0
86.8
71.6
58.4
55.8
48.3
50.4
52.3
54.5
67.7
58.3
71.9
4.7
3.1
2.7
3.0
3.8
3.9
Cash flow statement
Y/E Dec
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2011
13.8
1.3
0.0
0.5
-4.2
0.9
12.3
-17.2
0.2
0.0
-17.0
0.0
9.7
0.0
-5.4
4.4
-0.3
2.6
2.3
2012
15.5
2.5
0.0
0.4
-3.7
1.0
15.6
-8.5
-2.3
0.0
-10.8
0.0
0.8
0.0
-5.4
-4.7
0.1
2.3
2.4
2013
16.4
3.1
0.0
0.9
-5.1
0.6
15.9
-4.3
-2.6
0.0
-6.9
0.0
1.4
0.0
-5.5
-3.9
5.1
2.4
7.5
2014E
17.2
3.3
0.0
1.2
-5.7
4.4
20.5
-0.7
-1.3
0.0
-2.0
0.0
-11.9
0.0
-10.0
-21.9
-3.3
7.5
4.2
(INR Billion)
2015E
2016E
20.0
23.7
3.6
3.8
0.0
0.0
1.7
2.3
-6.7
-8.2
1.7
2.4
20.4
24.0
-1.3
-1.6
-1.5
-1.8
0.0
0.0
-2.8
-3.4
0.0
0.0
0.0
0.0
0.0
0.0
-11.8
-13.5
-11.8
-13.5
5.8
7.1
4.2
10.0
10.0
17.0
E: MOSL Estimates
18 November 2014
8

Nestle India
NOTES
18 November 2014
9

Disclosures
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Nestle India
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