Published on 16/09/2019 10:52:59 AM | Source: Motilal Oswal Services Ltd

Neutral Nestle India Ltd For Target Rs.11,510 - Motilal Oswal

Strengthening building blocks for long-term growth

Nestle India (NEST) hosted its analyst meet on 9th Aug’19 to share a holistic view on its business. We thoroughly analyzed the details revealed by management and were particularly impressed with its best-in-industry growth strategy.


Key takeaways:

* After many years of lull (and an actual sharp decline in CY15 due to the Maggi crisis), NEST’s distribution reach is now targeted to be increased to 5.5m-6m outlets from the current 4.6m outlets.

* The company has launched 61 products over the past three years with a remarkable success rate of 70% (v/s industry’s success rate of 10%-15% for new launches). These products now contribute ~3.7% of sales. Notably, the timeline for new product innovation has come down from 18-24 months earlier to 3-9 months.

* Ad-spend growth of 18% YoY for 1HCY19 was very impressive at a time when most consumer peers curtailed spending in Jun’19. This especially comes after an even more impressive 40% plus ad-spend growth in CY18.

* Most segments reported strong top-line growth in 1HCY19. Revenue for Milk and Nutrition was up 8.5% YoY (volumes: +8.1% YoY), while that for Prepared Dishes (Maggi) increased 15.0% YoY (volumes: +12.9% YoY). Chocolates – aided by category revival and higher market share in Kit Kat – grew by an impressive 22.5% YoY in value terms and 22.8% YoY in volume terms. Beverage was the only underperforming category, with muted value and volume growth of 4.2% and 3.4% YoY, respectively.

* Cluster-based approach (15 zones) is helping the company to challenge anecdotal and historical thinking, and in turn, fuel growth.

* Also interesting was management’s emphasis that strong brand franchises with a high market share should not and need not give in to any adverse terms of trade sought by modern trade – a strategy that NEST has deliberately adopted in recent years without impacting its top-line growth.

* Attrition has consistently come down from 15% in CY15 to 3.5% annualized YTD in 1HCY19.

* Management, however, also reiterated that, despite its own good performance so far, the consumer demand slowdown in recent months and the rising material costs present a risk to earnings growth. Rising material costs have already meant that EBITDA and PAT growth were 8% YoY in 1HCY19 compared to volume-led doubledigit revenue growth. Valuations are expensive at 53.7x CY20E and 46.7x CY21E EPS. As a result, despite its strengthening structural story, we would wait before turning constructive on the stock. Maintain Neutral.


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