All-round improvement continues
Maintain Neutral on fair valuations Nestle’s (NEST) CY19 Annual Report highlights the company’s underlying strengths, which makes it one of the strongest top line growth opportunities in our Indian consumer universe.
Key takeaways are as follows:
* Near double-digit sales growth (9.5%) for the third consecutive year (excluding revival off the 2015 Maggi crisis in 2016) was led by volumes (7.0% of 9.6% gross sales growth), and was also broad-based with (a) 5-year high sales growth in Milk and Nutrition (its largest segment at 46% of sales), and (b) 9-year high sales growth in the Chocolates segment.
* The pace of new launches, which has gathered momentum since 2016, continued to be strong. Since 2016, NEST has launched 71 new products, which are contributing 3.4% of sales.
* Ad spends at 6.7% of domestic sales was maintained close to 15-year high levels, and thus, supported sales growth and new launches.
* Negative working capital was witnessed for the second consecutive year after being in the positive territory over CY11-17. With the special dividend announced in CY19, the company’s RoE and RoCE have received significant boost.
* The board’s proposal of granting 5-year extension (up to Jul’25) to the current Managing Director (MD), Mr. Suresh Narayanan, is a welcome move.
* Valuations are expensive at 67x CY21E EPS, thus, preventing us from turning constructive on the stock.
Broad-based growth led by volumes
* Growth across segments was broad-based, primarily led by volume growth (7.0% out of 9.5% sales growth).
* Barring beverages (~12% of CY19 sales), other segments reported strong sales growth, including 8.9% in its largest category Milk and Nutrition (46% of CY19 sales; highest growth since 2014). CY19 was another year of double-digit sales and volume growth in Prepared Dishes (largely Maggi – 29% of sales). Since 2010, NEST has witnessed highest growth in the Chocolates and Confectionary segment in 2019 with over 15% volume/value growth along with market share gain for the first time in many years.
* In recent times, sales growth for many of NEST’s peers has come off; however, it is doing exceedingly well on this front. The same trend was also witnessed in the recently declared Mar’20 quarter results, where NEST’s performance was once again superior to its peers.
* With high category growth opportunity in foods and NEST’s focus on volume led double-digit growth backed by new launches, prospects of top-line growth remain bright. This would also be supported by ad spends, benefits of the cluster-based approach, distribution expansion and usage of analytics.
New products doing well, ad-spend support remains strong
The company has launched 71 new products since 2016, which now contribute 3.4% of sales. Sales growth and support for new products comes from continued elevated levels of ad spends to sales, the second highest in the past 15 years at 6.4% of sales (barring the spike in 2015 as sales had collapsed due to the Maggi crisis)
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