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Focus on product innovation, expanding rural reach

We attended the Nestlé India Analyst Meet to get an insight on the CY20 operational performance. The management also elaborated on its strategy on new launches, rural distribution expansion & aggressive capex plan for the future. Nestlé registered volume growth of 6% in CY20 aided by strong growth in Maggi Noodles (~20% in Q4CY20) & KitKat (>20% in H2CY20). Some key challenges faced by the company during pandemic were supply constraints in noodles category in Q2CY20 & demand contraction from out of home channels in beverage segment. However, the management emphasised the strong traction in multi-pack noodles in rural regions in H2CY20 & strong growth in retail segment in coffee (>11% in CY20). One of the important highlight of the management commentary was continuance of its thrust of new launches in future as well. The company has launched 80 new products in last five years with 75% success rate and it has 40-50 innovation projects in the pipeline. NIL is increasing its rural presence since last five years from access to 1000 villages in 2016 to ~90000 villages in 2019. It aims to further increase its rural presence to 1.2 lakh villages by 2024. We believe the focus on innovation, increasing its reach and expanding capacity would cover both facets of creating demand and improving availability of its products.

Other key highlights

* During CY20, milk products & nutrition segment (contributes 45.8% in value sales) grew 8.9% with secular growth trends. Prepared dishes & cooking aids (contributes 30.1% in value sales) grew 11.4% aided by strong volume growth in Q4CY20. The company has increased penetration by 1 crore households in last one year

* Confectionary segment (contributes 13.6% to value sales) saw growth of 7% with KitKat growing more than 20% in H2CY20. Beverages segment (contributes 10.5% in value sales) saw muted 0.9% growth given out of home products contributes significantly to the sales. However, retail (B2C) sales was up 11% during the year

* Rural sales contribute 25% of total sales. NIL is looking to raise its footprint from 0.9 lakh villages to 1.2 lakh villages in next four years

* E-commerce channel sales witnessed growth of 111% in CY20 contributing 3.7% of total sales whereas 85-90% of NIL’s business was contributed by general trade, which still has a lot of growth potential in tier 2, tier 3 towns. The growth rate in these towns is 2- 3x of urban regions

Valuation & Outlook

With the clear strategy to focus on new product innovation, expanding rural reach and adding capacities, the company is expected to continue to grow at a sustainable pace for an extended period of time. Most of NIL’s brands are targeting the young & aspirational class. It would be able to reap the benefits of a demographics led consumption boom. We maintain our target price of | 18000 and HOLD recommendation (unchanged) on the stock.

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