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Nestle India Brokerage Report March 2023: A Sweet Future or Bitter Taste for Investors?
The report was prepared by Abhishek Agarwal from KR Choksey Research
CY22 was an extraordinary year and saw several adversities such as the Omicron variant of coronavirus, impending climate concerns, the global geopolitical developments, such as the Russia-Ukraine war.
Despite the macroeconomic volatility, high inflation and rise in cost to consumers, Nestlé India (NEST) steered through challenges and sustained its growth platforms.
NEST navigated through the challenges and delivered growth driven by strategies of scale, efficiencies, mix and pricing. NEST delivered the highest double-digit YoY growth in a decade, which was led by sustained volume and mix-led growth.
Total Sales and Domestic Sales for CY22 grew by 14.5% and 14.8% YoY, respectively. Domestic Sales growth was broad-based with a healthy balance of pricing and volume. Export Sales grew by 8.2% YoY.
NEST’s robust performance in e-commerce continued, fuelled by Quick Commerce and Click & Mortar.
Out-of-Home (OOH) business made a comeback and recovered its pre-COVID base. The robust growth in OOH was delivered by revamping, and resetting geography, channel and sales priority.
NEST sustained its momentum on the strong RURBAN-focused strategy. NEST did so by sharpening its geographic focus and increasing distribution points. NEST added around 55,000 villages and 1,800 distribution touch points in CY22 and increased consumer connect through Haat activities and RURBAN smart stores.
With a focus on premiumization as one of the future growth engines, NEST acquired Purina Petcare business. Purina delivers nutrition to pets. NEST also launched the globally renowned brand Gerber, catering to the nutrition needs of toddler segment. Gerber cereals are ‘Made in India’ and ‘Made for India’.
NEST launched its first ever ‘direct to consumer’ (D2C) platform – www.mynestle.in, that offers products manufactured by it in India. Consumers can also access gourmet recipes on the site and get free nutrition counselling. The service is launched in Delhi NCR and will subsequently be expanded to consumers in other parts of the country.
2023 has been declared as the International Year of Millets by the United Nations General Assembly. NEST has already incorporated millets in its sub-brand Ceregrow Grain Selection and will continue to do so across categories.
Nestlé India – View & Recommendation
NEST is India’s leading FMCG company. It is a subsidiary of Nestlé S.A., a Swiss MNC which is the world's largest food & beverage company. India is among the fastest-growing markets for Nestlé SA. NEST has a presence across India with 8 manufacturing facilities and 4 branch offices.
The company manufactures products of international quality under internationally famous brand names such as Nescafé, Maggi, Milkybar, Kit Kat, Bar-one, Milkmaid and Nestea and in recent years the Company has also introduced products of daily consumption such as Nestlé Milk, Nestlé Slim Milk, Nestlé Dahi And Nestlé Jeera Raita.
NEST has continued to focus on volume growth even in the face of macro challenges.
NEST is betting on premiumization as one of its growth engines and has taken action in this regard by acquiring Purina Petcare business that delivers nutrition to pets and launching globally renowned Gerber cereals catering to the nutrition needs of toddler’s segment.
NEST’s focus on expanding distribution as part of its RURBAN strategy is also one of the factors helping it grow even in the face of macro concerns.
Total volume growth remained positive, but revenue growth was led by pricing
NEST’s total Sales and Domestic Sales for the year grew by 14.5% and 14.8% YoY, respectively. Domestic Sales growth was broad-based with a healthy balance of pricing and volume. Export Sales growth was 8.2% YoY.
Including other operating income, revenue growth was 14.6% YoY.
The growth was broad-based across segments. Total volume growth was 5.2% YoY against total sales growth of 14.5% YoY, meaning the contribution of pricing growth was higher than volumes.
Milk Products and Nutrition sales grew by 8.7% YoY (40.6% of total sales) while sales volume declined by 0.5% YoY. Prepared Dishes and Cooking Aids revenue growth was 15.7% YoY (31.6% of total sales) and had an underlying volume growth of 5.7% YoY. Beverages portfolio sales grew by 19.3% YoY (12.0% of total sales) with a volume growth of 14.3% YoY. Confectionary sales grew by 25.0% YoY (15.8% of total sales) with a volume growth of 12.1% YoY.
Exports grew in CY22 as NEST’s focus was on promoting the Indian product portfolio, particularly in the confectionery and foods category, through both traditional and mainstream channels. Products from the prepared dishes and cooking aids category witnessed growth in key markets such as Canada, the United States, Australia, New Zealand, and Singapore. The confectionery business in the Middle East delivered strong Growth. Growth was secular across Confectionery, Beverages, Milk Products and Nutrition and Prepared Dishes and Cooking Aids Portfolio.
NEST accelerated the RURBAN thrust by going deeper into smaller towns and cities, scaling up on-ground activation, deploying more resources, and leveraging partnerships to expand coverage.
Growth from e-commerce channels continued with strong performance driven by MAGGI Noodles from the Prepared Dishes and Cooking Aids Portfolio, Coffee and Beverages and Confectionary portfolios. Quick commerce and Click & Mortar also enabled the growth of e-Commerce.
NEST continued to accelerate its e-commerce footprint. The contribution of e-commerce to sales increased to 6.5% in CY22 from 5.3% in CY21. E-commerce grew by 41.0% YoY in CY22
Key Performance Drivers
NEST sees positive volume growth in 3 out of 4 segments
Prepared Dishes and Cooking Aids Portfolio
NEST’s Prepared Dishes and Cooking Aids business showed strong growth momentum, with a healthy balance of product mix, pricing and volume growth in Maggi Noodles and Maggi Masala-ae-Magic. The sales/ volume growth was 15.7%/ 5.7% YoY, respectively.
The growth was aided by strong consumer engagements and market presence with media campaigns and attractive consumer activations. • Production capacity was ramped up across factories enabling strong growth momentum.
Maggi Noodles saw the highest-ever distribution during the year and maintained market leadership as per Nielsen report.
Breakfast cereals business accelerated in CY22 with a focus on driving penetration through accessible price points. Taste and nutritional benefits of its offerings were communicated to consumers through extensive sampling across metropolitan cities. Availability of breakfast cereal portfolio increased manifold resulting in strong volume growth for brands such as Nestlé Koko Krunch and Nestlé Gold.
Milk Products and Nutrition Portfolio
Milk Product and Nutrition Portfolio registered satisfactory growth with sales growing by 8.7% YoY while volumes declined by 0.5% YoY.
NEST expanded its offerings for toddlers aged two and above.
NEST also brought the globally renowned and iconic brand Gerber to India with an offering that is customised to the needs of Indian toddlers, benefitting from over 90 years of Gerber’s nutritional expertise.
Milkmaid saw a strong double-digit value growth. Ready-to-drink (RTD) business saw accelerated growth for the 2 nd consecutive year. These 2 businesses also contributed to the portfolio growth.
While in-home consumption continued to grow, there was a post-pandemic revival of the out-of-home channels.
The Beverages portfolio growth was 19.3% YoY in terms of sales and 14.3% YoY in terms of volumes.
The coffee and beverages business continued to witness strong growth enabled by a sharp, consistent strategy focused on recruitment and building relevance for the coffee category.
Nescafé in-home portfolio consisting of Nescafé Classic, Nescafé Sunrise, Nescafé GOLD delivered broad-based double-digit growth and recorded the highest ever single-year growth in household penetration. The portfolio also maintained its leadership position in the category with significant growth in market share.
Nescafé ready-to-drink and out-of-home delivered broad-based double-digit growth.
NEST had a sharp focus on mitigating inflationary pressures by adopting several key initiatives that delivered optimizations across the value chain which allowed for sustainable growth across the portfolio.
After two pandemic-led challenging years, NEST witnessed return of the confectionary consumers in CY22.
The portfolio registered robust growth ( growth of 25.0%/ 12.1% YoY in terms of sales/ volume, respectively) and market share gains led by two iconic brands – Kitkat and Munch.
Nestlé Professional – Out-of-Home Business
NEST’s Out-of-Home (OOH) business made a strong comeback in CY22 recovering its pre-COVID base and delivering robust growth of 39.0% YoY which was an outcome of revamping, resetting geography, channel and sales priority.
NEST built a differentiated and relevant food solutions portfolio in line with the growing industry need of standardization, versatility and delivery-friendliness.
Geographical expansion beyond metros into Tier-1 towns, tapping tourist hot spots and focusing on geographical clusters led to growth. This expansion was supported with an enhanced chef organization, café care engineers, OOH distributors and feet on street.
NEST entered the high growth pet food category in CY22
Pet Food Portfolio
NEST acquired the Pet Food business from Purina Petcare India Pvt. Ltd., through a slump sale.
With this, NEST has made an entry in the potentially high-growth pet food category. The portfolio has delivered a strong performance with accelerated growth in Dry Dog and Cat Food products.
NEST’s Pet Food portfolio includes globally recognized brands like Purina Supercoat and Purina Pro Plan in the Dry Dog Food range that provide complete and balanced nutrition, with no artificial colours or flavour, to help keep dogs happy and healthy.
The Pet Food portfolio also includes Purina Friskies, and Purina Fancy Feast in the Dry and Wet Cat Food range respectively, that provide the right balance of nutrition and delicious taste.
With a plan to bring new products and innovation, NEST has recently launched Felix Wet Cat Food, making a strong entry in one of the highest growth portfolios across the world in the Pet Food Category.
eCommerce grew with speed and delivered high growth and market penetration for NEST’s Pet Food portfolio.
Key Performance Drivers – New Launches
NEST continued to launch new products in India. The Company has launched over 110 new products over the last seven years.
NEST has approximately 30 new projects in the pipeline.
NEST managed to deliver strong double-digit topline growth but saw significant pressure on margins
NEST delivered decade-high double-digit YoY topline growth aided by volume and broad-based performance across all categories. This growth of 14.6% YoY in revenues was despite a challenging economic environment.
Despite an external volatile environment, inflation, price and cost to consumers, NEST steered through challenges, with its growth platforms not being compromised. NEST delivered this growth by strategies of scale, efficiencies, mix and pricing.
There were several headwinds for the FMCG sector in India in CY22, including a sharp rise in inflation worsened further by supply chain issues with an increase in fuel costs. Rural inflation was higher than urban inflation which delayed rural consumption.
Against the revenue growth of 14.6% YoY, the Cost of goods sold grew by 22.1% YoY, employee costs grew by 6.9% YoY and Other expenses grew by 14.4% YoY. This means that the higher gross margin pressure was partially mitigated by lower employee costs as efficiency (revenue per employee) improved.
However, the pressure on gross margins was not entirely mitigated for the year and NEST saw pressure on the EBITDA margins, which declined by 206 bps YoY to 22.1% in CY22 from 24.2% in CY21.
CY21 had exceptional costs of INR 2,377 mn which mainly comprises the aggregate of past service cost, settlement cost and incidental expenses incurred for the implementation of the ‘Future Ready Plan’ effective 1 st December 2021, for certain categories of employees. The only exceptional cost in CY22 is related to impairment loss on PPE of INR 294 mn.
PAT margin in CY22 was 14.1% vs. 14.4% in CY21, a YoY decline of 22 bps which is significantly lower pressure than at the EBITDA level. This is due to the higher exceptional costs in CY21 which were absent in CY22.
Cost & Margin Analysis
Like the rest of the world, India was impacted by decadal high commodity prices in CY22. As a result, NEST’s Cost of Goods sold as % of sales went up to 45.9% in CY22 vs. 43.1% in CY21.
Employee costs as % of sales reduced to 9.7% in CY22 from 10.4% in CY21, indicating improved efficiency and partly mitigating the input cost pressures.
Other expenses as % of sales remained flattish at 22.3% in CY22 vs. 22.4% in CY21.
Within other expenses, power and fuel costs as % of sales went up by 62 bps YoY. NEST reduced the intensity of advertising and sales promotion as a % of sales, which reduced by 112 bps YoY. NEST has consistently reduced advertising and sales promotion as a % of sales for the last 4 years.
Outlook: Uncertainties remain in terms of food inflation, acceleration of war and fears of a recession in parts of the world. NEST’s approach is to be boringly consistent in such times than being brilliantly erratic. NEST will continue to focus on building volumes, deepening RURBAN expansion, and bringing innovations with the support of Nestlé Group’s Global Research & Development network. The Company plans to astutely manage value and simultaneously nudge the premiumization trend that is driving economic recovery in parts.
Gross profit improved by 9.0% YoY to INR 91,471 mn. Gross margin declined by 280 bps YoY to 54.1% in CY22 from 56.9% in CY21. Gross margin pressure was on account of the unprecedented input cost inflation witnessed in CY22.
EBITDA for CY22 grew by 4.9% YoY to INR 37,420 mn. EBITDA margin declined by 206 bps YoY to 22.1%. The pressure on gross margins was partly mitigated by lower employee costs as % of sales.
PAT grew by 12.8% YoY to INR 23,905 mn while PAT margin contracted by 22 bps YoY to 14.1%. Lower exceptional costs in CY22 contributed to the lower contraction in PAT margins vs. EBITDA margin.
EPS for CY22 was INR 247.9, which is a growth of 12.8% YoY. EPS growth ramped up in CY22 vs. the previous 2 years.
Working Capital & Dividend Analysis
Working capital: Working Capital for NEST saw some uptick in CY22 after a sharp drop seen in CY21. This was led by a jump in current investments, cash, and other current assets and a lesser increase in current liabilities than current assets.
Dividend: In CY22 the company has recommended a final dividend of INR 75 per equity share and 2 interim dividends of INR 25 and INR 120 per equity share, respectively. The total dividend declared for the year stands at INR 220 per equity share compared to INR 200 per equity share in CY21, a 10.0% increase.
Nestlé India (NEST) has continued to see volume growth which is broad-based across most categories, despite the tough macro environment. The Company has seen positive growth across town classes in all 4 quarters of CY22. The growth has remained positive despite some lowering of growth rates in some town classes due to price hikes in Lower Unit Packs (LUPs). Consistent focus on volume growth and improving distribution and rural reach under RURBAN approach are contributing to broad-based growth. Through procurement strategies, internal savings programs, enhanced efficiency and calibrated pricing decisions, NEST has delivered consistent QoQ EBITDA margin improvement in Q3CY22 and Q4CY22, post the bottom in Q2CY22.
We expect revenue and Adj. PAT to grow at a CAGR of 10.8% and 18.6% over CY22-CY24E, respectively. We like NEST for its focus on penetration-led growth, especially in RURBAN. We also like the focus on premiumization, and cost rationalization and expect these factors to aid margins going ahead.
The shares are trading at 60.6x/53.6x its CY23E/CY24E EPS estimates, respectively.
We continue to apply P/E of 61.7x on CY24E EPS of INR 353.2 and maintain our target price of INR 21,805 per share (unchanged) with an upside potential of 15.1% from the CMP. Accordingly, we maintain an “ACCUMULATE” recommendation on the shares of Nestle India.
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