NESTLE: Add This Yummy Taste To Grow Your Portfolio

Nestle India Limited is a food and beverage company that has a strong presence in the FMCG industry in India. It is a subsidiary of Nestle S.A. of Switzerland. Nestle India operates through eight manufacturing facilities and four branch offices spread across the country. 

The company’s product portfolio takes up about 85 per cent of the FMCG market share in India. It benefits from strong brand equity and new product launches. The popular products include Maggi noodles and its variants, Nescafe, KitKat, Nestle yoghurt, Milo, infant formula Lactogen NAN and infant cereals like Cerelac, EveryDay tea creamer, Milkmaid, Munch, etc. The Indian economy is experiencing a slow and steady growth owing to the impact of rising global trade tensions and the credit squeeze in the domestic market. Hence, businesses had registered a reasonable growth in revenue and profits during the year. With the hope of stability in governance and growthoriented policies worldwide, better growth rates in the economy and industry are expected. The FMCG business in the global industry remains challenging because of the slowdown of consumption mainly due to shrinking diaspora, mass lay-offs, politically unstable situations in key markets and steep local currency depreciation in few economies. Due to the prolonged effect of the implementation of GST, companies have reduced the number of their warehouses and recovery of production activities has been slow.

PRODUCT CATEGORIES:

Prepared Dishes & Cooking Aids:

Prepared dishes and cooking aids include products such as instant noodles, sauces, seasonings, pasta, cereals and masalas. For H1FY19, the product group grew by around 15 per cent, thus contributing to 28.9 per cent towards the total growth. The market share of Maggi products alone consist of 51 per cent. Through multifaceted inputs and regional engagements increasing the penetration and distribution of Nestle’s products, Maggi has been maintaining its popularity in the market. Nestle launched new innovative products such as Maggi Special Masala noodles and Maggi Nutrilicious baked noodles containing sweetcorn. As for the cooking aids business, refurbished and attractive packaging along with the launch of new variants of Maggi Masala-Ae-Magic for non-vegetarian and South Indian dishes has resulted an increased demand. It introduced breakfast cereals through a joint venture between Nestlé S.A., Switzerland and General Mills Inc., USA. For the year ended December 31, 2018, the product group had sales of 240879 MT amounting to value of Rs.3105.25 crore, which is an increase of 14.7 per cent compared to the sales of the previous year which were boosted by strong performance of Maggi and also launch of the new organic cereals.

Milk Products and Nutrition:

Milk products and nutrition product group includes dairy whitener, condensed milk, UHT milk, yoghurt, maternal and infant formula, baby food and healthcare nutrition. This product group has been delivering satisfactory growth in volumes from existing as well as new products. The company expanded its chilled dairy portfolio to include healthier range of yoghurt based products, marketed by the name of Dip and Spread. The products under infant formula and infant cereals were appreciated by the consumers for being the only products on shelves with healthier options. Milk products and nutrition has a market share of 81.55 per cent, thus contributing 46.8 per cent to the domestic sales of Nestle. For the year ended December 31, 2018, the sales stood at 137066 MT amounting to Rs.5187.63 crore, thus increasing by 7.64 per cent from sales of Rs.4819.63 crore in the previous year. The growth can be attributed due to sustained performance of Ceregrow and Nangrow.

Powdered and Liquid Beverages:

Instant coffee, instant tea and ready-todrink beverages belong to the powdered and liquid beverages product group. Nescafe is a prominent brand in coffee and beverages with robust brand growth. The company launched NESCAFÉ É which is a smart app-enabled coffee machine. Nestle wishes to foray more into new product launches so as to leverage global innovations for delivering superior coffee cup to consumers. Export sales of instant coffee were affected due to discontinuation of preferential trade agreements, but even then for the year ended December 31, 2018, Nestle sold 27013 MT products resulting into sales of Rs.1522.61 crore, thereby expanding by 9.77 over the sales of the previous year for this product group.

Confectionery:

Confectionery includes bar countlines, tablets and other sugar confectionery items. The main focus of the product group is on growing the core and foraying into the value-up or premium segment. The company launched a few new variants of Munch and KitKat chocolate bars and also modified packaging to attract more consumers. KitKat had a strong growth and an increasing market share along with Milkybar Moosha which helped in gaining sales of 42197 MT for confectionery for the year ended December 31, 2018 with a sales figure of Rs.1400.74 crore which is a substantial growth of 14.69 per cent compared to Rs.1221.35 in the previous year. Growing market competition and increase in raw material cost poses a risk to the confectionery product group margins.

 

"The outperforming brands in 1HCY19 were Kit Kat, Munch, Nan, Maggi noodles and Masala-ae-Magic."

FINANCIALS:

The company follows a January to December calendar year for its business activities. In Q3CY19, revenue from operations increased by 11.2 per cent YoY to Rs.3000.85 crore. PBT stood at Rs.659.15 crore for Q3CY19 and Rs.595.31 for Q3CY18. As a result of better marketing strategies and digital advertisement expenses, the net profit expanded by 10.84 YoY to Rs.437.84 crore in Q3CY19 from Rs.395.03 crore in Q3CY18. In H1CY19, its domestic sales grew by 11.63 per cent YoY with revenue of Rs.6003.8 crore. In H1CY19, PBT expanded by around 10.16 per cent YoY. The net profit in H1CY19 increased by 10.02 per cent to Rs.901.12 crore compared to Rs.819.06 crore in H1CY18. For CY18, the total sales quantity, including all product groups, stood at 447155 MT, which is an increase by 11.11 per cent compared to 402449 MT in CY17. For CY18, its domestic sales grew by 10.93 per cent to Rs.10507.54 crore from Rs.9472.45 crore in CY17. The company’s income from exports in CY18 was Rs.708.69 crore. 

For the year ended December 31, 2018, the revenue from operations expanded by 10.79 per cent and was Rs.11292.27 crore as against Rs.10192.18 crore in the previous year. After adjusting the expenses, PBT for CY18 stood at 2428.95 crore, an increase of 32.05 per cent from Rs.1839.3 crore in CY17. The margins were positive even after being affected due to higher input costs. Compared to the net profit of Rs.1225.19 crore in CY17, Nestle India's net profit in CY18 was Rs.1606.93 an increase of 31.16 per cent. The company declared an interim dividend of Rs.23 per equity share of Rs.10 each for 2019 out of its current year profits and a special interim dividend of Rs.180 per equity share of Rs.10 each out of accumulated profits from previous years (surplus in the profit & loss account) on the entire issued, subscribed and paid-up share capital of the company. Hence the total interim dividend being paid is Rs.203 per equity share of Rs.10 each. 

CONCLUSION: 

The growth in domestic sales due to higher volumes is one of Nestle’s strength driving the company’s growth. As exports account for nearly 6 per cent of the company’s total revenue, it intends to consolidate its business activities, thereby increasing the production capacity to meet the demand. Post the Maggi crisis which happened in 2015, the company aims to increase its distribution to 5.5-6 million outlets from current 4.6 million outlets. Nestle intends to increase its out-of-home activity and vending kiosks, which is a growth-oriented opportunity for Nestle. To fuel growth, Nestle has adopted a cluster-based approach. The company’s management believes that by developing strong brand franchise and a huge market share, the business is less susceptible to adverse market conditions. Hence, it is focusing on brand expansion and innovations with R&D help from the Nestle Group. The lead time for new product launches will be reduced to nearly nine or less months from the current eighteen to thirty-six months. The company’s growth prospects look positive with an expected earnings CAGR of 19.7 per cent for CY18-20. 

The threats for Nestle include a slowdown in consumer demand and rising material cost. Even as this could affect the financial margins, proper strategic structuring will reduce the impact. 

The company’s efforts towards achieving volume growth can be seen with strong sales for the quarter and for CY18. It will be commencing construction of its ninth factory in India in Gujarat. This factory for Maggi noodles will take an investment of around Rs.700 crore over the next two years. A great amount of focus to create a balanced portfolio through new launches, entry into new high margin categories, expansion plans of manufacturing facilities and focus on exports will drive improved earnings performance for the company. 

Hence, based on our analysis, we recommend a BUY.