Nourishing gains

POUND WISE

New product launches, dominant position across categories, sustainable margins and favourable demographics augur well for Nestle India.

Among India's leading processed foods and beverages players, Nestle India dominates most of the product categories it operates in.

While the company has grown at a healthy rate in the past few years, growth rates have accelerated in the last few quarters, thanks to internal restructuring (aimed at sharper business focus, improved flexibility and faster customer response), new product launches and other initiatives undertaken.

Sales and profits have grown at a compounded annual rate of 16.24 per cent and 18 per cent, respectively in the past three years. For year ended December 2007 (CY07), sales growth was higher at 24.2 per cent helped by volume growth of 14 per cent. The robust volume growth is far better than the single digit figures experienced in the past many years.

Interestingly, volume growth is likely to be sustained over the next two years, which along stable margins (aided by ability to pass on cost increases and improvement in efficiencies) should help sustain the high growth.

Nestle India's business can be broadly classified into four categories ---milk products and nutrition (infant mixes, yoghurt, milk), prepared dishes and cooking aids, beverages (coffee and malted drinks) and chocolate and confectionary. The company has a strong product portfolio, which it sells under popular brands like Nestle, Nescafe, Kit Kat, Munch, Maggi, Milo and Polo among others.

Accelerated innovations
Besides restructuring (completed recently), the company has undertaken various initiatives and increased focus on products based on nutrition, health and wellness.

These, along with its strong understanding of consumer needs and launch of a number of new products and variants in each of the four business categories (during the last 15 months), have resulted into faster growth rates for the company.

In milk products, the company has introduced Nestle Nido (nutrition product for children above two years), Nestle Funshakes (health-based refreshment) and Nestle Cerevita multigrain cereal (nutritious breakfast).

Likewise, Nestle Fresh 'N' Natural Slim Dahi (fat free), Nestle Milkmaid Fruit Yoghurt (fat free with real fruits), Nestle Nesvita (fat free with probiotics, for healthy digestion), Nestlé Cerelac Stage 4 and Nestlé Nan with DHA (both infant foods) were also launched.

Under the Maggi brand, after launching vegetable atta noodles in 2006, Nestle launched Maggi Rice noodles (in three flavours to suit regional preferences). A new range of instant soups, Sanjeevni, with traditional ingredients like Amla and Badam was also launched.

The chocolate and confectionery business also witnessed action. Nestlé Munch Pop Chocs (snack product), Tangeez (candy with Ajwain and Kala Namak ) and Kit Kat Mini (Rs 2 each) were launched.

In beverages, a new instant mild coffee Nescafé Mild was launched; this product was also introduced in sachet form (Re 1 each). Small-sized and low -priced packs help increase convenience and affordability and thus, also drive consumption.

Steps to strengthen presence in the 'out-of-home' segment were also taken. These moves reflect Nestle's aggressive stance and appetite for growth, while simultaneously indicating its strengths in the business and its ability to identify new segments.

Strong backing
Nestle India has access to its Switzerland-based parent, Nestle SA's investments (global expenditure was Rs 6,500 crore in 2007) in research and development and advanced technology for foods and beverages.

While Nestle India pays a fee (it has ranged between 3-3.5 per cent of annual net sales) in return for the access, it has still reported a healthy EBIDTA margin of a little over 20 per cent in the last three years.

Importantly, this support along with consumer insight has helped Nestle launch products customised for Indian consumers, which is commendable, especially in the foods business where not many companies have been able to break ice.

The other support comes in the form of opportunities in the export market. Nestle derives about 10 per cent of its sales from exports. Although coffee exports to Russia account for a significant chunk of export sales, its share should hopefully decline over the years, led by increasing exports of other products and foray into new markets.

In 2007, the company exported culinary products to Australia and South Africa for the first time. It aims to further diversify the product composition and geographies besides developing products for the Indian community residing outside India

Back home
Nuclearisation of families, increasing number of double-income families, rising disposable incomes, changing lifestyles and increasing acceptance of processed foods are some of the key positive factors, which should provide further opportunities for companies like Nestle. The low per capita consumption in many categories also indicates huge potential for growth.

Growth prospects
While Nestle' aggression is clearly visible through new product / variant launches, focus on exports, innovative packaging, thrust on health-based product and strengthening of new consumption channels, the improving demographics and low per capita consumption provide long-term revenue visibility.

Analysts expect Nestle to sustain volume growth of 11-13 per cent per annum in CY 08 and 09. While there is little doubt about Nestle's ability to handle competitive pressures, the real threat comes from firm input costs (wheat, rice, milk and sugar). So far, judicious price hikes and cost control measures have helped offset these pressures.

Going forward, analysts expect margins to sustain at current levels. This confidence comes on the back of Nestle's strong relationship with its suppliers; for example, in milk (accounted for 38.5 per cent of total raw material costs in CY07) it has established milk districts around its plants.

Meanwhile, its Q1 results provide further confidence; net sales up 26.4 to Rs 1,090.91 crore, EBIDTA margin at 22.8 per cent and net profit up 47.7 per cent to Rs 160.15 crore. While the higher profit growth was partly due to the mere 13.8 per cent increase in taxes (tax holiday at new Pantnagar factory), adjusting for it, the profit growth was still strong at 38 per cent. 
 

NUTRITION POWERED
Rs crore	CY07	CY08E	CY09E
Net sales	3,504.40	4,233.50	4,998.10
EBIDTA	696.30	872.10	1,053.80
Net profit	413.80	545.30	674.40
EPS (Rs)	42.90	57.10	70.60
PE (x)	38.90	29.20	23.60
E: Estimates

Investment rationale
At Rs 1,669.80, the stock quotes at a PE of 23.6 estimated CY09 earnings. While valuations appear to be a tad higher as compared with its peers, Nestle has historically been quoting at a premium (PE of 28-30).

Strong brands, leadership position, continuous product innovation, huge growth potential and healthy financials are some reasons for the same.

Nestle is also expected to report higher growth as compared to its peers, which provides further comfort. To sum up, the stock can deliver over 20 per cent returns in one year.