Company update: Nestle (Outperformer) - Hungry for more!

We present key takeaways of our interaction with Nestle India at its analyst meet. Nestle’s execution engine continues to roll on as it remains confident of sustaining profitable growth. The ‘cluster’ approach is paying rich dividends as it continues to sustain or build on its leadership position in ~85% of its portfolio. Science and consumer driven innovations and renovations would continue as Nestle has a ~70% success rate in NPDs (vs 5-10% of industry) and not only is this a key near-term growth driver but also helps diversify into newer categories of the future. E-commerce and Out of Home are key focus areas and Nestle is investing in capacity building ahead of time. Increasing access, especially in Rural, is another focus area as it looks to expand reach to ~6m outlets (from 4.6m currently). There is no change in Nestle’s ideology in terms of driving volume & mix led profitable growth led by judicious price hikes and cost saving initiatives even as input cost scenario turns unfavourable. We believe Nestle would continue to deliver industry leading growth led by its premium portfolio and superior execution, as a result premium valuations are likely to sustain, maintain OP.

Lower Rural salience & traction in innovations helps beat market slowdown: Nestle indicated that market momentum for overall FMCG industry has waned over the past few quarters but management is hopeful about the future growth. The impact of slowdown in Rural was lower on Nestle as its Rural salience is only ~20-25% of sales (compared to ~35-45% for peers). The innovation focus remains strong (61 new launches since 2016 with ~70% success rate vs industry average of 5-10%) and NPDs contribution to domestic sales increased further to 3.7% in 1HCY19, helping Nestle outperform peers in 1H.

Strong volume growth of 9.6% yoy in H1CY19: H1CY19 domestic sales growth of 11.7% was led by a robust 9.6% yoy growth in volumes and strong RIG of 10.8% yoy. The robust RIG performance was backed by similar growth in secondary sales, strong growth (double that of company average) in premium products and e-commerce channel. In terms of segments, Confectionary grew by 22.8% yoy, Prepared dishes grew by 15%, Milk Products & Nutrition sales grew by 8.5% yoy while Beverage segment sales were muted at 4.2% yoy.

Inflation in raw materials, pricing action contemplated: Milk (42% of RM) prices increased by 8% yoy, MSK (4%) was up 12%, Wheat (13%) & Palm Kernel (7%) prices were up 12% and 10% respectively in 1HCY19. Nestle has been able to curtail the impact of inflation through premiumisation, better price mix, procurement efficiencies and cost reduction initiatives. Price increases are postponed as much as possible but the idea is not to dilute the margins or the brands, the decision is made taking both category penetration and volume impact in consideration.