Management Speak: Nestle India (Outperformer) - Creating new engines of growth!

We present key takeaways of our interaction with Nestle India at its analyst meet. The Nestle management is confident of maintaining double-digit revenue growth momentum through 1) ahead of category growth, 2) building on recent innovations, and 3) using multiple cluster approach to identify pockets of under penetration, under indexation to target the full potential of its portfolio through the country. Inflation has inched up from current low levels on improving price value equation over last 12-18 months, due to GST-led price cuts and fall in commodity costs. As a result, management expects to sustain gross margins at healthy levels through a combination of judicious price increases and cost savings initiatives. We expect the company’s cluster approach to pay rich dividends and result in Nestle sweating its product basket to the fullest by reaching more consumers with larger product and SKU portfolios. The stock trades at 52x CY19E/44x CY20E earnings. Maintain Outperformer with a target price of Rs11,879.

Accelerated innovation agenda – Continued strong innovation is one of the key drivers that would enable management to maintain double-digit revenue growth. New launches in existing categories and entry into health science and breakfast cereal categories have doubled new product contribution to overall sales (3% of sales in 1HCY18 from 1.5% in CY16) and would continue to be revenue growth drivers.

Cluster approach a welcome change – Nestle has adopted cluster strategy (breaking up India into 15 clusters) from being more urban centric and not much SKU focused. This change will have multiple benefits such as, capturing a larger consumer set, opening up opportunities in new categories, better management of advertising and promotional spends and improving market shares, which we believe could be sustainable growth drivers.

Sufficient levers to sustain margins – Nestle has posted 4 consecutive quarters of strong margin improvement driven by improved product mix and lower commodity prices (Milk, milk powder, coffee sugar); management believes the company has multiple levers such as cost control and price increases that will continue to deliver sustainable profitable growth going forward.