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MOSL: NESTLE INDIA (ANNUAL REPORT)-Non-Maggi yet to taste success of new launches-A few silver linings emerge in 4QCY17

Nestle India (Annual Report): Non-Maggi yet to taste success of new launches; A few silver linings emerge in 4QCY17; Valuations fair

(NEST IN, Mkt Cap USD13.0b, CMP INR9016, TP INR8870, 2% Downside, Neutral)

 We pored over Nestle's (NEST) CY17 annual report to come up with some interesting takeways:

• Volume growth in the non-Maggi portfolio was lackluster in the year, despite a spate of new launches.
• A&P to sales is on a downtrend and remains well below that of food and other FMCG peers.
• Pace of new launches is coming off from previous high levels.
• Blended realization growth has trended down for two consecutively years (as against NEST's overt focus on margins in the prior years), which, in our view, is good for volume growth.
• We believe the moderate dividend payout trend is limiting RoCE expansion, despite improving balance sheet efficiency.

 Volume grow more than 10%, but off a very low base

Overall volume growth of 10.7% in CY17 appears impressive, but we note that this has come off a very low base – in 1HCY16, the noodles category was in a recovery phase, while Maggi was yet to gain a foothold after a huge market share debacle (the product was re-launched only in November 2015 and distribution expansion happened only gradually over the subsequent 3-4 quarters). In CY17, Maggi volumes grew by 19% YoY, but non-Maggi volumes increased only by 3.2% YoY despite a spate of new launches. Another important point to note here is that the prepared dishes (Maggi) category forms only 27% of sales, but as high as 52% of total tonnage. Thus, high overall volume growth in CY17 can mostly be attributed to the low Maggi base – an advantage that NEST might not enjoy going forward.