MOSL: NESTLE INDIA | ANNUAL REPORT (Neutral)-Double-digit volume growth an evidence of strategic success
Nestle India | Annual Report: Double-digit volume growth an evidence of strategic success; Ad spend increase and WC days reduction - key positives; Valuations fair
(NEST IN, Mkt Cap USD14.8b, CMP INR10692, TP INR11800, 10% Upside, Neutral)
Key takeaways from Nestle's (NEST) CY18 annual report:
- For the first time since CY10, Nestle posted double-digit overall volume growth on a reasonable base (barring CY16 and CY17, when the double-digit volume growth was led by recovery from the 2015 trough after the Maggi crisis).
- Clear preference for volume growth has also been demonstrated by the third consecutive year of decline in realization growth. Realizations declined by 0.4% in CY18, following a 2.8% decline in CY17 and 10.7% decline in CY16. This compares with realization CAGR of ~14% in the preceding five years, when volumes were extremely tepid.
- Another clear message of the NEST's focus on the top line is the absolute ad spend increase of 44.2% in CY18. Ad spend to sales increased by 160bp YoY to 6.9% of domestic sales, the highest level since CY02. Nevertheless, we believe there is room for further increase in A&P to boost sales, given the elevated gross margins in recent years. CY18 gross margin at 59.4% is 530bp higher than CY14 levels (Note that the company does not share volume and ad spend details in its interim results).
- Net Working Capital (NWC) days' reduction to -2 days (negative for the first time since CY10) and improving fixed asset turns are great from a ROCE perspective, particularly if dividend payout is increased further. ROCE was already healthy at around 50% in CY18.
Nestle India is engaged in the food business. Co.'s product groups are: milk products and nutrition; beverages; prepared dishes and cooking aids and chocolates and confectionery. Co.'s milk products and nutrition include: NESTLE a+ Milk, NESTLE Slim Milk, NESTLE a+ Dahi, NESTLE Slim Dahi and MILKMAID Sweetened Condensed Milk. Co.'s beverages include: NESCAFE, NESCAFE SUNRISE and NESTEA. Co.'s prepared dishes and cooking aids include: MAGGI Noodles, Veg Atta Noodles, Multigrainz Noodles and 2-Minute Noodles, MAGGI HUNGROOO, MAGGI Magical Masala Noodles, MAGGI Masala-ae-Magic spice mix and MAGGI Soups.Co.'s chocolates and confectionary include: Nestle KITKAT, NESTLE MUNCH and Nestle MILKYBAR.
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