nestle india ltd.-techno research report

8/19/2019 Nestle India Ltd.-techno Research Report

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TECHNO SHARES & STOCKS LTDINDIA RESEARCH

FMCGACCUMULATE

Shivani Mehra Vishal Shah 6633 8900 EXT. 158 6633 8900 EXT. [email protected] [email protected]

NESTLE INDIA LTD. (NESTLE)

Su r f i n g s m o o t h l y o n h e a l t h p l a n k ………

23rd March 2009


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Nestle India Ltd. (NESTLE) 2 23rd March 2009

NESTLE INDIA LTD. (NESTLE)

Nestle India is well know for its brands like Maggie in the foodsegment, Cerelac in the infant foods segment & Milkmaid in thecondensed milk space. With strong support from its parent NestleS.A., Nestle India has created a niche through its product offerings

in India. The strong brand equity has enabled it to attain leadershipposition in the respective categories. The emergence of urban andsemi-urban areas on the Indian landscape spells a secular long termpositive for the pro-urban product portfolio built & nurtured byNestle for last many decades.

KEY RATIONALE

Build-up of niche product portfolio with focus on health &nutrition: The build up of the product portfolio & brandextension based on the health & nutrition platform aptly placesNestle to capitalize on the growing wellness trend. The Maggirice noodles, probiotic dahi, Cerevita protein & fruit cereal, lowfat milk reflects Nestle’s ideology to create health & wellnessproducts.

Prepared cooking dishes (PCD) & confectionaries leadingthe growth: The convenience foods & chocolates have grown at2 year CAGR of 22.4% & 16.7% respectively. The PCD &chocolates have registered strong YOY volume growth of 27-28% & 19-20% resp. even during testing times in CY08.

The introduction of nutritional variants and availability atattractive price points has enhanced penetration & spurred theconvenience foods & confectionary segment growth.

Ability to pass on the cost increases: Inspite of the steep

rise in the operating costs in CY08, the niche product offeringshave aided Nestle not only to grow volumes but also inmaintaining their margins (19-20%). We believe, the strong

product positioning will help Nestle maintain the margins (if notincrease) going forward.

Savings in tax rate: The new plant at Uttaranchal mainly forconvenience foods has started contributing to the production asevidenced by the drop in tax rates from 34% in CY07 to 30% inCY08. We believe that with the new plant’s increasingcontribution to total production, the effective tax rates willreduce to 26-28% levels in CY09 & CY10.

Increasing urbanization of the Indian landscape: Urban &semi-urban households are expected to increase at ~2.5-2.8%CAGR over the next 5 years. We believe that the increasingurbanization, rise in working women population & the growinghealth consciousness augurs well for Nestles pro-urban productlines.

VALUATION: Nestle is trading at substantial premium to itspeers like HUL, GSK Consumer & Colgate even on TTM basis atthe CMP of INR 1,520. The stock trades at 22.2x its CY09E and19.3x CY10E EPS of INR 68.6 and INR 78.8 respectively. Theproduct positioning & increasing customer base provides soundgrowth prospects over the long term. We recommend‘ACCUMULATE on dips’ for the stock with a price objectiveof 15-17% upside over a period of 1-year.

KEY RISKS TO OUR CALL:

o Fluctuations in key raw material prices.

o Severe downturn in Indian economy.

INTIATING COVERAGE:

ACCUMULATE

Date 23rd March 2009

CMP INR 1,520

52 week High / Low INR 1,880 / 1,220

Equity Cap (current) INR 96.42cr

Face Value INR 10

Mkt. Capitalization INR 14,658.25 cr

Avg. Daily Vol. (12 M) 34,743

BSE SENSEX 8,966.68

NSE - NIFTY 2,807.05

Bloomberg Code NEST IN

BSE Code 500790

SHAREHOLDING PATTERN @ 31-12-08

Promoters 61.9%

FII & DFI 19.7%

Public & Others 18.4%

3-MTS 6-MTS 1-YR

NESTLE 12% -9% 8%

Nifty -9% -31% -38%

Sensex -11% -33% -39%

BRIEFFINANCIALS

2007A 2008A 2009E 2010E

Net Sales 3500.7 4324.2 4943.2 5513.5

Salesgrowth

24% 24% 14% 12%

EBITDA 619.7 832.8 976.3 1102.7

EBITDAM 17.7% 19.3% 19.8% 20.0%

PAT 413.8 534.1 661.2 759.9

EPS 42.9 55.4 68.6 78.8

P/E (x) 21.8 27.0 22.2 19.3

RONW(%) 102.5% 109.1% 103.7% 96.8%

*E – Estimated, A – Audited


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KEY RATIONALE

B u i ld i n g u p a p o r t f o l io w i t h f o c u s on h e a l t h & n u t r i t i o n

f a c t o r

T h e in t r o d u c t i o n o f h e a l t h y a l t e r n a t i v e s

a c r o s s c a t e g o r i e s b y v a r i o u s FMCGp l a y e r s s t a n d s t e st i m o n y t o t h e g r o w i n g

w e l ln e s s t r e n d…… .

There is a new wave engulfing the Indian FMCG industry –

‘Health Consciousness’. Various industries such as food,hospitality, consumer durables (refrigerators) etc. are adaptingthe health, nutrition, safety and wellness platform so as tohave a competitive edge by giving the consumer a healthyalternative.

Recently, the Nielsen Company conducted a study on globalfood labeling trends. It was an internet survey on FoodLabeling and Nutrition conducted across 51 countries.Statistics revealed that in 2005, 32% Indians (mainly urban &semi-urban) checked the food nutrition information on thepackage as compared to 71% in 2008 (but only 59% of themunderstood these labels). India tops the Asia Pacific region inunderstanding of food labels. This re-iterates our stance of

growing health consciousness in India.The introduction of healthy alternatives like ‘Saffola’ by Maricoin the edible oil space, fibre enriched biscuits by Britannia &ITC, iodized salt by Tata, fortified atta by HUL, Women Horlicksby GSK, calcium enriched milk by Amul & others standtestimony to the growing wellness trend.

Break-up of Population Reading the

Labels and Understanding it

59

3312

23 29

3763

7973 66

54944

0

20

40

60

80

100

120

India Malasia Japan China Asia

PacificMostly In part Not at all

When you are buying packaged food,

when would you check the Nutritional

informationon the package?-Always

37

2723

19

25

India Malasia Japan China Asia

Pacific

P r o d u c t r e al iz a t io n t o c o m e d o w n b y~ 1 0 % i n CY0 9…

Nestle has been an early follower of the nutrition ideology. Itidentified the trends of growing urbanization, rising incomelevels & increasing proportion of working women andenhanced its product portfolio based on the convenience andnutrition theme.

Nestle has through a combination of brand leveraging andemphasis on the nutrition theme gained the confidence of theworking women population. Assured quality, quick to make,hassle free and on top of that a healthy substitute to a homecooked meal are the attributes that have augured well for allNestle’s nutrition based food and beverage products.

Existing Product Brands Nutritive Brand ExtensionsMaggi Instant Noodles Maggi Dal Atta Noodles & Maggi Rice Noodles

Maggi Soup Maggi Healthy SoupsNestle Milk Nestle Slim Milk


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N i c h e O f f e r i n g s

Nestle’s product offerings have gained in popularity because offour reasons - convenience, quality, taste and nicheproposition. Through this combination Nestle has createdleadership position in the infant food, instant coffee, noodles,

condensed milk and chocolate wafer segment. Its brands havebecome synonymous with the product itself. It’s strategy forproduct entry has always been with the aim of creating a nichefor itself & hence managed to create and maintain marketleadership in its product offerings.

R&D as a %age of sales

0.21%

0.30%

0.44%0.38%

0.15%

0.22%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

C Y 0 2

C Y 0 3

C Y 0 4

C Y 0 5

C Y 0 6

C Y 0 7

Survival in the functional foods business requires robust R&Dcapabilities enabling a company to innovate and develop newproduct lines on the health and nutrition platform.

Nestle enjoys an R&D edge over its peers due to support fromits parent company. Nestlé’s clear focus on health & nutritionhas enabled it to stay ahead of its peers and offer more

innovative products on the wellness platform.

A b i l i t y t o p a s s o n c o s t i n c r e a s e s

Two Year CAGR in Realisations

2%

4.20%

11.20%12.50%

P r e p a r e d

D i s h e s &

C o o k i n g

C h o c o l a t e s

M i l k

P r o d u c t s

&

M u t r i t i o n

B e v e r a g e s

Nestle’s focus is on overall profitable growth for which itadopts a mix of both volume and realization growth strategieswhile considering all external factors influencing suchdecisions. In the 1990’s when the agri-commodities were in adeflationary cycle Nestle emphasized on volumes growth.

During H1CY08 FMCG players world over were faced withrising agri-commodity prices. Inflation was the hanging overthe world and Nestle was forced to take price hikes across allsegments to account for these input cost pressures. Inspite ofthe steep rise in the operating costs in H1CY08, the nicheproduct offerings have aided Nestle to grow not only involumes but also in maintaining their margins (20%). Webelieve, the strong product positioning will help Nestlemaintain the margins (if not increase) going forward.

RESULTS TABLE (INR in crs) CY08 CY07 VAR.

Net Sales 4,324.24 3,500.65 23.53%

PBIDT 832.8 619.7 34.38%

PBIDTM (%) 19.3% 19.8%

Interest 1.6 0.9 92.94%

Depreciation 92.4 74.7 23.58%

PBT 772.8 628.6 22.94%

Tax 238.7 214.8 11.15%

Tax rates 30.9% 34.2% -9.60%

PAT 534.1 413.8 29.07%Extra-ordinary Ex

- 16.69*

Adj. PAT 534.1 430.5 24.06%

EPS 55.4 44.6 24.06%

Prices of vegetable oils have eased slightly in H2CY08 whileprices of other key inputs like wheat flour, sugar and milk haveincreased marginally. Nestle has witnessed tremendous cost

pressure but still been able to maintain 19%+ margins for theCY08. Topline growth at 24%, was a mix of realization growthand volume growth.

Nestle enjoys pricing power as it is in a leadership positionacross its product offerings. Apart from pricing Nestle hasbeen able to improve margins across all segments even insuch adverse conditions through cost efficiency programs,fixed cost leveraging as it grows and product mix.

We believe that these cost pressures were temporary for andthat Nestle will be able to maintain 19-20% margins goingforward.

*Includes one time expense for VRS INR 75.73 crs. &INR 59.04 crs of income on account of write back of a

provision for contingency for a litigation.


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P r e p a r e d c o o k i n g d i s h e s ( PCD ) & c o n f e c t i o n a r i e s

l e ad i n g t h e g r o w t h

The convenience foods & chocolates have grown at 2 yearCAGR of 22.4% & 16.7% respectively. The PCD & chocolateshave registered strong YOY volume growth of 27-28% & 19-

20% resp. even during testing times in CY08.The introduction of nutritional variants and availability atattractive price points has enhanced penetration & spurred theconvenience foods & confectionary segment growth.

S t r a t e g i c f o c u s o n t h e P o p u l a r l y P o s it i o n e d P r o d u c t s

( P P P) s e gm e n t

PRICE PRODUCTS/BRANDS

INR 10Maggi Noodles, Kit Kat, Barone, Milkybar,Nescafe Sunrise, Nescafe Classic,Everyday

INR 5 Maggi Noodles, KitKat, Milkybar,Everyday, Munch, Nescafe Sunrise, Polo

INR 2Nescafe Sunrise, KitKat, Munch, Milkybar,Barone, Polo

INR 1 Nescafe Classic, Milkybar, Éclairs

INR 0.50 Éclairs, Polo, Tang Eez

Nestles PPP segment is aimed at targeting newconsumers who are willing to transcend tobranded products as income levels increase. Webelieve that the demand for products in thiscategory to be less price elastic and income

elastic.The consumers in this segment are driven byvalue for money and hence Nestle is leveragingon its quality, taste and nutritional content topopularize its PPP segment. Products in thissegment are priced in the range of INR 0.50 toINR 10. Approximately 66% of the products inthe PPP segment are from the chocolatessegment.

16% 10% 17% 53% 4%PRICE POINT

INR 0.5 INR 1 INR 2 INR 5 INR 10

7% 10% 66% 17%PRODUCT CATEGORY

Milk Products & Nutrition Beverages Chocolate & Confectionery Prepared dishes & cooking aids

Growth through PPP PPP ' 03 PPP ' 07

Volumes (' 000MT) / SKUs (Nos.) 24 / 60 48 / 50

Revenues (INR Bn.) 3.3 6.9

Revenues CAGR 2003-2007 % 20%

Nestle has over the last 4-5 yearsrationalized the number of SKU’s in thissegment but doubled its volume output.The contribution of this segment hasincreased from 21% in CY03 to 27% inCY07.

The PPP segment has boosted volumes growth in theconvenience foods & the confectionary segment and hasproved to be a good defensive strategy for Nestle as it hasbeen able to retain its customers by offering products atdifferent price levels to meet various customer needs.


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I n c r e as in g u r b a n i za t i o n o f t h e I n d i a n l a n d s ca p e

Households (in mn)

14.919.1

29.3

40.7

55.8

66.375.01

010

203040

5060

7080

1 9 6 1

1 9 7 1

1 9 8 1

1 9 9 1

2 0 0 1

2 0 0 7 E

2 0 1 2 P

According to the Urban Housing Policy Working Papers 2007-2012, urban households in India is expected to grow at aCAGR of ~2.5-2.8% for the next five years. By 2012 India’surban cities will be handling ~ 75 mn households with an

average size of 4-5 members per household. This includes TierI, Tier II and Tier III cities.

Another trend arising out of growing urbanization is theincreasing proportion of working women in the workforce.

These trends augur well for Nestles nutrition based convenientfoods & low fat milk segment. Nestles products are easy tomake & healthy substitutes versus home cooked snacks.Nestles trusted brand quality has enabled it to create marketleadership in its product offerings and making it a preferredchoice in a mother’s shopping list for a healthy snack.

This transition in mindsets supported by the demonstrationeffect to a certain extent will augur well for the PPP segment.

Nestle’s PPP segment is aptly placed to attract new consumersat the entry level who want to shift to the branded segment.Apart from this Nestle’s health and nutrition based productlines will also benefit from increasing demand from the higherincome groups.

CONCERNS

F lu c t u a t i o n s in k e y r a w m a t e r i a l p r i c e s

Cost Trends for CY08 over CY07

4.8%

8.1% 8.6%

16.0%

13.4%

0.0%

5.0%

10.0%

15.0%

20.0%

W h e a t

F l o u r

M i l k

M i l k

P o w d e r

S u g a r

O i l s

% I

n c r e a s e

Nestle’s inputs are all agri-based, hence vagaries ofmonsoon will impact the company’s sourcing and henceprofitability. In H1CY08 the company released its Indexedcost data, which reflected a YOY increase in cost of allmajor inputs as agri-commodity prices hardened. Nestlewas hence forced to take price hikes across segments soas to maintain profitable growth. CY08 results show thatNestle has not been able to pass on full cost increase andmargins fell below 20%. Prices of vegetable oils haveeased slightly in H2CY08 while prices of other key inputslike wheat flour, sugar and milk have increased marginally.

The management is of the view that more price increaseswill not be needed if input costs remain stable at thislevel. Hence margin expansion is possible if themanagement decides not to roll back prices. We believe itwill be able to come back to its historical 19-20%+margins even if it intends to pass on the benefit of inputcosts to consumers going forward.


7/17


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COMPANY BACKGROUND

L e a d e r s h i p p o s i t i o n i n a l l c o r e

c a t e g o r i e s…

A 61.85% subsidiary of Nestle S.A of Switzerland, Nestle indiahas seven factory locations across the Indian geography.

Nestle operates in 4 segments: milk products & nutrition,

prepared dishes & cooking aids, beverages and chocolates.Some of its established brands include Maggi, Nescafe,Lactogen, Kit Kat and Milkmaid.

It enjoys leadership position in its core categories like babyfoods, instant noodles and instant coffee. Nestle has created aniche for itself through its product offering.

S t r a t e g i c f o cu s o n t h e h e a l t h , w e l ln e s s

a n d n u t r i t io n p l a t f o r m …

Nestle focuses on developing products around the nutrition,health and wellness platform. Strong parental support alongwith renovation and innovation in its offerings has enabledNestle to create a niche for itself.

St r o n g b r a n d e q u i t y… Over the years Nestle has built strong brand equity. This

strong brand equity has transcended into a strong brand recallwith the consumers and is evident from rising sales vis-a-visfalling advertising spend to sales ratio from 20% in 2002 to17.1% in 2007.

Source : Co mp any


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SEGMENT-WISE PERFORMANCE

M I LK PRODUCTS & N UTRI T I ON…

P r o d u c t P r o f i le

Revenue Contribution & Segment Growth

4 5 . 4

%

4 4 . 5

%

4 3 . 7

%

4 3 . 2

%

4 6 . 3

0 %

9.1% 9.0% 9.4%

22.6%

27.1%

42%

42%

43%

43%

44%

44%

45%

45%

46%

46%

47%47%

CY04 CY05 CY06 CY07 H1CY08

0%

5%

10%

15%

20%

25%

30%

% of Total Revenues Segement Growth

Milk Products and Nutrition is the largest segmentcontributing 43-45% to the topline growing at~12% CAGR over the last 5 years. Productportfolio for this segment includes ghee, dairywhiteners, packaged milk, Dahi (Curd), FruitYogurt, baby & infant foods, cereals andsweetened condensed milk. The contribution totopline from this segment has been tapering sincelast 4 years.

Product Category Brands Nearest Competitor

Ghee Everyday Amul, Vijaya, Sagar etc.Dairy Whitener Everyday Amul ( Amulya)Packaged Milk Nestle Amul

Dahi Nestle Fruit 'n' Natural Amul, Mother Dairy etc.Fruit Yogurt Nesvita -

Baby & Infant Food Cerelac, Nan, Lactogen & Nestogen Amul ( Amul Milk Powder)Cereals Cerevita Kelloggs

Sweetened Condensed Milk Milkmaid Amul ( Mithai Mate)

Ma r k e t P o s it i o n

Apart from being No.1 in the baby and infant foods segment,Nestle commands No. 1 position in the dairy whitener marketwhich is a niche product offering catering mainly to theinstitutional clients. Nestle’s nutritional product offering in thebaby and infant foods segment has enabled it to garner No. 1position in this segment. Nestle has created a strong brandrecall in this segment hence making it the preferred brand fornursing mothers.

It has been a pioneer in the probiotic dahi segment – a nicheoffering of dahi containing “friendly” bacteria which helpsimproving metabolism and digestion. Nestle also has strongpresence in the sweetened condensed milk segment throughits brand Milkmaid.

S t r a t e g y

B r a n d Ex t e n s i o n + W e l ln e s s P la t f o r m … Nestle has launched brand extensions of its existing productsin the milk products segment while keeping health, wellnessand nutrition platform as the basis for its launch. Someexamples in this category include Everyday Slim (milkpowder), Nestle Slim Milk and Nestle Fresh ‘n’ Natural SlimDahi & NesVita Probiotic Dahi.

This segment is seeing a rationalization of volumes growth onaccount of its maturing product line & sustained increase inaverage realizations. Its contribution to the topline is taperingas the company is laying emphasis on other more profitablebusiness segments like prepared dishes & cooking aids andbeverages.


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11/17


PREPARED D I SHES & COOK I NG A I DS…


“2 minutes” that’s the motto for this segment of Nestle. Maggiis a household brand synonymous with instant noodles andtomato ketchup. Product portfolio in this segment includes

instant noodles, tomato ketchup and soup mix. Thecontribution of this segment to topline has been increasingover the past 4 years from ~17.5% to 21.5%. This segmenthas clocked a 17.4% CAGR over the last 5 years.

ProductCategory

BrandsNearest

Competitor

Ketchup Maggi Kissan

Instant noodles Maggi Top Ramen(Nisin)

Soup Maggi Knorr


17.7%19.0%

20.3% 21.4%23.10%

19.3% 19.2%

30.6%

2.7%

34%

0%

5%

10%

15%

20%

25%

CY04 CY05 CY06 CY07 H1CY080%

5%

10%

15%

20%

25%

30%

35%

40%


S t r a t e g y

Tw o - p r o n g e d s t r a t e g y – v a l u e a d d i t i o n

t o e x i s t i n g b r a n d s a n d i n c r e a s e

p e n e t r a t i o n a c r o s s v a r i o u s p r i ci n g

p o i n t s…

The company has followed a two-pronged strategy in thissegment – leveraging existing brands to introduce value addedproducts on the same platform and increasing penetrationlevels by offering the products across various pricing points.

The company has garnered strong volumes growth in thissegment on account of launch of maggi noodles in a smaller

pack priced at INR 5/- to cater to the demand from all incomelevels.

The company has launched dal atta and rice instant noodleskeeping in mind its wellness drive. Maggi cup noodles havealso been launched to make maggi preparation even quickerand more hassle free.

In the ketchup segment also Nestle has re-launched productsin smaller bottles and satchets. Apart from that the companyhas launched new products in the chutney segment (Indiansauces) to cater to the Indian taste buds.

Nestle has used its Maggi brand to launch instant soupsagainst market leader Knorr. Maggi soups have been able to

garner a little less than 50% share in this market. Maggifollowed the launch of the soups with the brand extension ofMaggi Healthy Soups.

Ou t l o o k

I n c r e a s in g i n c om e l ev e l s i n T ie r I a n d

T ie r I I c i t ie s h a s u s h e r e d i n a n

o p p o r t u n i t y f o r c o n v e n i e n ce f o o d

i n d u s t r y t o g r o w …

Increasing urbanization and growing proportion of workingwomen has given a boost to the Indian ready to eat foodmarket. Tier II and Tier III cities are also witnessing anincrease in general income levels hence increasing theirpurchasing power. All these factors when put in perspectiveushers an opportunity for convenience foods industry to growfaster.

If these food preparations are backed by nutrition and healththemes and are available at reasonable prices then thissegment can clock even higher growth as is being seen by thefunctional foods industry presently in India. Nestles brandingof Maggi as a healthy convenient snack has enabled it tomaintain top spot in the instant noodle segment.


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Ne s t l e ’ s P o s i t i o n… Nestle’s leadership position in instant noodles and ketchupsegment and launch of brand extensions of the same onnutrition based platform will help it grow even faster andgarner higher market share.

BEVERAGES…


Nestle’s second most powerful brand (after Maggi) ifnot the first is Nescafe – its instant coffee brand.Regular coffee drinkers express desire to have aNescafe synonymous to desire of drinking a hot cupof coffee. Apart from instant coffee this segmentincludes other brands such as Nestea (iced tea) andMilo (brown drink mix). This segments contributionhas been tapering off from 22% to 20% over thelast four years. This segment has grown at 8.1%CAGR over the last 5 years.

Nestea was launched in both lemon and peachflavor. Nestea fast picked up in popularity and is nowthe official iced tea brand at various eateries. Nesteapowder mix was also brought to the doorstep of theretail consumer through the launch of various sizeretail packs.


2 2 . 2 %

2 2 . 0 %

2 0 . 5 %

1 9 . 8 %

1 6 . 6 %

10.4%

3.9%-3.2%

9.7%

19.4%

0%

5%

10%

15%

20%

25%

CY04 CY05 CY06 CY07 H1CY08

-5%

0%

5%

10%

15%

20%

25%


In the brown drinks market, Nestle Milo has beenpositioned as a healthy option for growing kids.Unlike the other two products in this segment thebrown drinks market is highly competitive withBournvita and Complan commanding more than80% of the market.

Product Category Brands Nearest Competitor

Instant Coffee Nescafe Bru

Ice Tea Nestea Lipton

Brown Drinks Milo Complan, Boost, Horlicks & Bournvita

R e t a i l c o f f e e v e n d i n g t a r g e t i n g t h e

m a s s…

N e s t l e ’s a p p r o a c h…

Nestle is different from a Café Coffee Day or a Barista as it hasadopted different strategy to increase its penetration level. Atthe institutional level Nestle’s Nescafe faces stiff competitionfrom Lipton & the emerging Café Coffee Day vending SBUs.Instead of catering to a specific age group or income bracketNestle has adopted a mass market strategy.

Nestle wants its coffee to be accessible to every income groupand age group. Nestle plans to increase its penetration in thecoffee vending business by following a franchisee approach.Nestle identifies locations at educational institutions, businesscomplexes, malls etc. to set up café and increase its vendingbusiness. Nestle believes that these franchisees are likelaboratory for its product launches. One such launch has beenof Nescafe cold coffee which has become an instant hit inNestle beverage line up. At the retail level Nestle is pushing forvolumes growth through the launch of one person servingsachet’s at affordable price.

Ou t l o o k

Co f f e e p o p u la r i t y is g a in i n g m om e n t u mw i t h c o f f e e r e t a i l i n g p i c k i n g u p … India is primarily a tea drinking market. Coffee popularity isgaining momentum with coffee retailing picking up. Coffee

joints like Café Coffee Day and Barista have worked topopularize coffee as a beverage and have educated theconsumer about the product and its varieties.


13/17


With growing awareness of coffee as a beverage, Nescafe willbe a main beneficiary at the retail level as it will be able tosatisfy the consumer’s want of a good trusted quality, easy tomake, affordably priced coffee to make at home.

In the last three years, domestic consumption of coffee hasgone up steadily, with out-of-home consumption of coffee

growing at a faster rate of 12-13 per cent. Coffee consumptionin India is expected to rise by another 10% in the upcomingcrop year starting October to reach one lakh metric tons by2009.

Iced tea is transforming the soft drinks market by becoming ahealthy substitute to aerated drinks and hence a necessary onthe menu cards at every restaurant, club or gathering.

CHOCOLATES & CONFECT I ONER I ES…


Revenue Contribution & Segment

Growth

14.6% 14.5%

15.5% 15.6%

14.0%

11.0%

18.5%

24.50%

2.9%

24.8%

13%

14%

14%

15%

15%

16%

16%

C Y 0

4

C Y 0

5

C Y 0

6

C Y 0

7

H 1 C Y 0

8

0%

5%

10%

15%

20%

25%

30%


KitKat, Eclairs, Polo, Milkybar, Munch and NestleChocolate bar are the chocolate offerings by Nestleavailable across all price levels. This segmentscontribution to topline has been increased from 14.6% to15.6% in the last 4 years. Margins in this segment varyfrom 10% - 20% depending upon the product mix andpricing point. This segment has recorded a 12% CAGR forthe last five years. Nestle is at No.1 position in the waferchocolate segment.

S t r a t e g y

B r a n d e x t e n s i o n a t v a r i o u s p r i ci n g

p o i n t s…

Over the years Nestle has been able to grow in this segmentby launching brand extensions at various price points so as tobe able to cater to the demand of all segments. Volumesgrowth is the main strategy in this segment. KitKat has beengrowing the fastest in this segment.

Ou t l o o k

Estimated at INR 2,500 crs. the Indian chocolate industry isled by Cadbury which has ~72% market share. Lower percapita consumption of 300 gms in India vs. 1.9 kg indeveloped nations presents an opportunity for high growth inthe Indian chocolate industry.

Nestle has created a niche for itself by emphasizing on mintsegment and wafer chocolate segment. Brand Equity & pricingpoint are the main drivers for this segment of business. Withincreasing raw material prices for chocolates this segment islikely to undergo price hikes in the near future.


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PEER COMPARISON

COMPANY NAMENET

SALESSALES

3-YR CAGRPAT

PAT3-YR CAGR

PRICEMCAP/SALES

P/EDIV.

YIELD

GSK Consumer Ltd. 1,542.78 12.31% 188.33 20.70% 03.9 1.6 13.5 2.48%

Colgate Palmolive 1,630.68 19.14% 268.78 25.66% 460.6 3.8 23.3 3.26%

HUL 16,345.19 13.90% 2,101.48 15.77% 233.0 3.1 24.2 3.86%

Nestle India Ltd. 4,324.24 20.41% 534.08 19.94% 1,520.3 3.4 27.4 2.80%

Note: Sales and PAT figures are for CY08. Colgate is Dec. ending hence figures are TTM ending CY08. Price as on 20th March 09

Actually there is no one to one competitor for Nestle hence wehave conducted a peer comparison of Nestle vs. other FMCGMNC’s in India having presence across segments. As can beseen from the table above Nestle has always traded at apremium to its peers. This is primarily because Nestle hascreated niches for itself through distinct product offerings andthereby creating a leadership position in these segments.Nestle commands a premium over its peers because of marketleadership in segments it operates in, trusted quality, and itsbrand equity.

VALUATION

Nestle has over the years created a trusted brand for itself inFMCG space. Over the years Nestle has understood the needsof the domestic consumers and strived to meet theirexpectations while assuring quality, taste, convenience andaffordability. Nestle has provided employment to over 1 million

people across India. Nestle has created a niche for itselfthrough its product offerings and hence created marketleadership in the segment in operates in.

Nestle is trading at substantial premium to its peers like HUL,GSK Consumer & Colgate even on TTM basis at the CMP ofRs.1,520. The stock trades at 22.2x its CY09E and 19.3xCY10E EPS of INR 68.6 and INR 78.8 respectively. The productpositioning & increasing customer base provides sound growthprospects over the long term. We recommend‘ACCUMULATE on dips’ for the stock with a priceobjective of 15-17% upside over a period of 1-year.


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FINANCIAL SUMMARY

(in INR crs.)

INCOME STMT. CY07A CY08A CY09E CY10E

Net Sales 3501 4324 4943.2 5513.5

Total Expenditure 2880.9 3491.5 3966.9 4410.8

PBIDT 619.7 832.8 976.3 1102.7

Other Income 84.5 34.1 35.0 38.0

Interest 0.9 1.6 1.0 1.0

PBDT 703.4 865.2 1010.3 1139.7

Depreciation 74.7 92.4 92.0 98.0

PBT 628.6 772.8 918.3 1041.7

Tax 214.8 238.7 257.1 281.8

PAT 413.8 534.1 661.2 759.9

Extraordinary Adj. 0.0 0.0 0.0 0.0

Adjusted Profit 413.8 534.1 661.2 759.9

EPS 42.9 55.4 68.6 78.8

(in INR crs.)

BALANCE SHEET CY07A CY08E CY09E CY10E

Share Capital 96.4 96.4 96.4 96.4

Reserves & Surplus 322.0 464.3 617.8 759.2

Less: ME & RR 0.0 0.0 0.0

Net Worth 418.4 560.8 714.2 855.6

Minority interest

Secured loans 2.9 5.9 2.9 2.9

Unsecured loans 0.0 0.0 0.0 0.0

Total Debt 2.9 5.9 2.9 2.9

Sources of fund 421.3 566.6 717.1 858.5

Gross Assets (Net of revaluation) 1179.8 1353.8 1453.8 1553.8

Less: Dep 578.0 664.0 756.0 854.0

Net Assets 601.8 689.8 697.8 699.8

CWIP 73.7 0.0 0.0 0.0

Investments 94.4 169.4 219.4 359.4Current Assets 637.9 731.7 787.7 875.3

Inventory 401.2 399.9 456.5 507.5

Debtors 53.5 94.6 67.7 90.6

Cash & Bank 37.8 76.8 88.1 96.7

Advances 145.4 160.4 175.4 180.4

Current Liabilities & Prov. 986.5 1024.3 987.8 1076.0

Current Liabilities 460.0 543.0 587.0 652.7

Provisions 526.5 481.2 400.7 423.3

Working Capital -348.6 -292.6 -200.1 -200.7

Uses of Funds 421.3 566.6 717.1 858.5


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(in INR crs.)

RATIO ANALYSIS CY07A CY08E CY09E CY10E

PROFITABILITY RATIOS

PBIDT(%) 17.7% 19.3% 19.8% 20.0%PBDT(%) 20.1% 20.0% 20.4% 20.7%

PBT(%) 18.0% 17.9% 18.6% 18.9%

PAT(%) 11.8% 12.4% 13.4% 13.8%

Tax Rate(%) 34.2% 30.9% 28.0% 27.1%

RoCE(%) 152.3% 156.8% 143.2% 132.4%

RONW(%) 102.5% 109.1% 103.7% 96.8%

VALUATION RATIOS

EPS 42.9 55.4 68.6 78.8P/E 21.8 27.0 22.2 19.3

CEPS 50.7 65.0 78.1 89.0

BV 43.4 58.2 74.1 88.7

DPS 33.0 42.5 45.0 55.0

EV/EBITDA 23.6 17.5 14.9 13.2

Debt/NW 0.0 0.0 0.0 0.0

GROWTH RATIOS

Net Sales 24% 24% 14% 12%

PBIDT 20% 34% 17% 13%

Adj.PAT 31% 29% 24% 15%

Net Sales to Net FA (x) 5.6 6.3 7.1 7.9

LIQUIDITY RATIOS

Inventory (Days) 43 42 39 40

Debtors (Days) 6 6 6 5

Creditors (Days) 53 52 52 51

Other Income / PBT 13.4% 4.4% 3.8% 3.6%

Current Ratio 0.6 0.7 0.8 0.8


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