Nestles strong belief in its strategic drive towards a more value-added portfolio, while slowly moving away from price-point packs, remains unchanged. That the companys performance (volume growth, value growth, EPS growth, return ratios) has deteriorated in the recent years is a fact. What is arguable is whether the companys strategic choices have led to the deterioration.
The debate around any key strategic shift is never a short-term one; even as the initial results of portfolio rationalisation do not encourage, attributing the recent underperformance to the portfolio-related strategic choices is, at best, conjecture.
We do think, however, that some of the SKU-related decisions that Nestle has taken in the recent years, especially a reluctance to be in the low-price SKUs, may be suboptimal in certain cases essentially due to reduced competitiveness in the new user recruitment market.
Losing the mindshare of these low profitability new users when they are entering the category as consumers is a risky bet, even from a medium-to-long-term perspective. At a P/E multiple of 37X forward earnings, we find Nestls valuations expensive given volatile volume growth, weakening consumption trends and significantly lower-than-historical return ratios.
Kotak Institutional Equities