Nestle India gets 'sell' rating, any green shoot in haystack? Deutsche

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SummaryPrice-led sales growth seems an unsustainable strategy

More of the same. Nestlé’s preference for profits over volumes is intact: Our recent focus has been on stress-testing our long-standing negative view (and of consensus, of late) on Nestlé. ‘Ears to the ground’ views: (i) Alpino chocolate is c.1% of sales in key markets in <6 months of launch; (ii) Nestlé is piloting a distribution project to improve ‘beat-efficiency’ (salesman productivity); (iii) distributor ROIs (return on investment) have declined to <20% (>25% earlier) on higher stock holding; (iv) it has launched ‘Muah’ confectionary at R1 SKU (stock keeping unit); (v) ITC has >20% market share in noodles in large markets (differentiated product/variants); Nestlé’s endeavor to uptrade noodle consumers to R15 price-point has met with limited success.

Distressed distributors, low ROIs, no visibility on new launches: Distributors are disappointed, as ROI has declined to <20%. The reduction in ROI is because of a higher stock holding period, likely due to lower secondary sales and lower asset turns (distributor inventory holding is c.30 days now, vs. 15 days in 2012).

Underperformance of Maggi Hungroo: Lack of a well-thought-through strategy, rather than stickiness to the R10 price point, is the reason for the lower-than-expected success of the R15 Maggi Hungroo pack, in our view. ITC, through its successful launch of the Yippee Chinese variant at a 50% premium to the normal variant, has demonstrated that, instead of grammage jugglery, a value-based proposition can be more successful. Read on to find out (i) why grammage changes (as a pricing tool) need to be handled smartly (examples of ITC, Frito Lays, Cadbury’s), (ii) MD change at Nestlé India is being taken positively by investors (we humbly disagree, though).

Management change at Nestlé India: Some investors believe that the management change at Nestlé India is positive, which, in our view, is a simplistic assumption (Etienne Benet took over as MD from Antonio Helio Waszyk in Q4CY13). However, we do see a pattern where an MD/CEO is appointed by an MNC company with a specific mandate.

Antonio Helio Waszyk is from a technical background (holds a Bachelor’s degree in Pharmacy and a Master’s degree in Food Biochemistry). He was the head of R&D centres prior to his India stint. It is rare for an R&D head to be appointed as an MD, particularly in consumer companies. Etienne Benet (new MD) has been in general management since 1997. It is quite likely that Antonio Helio came to India with a mandate

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